Lloyd’s market expense ratio is expected to see a 0.4 percentage point improvement to 38.5 percent for 2020 as a decline in acquisition costs is partially offset by a rise in admin costs.
Slides from a Lloyd’s market presentation and seen by The Insurance Insider show that the projected acquisition cost ratio will fall 0.7 points to 25.9 percent for 2020, while the admin cost ratio will tick up by 0.2 points to 12.5 percent. The two components add up to a rounded 38.5 percent, according to the Lloyd’s slide, down from a forecast 38.9 percent for 2019.
The lower acquisition cost ratio is thought to be due to a changing business mix at Lloyd’s.
Lloyd’s said in the slide deck that “no real progress” had been made on expense ratios, with actual expenses in sterling continuing to rise.
The 38.5 percent total expense ratio is a projection based on 2020 business plans and could end up being higher or lower come the end that year. The forecast final expense ratio for 2019 is expected to be 0.3 points lower than that projected in 2019 business plans.
The projected 2020 expense ratio is also 1.8 points lower than that booked in 2018.
Performance management director Jon Hancock has previously made clear that 2020 business plans would not be approved without an improvement in the expense ratio year on year.
He has previously told this publication that drive to reduce expenses was a “principle not a rule” and the performance management directorate would not enforce set targets on expense ratio reduction, as every syndicate is different.
He noted that there were some syndicates in Lloyd’s which had “super competitive” expense ratios and it would be foolish to expect them to cut those even further.
Research into admin costs at syndicate level has also found that there is no correlation between the size of a syndicate and its admin expense ratio, contrary to the popular belief that administrative costs decline as a syndicate grows.
Expense reduction is a major focus of the Future at Lloyd’s strategy. CEO John Neal has previously said Lloyd’s was targeting a 25-30 percent expense ratio within five years via digitisation, automation, simplification of processes and end-to-end processing at Lloyd’s.