Lloyd’s CEO John Neal has said he expects to sign off on business plans allowing the market to grow by between 12% and 13% in 2021 and write up to $15bn of new business.

The CEO was speaking as part of Aon’s fireside chat series of interviews with top (re)insurance executives.

Neal also said he was confident the market would perform within expectations in 2021, and there was scope for growing both exposure and pricing.

The overall growth forecast is an upwards revision of a recent prediction Neal made of high-single-digit growth next year, though the new business forecast is at the low end of a £12bn-£13bn ($15.5bn-$16.8bn) range he previously cited. The comments come as the business planning process continues between Lloyd’s and syndicates.

Lloyd’s gross written premium in 2019 was £35.9bn.

Neal added that the Covid-19 pandemic had enhanced the importance of Lloyd’s physical presence.

“I think the physical location has perversely become more important, not because we can’t trade without it, but because that ability to connect in certain circumstances and certain instances is critical,” he explained

“And as real estate footprints reduce in the major cities, I think having a legitimate location where people can meet for the purposes of doing insurance has just gone up actually.”

The Lloyd’s leader noted that the insurance industry had got off to a “slow start” at the beginning of the pandemic and found itself on the back foot in the media.

“We found ourselves in a similar position I think the banks did in the financial crisis, people feeling disappointed or frustrated that either there wasn’t cover in force or that they thought there might have been cover but the cover wasn’t there,” he said.

He commented that the pandemic experience had proved a “wake up call” for insurers to consider protecting intangible assets on companies’ balance sheets.

Quizzed on broker consolidation, Neal said he thought Aon and Willis Towers Watson would flourish following their merger and improve the broking market.

“I think it will lift the standards and that must be net net good,” Neal said.

Lloyd’s CEO John Neal has said repricing “has to happen” following the substantial industry losses from Covid-19, and pledged flexibility in permitting additional growth to the market as rates rise. 

This morning, Lloyd’s released an industry underwriting loss estimate of $107bn for Covid-19. When including the expected hit to investments, this total industry impact rises to $203bn, Lloyd’s said.

The Lloyd’s market is expected to take $3bn-$4.3bn of the Covid-19 underwriting losses.

Speaking to Insurance Insider, Neal said: “You can’t put a potential $200bn loss into the non-life insurance industry and not expect the market to reprice.”

He added: “I hope we will learn from experiences of the past, whether that was 9/11 or another event, and realise that this has to be a significant pricing event.”

The Lloyd’s CEO said the Corporation would be as accommodating as it reasonably can be in permitting syndicates to grow in a hardening market.

Lloyd’s performance management directorate has been tough on growth in the past two years as it has sought to rectify market performance, a process which is still ongoing. The market has previously complained that Lloyd’s would not allow it to grow ahead of risk-adjusted rate.

“If there is growth that’s price-driven we will be very quick to support that,” Neal told this publication.

He said that Lloyd’s would do as much as it could to approve business plans quickly and simply, and “there would be forgiveness if the right opportunities are there within your plan to grow”.

The light-touch cohort of outperformers will gain automatic plan approval and therefore freedom to grow.

Neal said those which are not light touch, Lloyd’s had revamped the standard approach to business planning around some KPIs. Provided the plans are credible, and there is clear demonstration of how managing agents got to their forecasted loss picks, “we can fast track those approvals”, Neal said.

“I think the vast majority of syndicates will fall into those two buckets. If plans are sensibly constructed they will be approved,” Neal said. “But there is a third bucket, the high-touch syndicates, and if they have been a problem it will be a difficult set of discussions.”

The high-touch cohort is made up of both underperforming syndicates and those which are deemed material to the market – either due to their size or cat exposure. Lloyd’s 2020 planning documentation shows the high-touch cohort has around 20 syndicates and accounts for around 45 percent of market premium.

Lloyd’s will also be accommodating to new capital wishing to support Lloyd’s businesses as the market enters a period of opportunity, Neal said.

He pointed to the two new Lloyd’s entrants recently approved – Carbon and Ki – and said the syndicate in a box framework was generating steady levels of interest.

“Our ILS work continues, so there is no reason why that alternative capital shouldn’t come in,” he said. “There is still interest from those not yet participating in the market, who are thinking about when entry to Lloyds is the right time.

“As difficult as this pandemic is for our customers, and how devastating the broad impact has been, there is an opportunity for insurers.”

Lloyd’s is extremely well capitalised and will be able to shoulder the cost of Covid-19, Neal said, noting that the twice-yearly recapitalisation opportunities at Lloyd’s meant the market should also be able to bolster capital before the peak US wind season.

Neal also warned that the Covid-19 impact would drag out over a number of years, with the first year creating a catastrophe-type loss, then the effects of recession being felt on premium income in the following years.

“We have also got to keep a really strong eye on inflation probably for two years out,” Neal said. “I think our businesses at Lloyd’s have learned that we have got to adjust price to keep pace with the recessionary and inflationary impact that will echo through 2021 and 2022.”

The government has confirmed it will proceed with the planned extension of off-payroll rules into the private sector from April.

The confirmation came in a report from Treasury published this morning into the review of the implementation of the extension off-payroll working rules into the private sector.

However, having listened to stakeholders the government also revealed it is making a number of changes to address concerns, and support the smooth and successful implementation of the reform.

These include:

• Customers will not face penalties for errors relating to off-payroll in the first year – barring cases of deliberate non-compliance 
• HMRC has reaffirmed that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies (PSCs) for tax years before 6 April 2020, unless there is reason to suspect fraud or criminal behaviour
• The government reaffirms the rules will only apply to services carried out from 6 April 2020 onwards
• The government will legally require clients to respond to a request for information about their size from the agency or worker, and update the legislation to address concerns raised over the rules as they apply to off-shore companies.

While HMRC has already published detailed guidance on the reform and clarified the position on a range of concerns raised – for example, the client-led status disagreement process, including by making explicit the time limits within which a disagreement can be raised – the Employment Status Manual guidance has been further updated in line with other outcomes from the review. 

Although HMRC has already published a factsheet to support contractors prepare for the changes, and are continuing to step up their communications in the run-up to implementation, it will launch further products to support contractors in understanding the changes, including a self-help guide on how to spot tax avoidance schemes.

Government further committed to continue to listen to stakeholders, and monitor and evaluate the operation of the rules, while HMRC is to commission external research into the impacts of the reform six months after implementation, including on how status assessments are being made.

Commenting on today’s development, Samantha Hurley, director of operations at APSCo and co-chair of the government’s IR35 Forum, said the association’s members will welcome the extra time to adjust that the promised ‘soft landing’ offers.  

“When the review into implementation was launched last month, APSCo made it very clear that we were not seeking a complete delay to implementation, but a period of time within which recruitment businesses and end clients wouldn’t be penalised. This was communicated directly to HMRC and other stakeholders, and we are extremely pleased this recommendation has been listened to and taken on board by the government.

“HMRC has long maintained that it genuinely wants businesses to comply with the new rules and that there will be no witch hunt – and this latest move suggests this may truly be the case. The fact that it has also published additional guidance to educate the supply chain is welcomed by APSCo.

“In addition, policy changes announced today also offer much needed clarity for our members. The fact that all businesses now have a statutory obligation to confirm whether or not they are ‘small’ takes the onus off others in the supply chain, while confirmation on the timeline for disputes is also welcomed. Many of our members will be particularly relieved that the rules will no longer apply to clients based wholly overseas, with the obligation to determine tax status in these instances moving back to the contractor.

“While there is no escaping the fact that the extension of off-payroll rules is not ideal, overall, this is a significant win for the professional recruitment sector and I’d like to thank all of our members who got involved, shared their experiences and contributed to this outcome.”

Sophie Wingfield, director of policy at the Recruitment & Employment Confederation, said: “It’s a positive move that the Treasury is putting the obligation on small businesses to declare whether the IR35 rules apply to them. This is a direct response to what the REC has been calling for and should provide recruitment businesses with much needed clarity on their obligations.”

In relation to the decision by HMRC to take a ‘light touch’ approach to enforcement, Wingfield added: “Taking a ‘light touch’ approach to enforcement in the first year will create more problems than it solves. The consequences of not complying with tax law should be clear. Not doing so could create an unlevel playing field where compliant employers lose out to unethical ones. We need to see more details about how this approach will work in practice. What’s obvious from this is that the Treasury know IR35 is not quite right. Rather than tinkering around the edges of this complex legislation, we need the government to delay implementation until 2021 to make sure it’s done properly.”

While welcoming government’s promise of a soft landing in implementation of the rules, Julia Kermode, CEO of the Freelancer & Contractor Services Association (FCSA), added she is cautious that this may cause more confusion if clients and contractors are misled into thinking that the legislation has been delayed or will not be enforced.
 
“We have confirmed with HMRC that the soft landing is genuine and that penalties won’t ordinarily be applied for the first 12 months of implementing the reforms. This is good news because HMRC’s education programme was delayed due to the general election, so a number of businesses are only finding out about the reforms and their new liabilities now, just weeks before the legislation comes into effect. However, the soft landing does not mean that businesses and individuals can plan to ignore the changes because HMRC has also confirmed that penalties will be applied where there is deliberate non-compliance.

“FCSA also welcomes the clarity regarding overseas clients being out of scope, plus the amendment requiring clients to confirm whether or not they are small so that the supply chain can ascertain if the new off-payroll rules apply.
 
“It has been clear to me for some time that HMRC has been hell bent on planning to implement the off-payroll reforms this April come what may, and the publication of their review clearly shows that these reforms are coming whether we like it or not. I can’t see the budget on 11 March bringing about a U-turn, so it would seem that the House of Lords inquiry into the legislation is the last hope to affect any meaningful change.
 
“Having given evidence to the House of Lords this week, it was clear that they were listening to the various representations, and I did get the distinct impression that they were not supportive of the legislation. Time will tell as to whether or not they can make a difference but, in the meantime, I would strongly urge everyone to prepare for the reforms as penalties will still be issued for deliberate non-compliance.”

Make no mistake, the sudden news that performance management director Jon Hancock is leaving Lloyd’s will send ripples across the London market.

He’s the man who stopped the rot and set the wheels in motion for a more profitable Lloyd’s. At a time when the future for 1 Lime Street looked bleak, he demonstrated that a firm hand and a risk-based approach to regulation could start to rectify the mistakes of the past, albeit slowly.

Lloyd’s had suffered from a crisis of confidence – even John Neal acknowledged when he arrived as CEO that the marketplace had lost its mojo. Restoring positivity in the market has been a big win for the Corporation in recent times, and Hancock’s role across performance and transformation was an important driver of that renewed confidence.

It goes without saying that his exit is a major blow for Lloyd’s, at a time when momentum around performance and strategy was just starting to gain pace.

Lloyd’s is keen to publicly show that there are no hard feelings. The transition will be flexible to suit both parties, they have said. There will be no cliff edge.

Both Neal and Hancock have stressed that this separation is nothing to do with differences of professional opinion – nevertheless market tongues will still wag on whether this departure is really to do with the fact that Hancock’s more measured view of how to implement change was at odds with Neal’s ambition to spark a big bang moment for Lloyd’s.

Departing before he has done four years in the role – and in a critical year for the Lloyd’s transformation work – certainly suggests there is more behind the move than just itchy feet.

When we spoke to him, Hancock stressed a desire to return to the commercial side of insurance, to be challenged in a way that only P&L business accountability can do.

This only works to emphasise a wider challenge that Lloyd’s faces in retaining and keeping the best talent. The best staff are reluctant to work at regulators long term.

Talent retention and turnover of staff has historically been a big issue within the Corporation, even if recently improved sentiment around Lloyd’s puts it in a much better position to recruit a highly credible successor.

The next question for the Corporation is who wants to take on arguably one of the toughest jobs in the global (re)insurance market.

Few individuals impact the performance of such a wide swathe of the market. The performance management director has a remarkable level of influence on both market profitability and pricing dynamics.

For the Corporation, performance is a key pillar of the strategy and it cannot afford to falter now that gains are starting to be made – and particularly with another calendar-year underwriting loss most likely in the pipeline.

Neal has stressed that the tone of performance management will continue with the new recruit, and the standards that Hancock has set will “100 percent” continue.

For the good of the market, this statement must prove to be more than just lip service.

But at the same time, there will not be complete continuity between the new regime and the old. The new performance management director will surely want to make his or her own mark in the role and will not want to live in Hancock’s shadow.

It will be a fine line to tread, while carrying a huge weight of responsibility.

As we have said before, the talent element is crucial to Lloyd’s ability to carry out the transformational change it is targeting.

With much more still to be done, the next performance management director will be one of the most important hires, if not the most important, Lloyd’s has made in recent times.

Anticipation of a harder market and the creation of an unrestricted light-touch cohort of syndicates has resulted in an increase in the aggregate Lloyd’s market stamp capacity of 6.4 percent to £33bn ($43.6bn) for 2020.  

The Insurance Insider’s annual stamp capacity survey found that overall the market is permitted to write £2bn more business for 2020 than this year.

The increase also marks a reversal of the contraction in stamp seen for 2019, when the Lloyd’s performance management directorate’s clampdown had led to the exiting of a number of classes and a tough stance on growth. Stamp for 2020 is also higher than that recorded in the 2018 survey.

Stamp capacity is the amount of sterling business a syndicate is authorised to write in a year of account. For the purposes of this survey, stamp capacity is calculated as gross of reinsurance and net of brokerage.

The measure is not a perfect indicator of the amount of business that syndicates intend to write, with carriers choosing to maintain different amounts of headroom at different points in the cycle. However, it remains a useful proxy for the business the Lloyd’s market expects to write in a given year.

This publication previously reported that planned premium growth for the market in 2020 would be a few points higher than the expected risk-adjusted rate increase of 5 percent.

The top 10 syndicates by stamp capacity also collectively grew their stamp by 8.9 percent to £14.1bn.

The largest syndicate in the market is now Beazley’s flagship Syndicate 2623, which has grown its stamp by 19 percent year on year to £1.9bn for 2020.

Syndicate 2623 is understood to be a light-touch syndicate, one of a group of 15 which are permitted unrestricted growth due to a good track record.

As previously reported, the light-touch cohort of syndicates grew planned premium by 14 percent for 2020, compared to 3 percent for the rest of the market.

Syndicate 2623 has replaced MS Amlin’s Syndicate 2001 as the largest syndicate in the market. In 2019, Syndicate 2001 had a stamp capacity of £1.85bn, but has reduced this by £250mn for 2020 to become the third-largest syndicate with a stamp of £1.6bn.

The de-emption comes after news that MS Amlin would exit nine business lines as part of remediation efforts.

The number of Lloyd’s underwriting entities is steadily falling. 

The closure of a sequence of syndicates – most recently Acappella, Vibe and Pioneer – has been the most prominent cause of that drop. 

But over the last two weeks, developments at Arch-Barbican and China Re-Chaucer have thrown the spotlight on mergers as a driver of the contracting number of underwriting entities. 

Canopius and AmTrust at Lloyd’s were already on this path, along with Hamilton and Pembroke following deals earlier this year. 

The previous situation, with 60 managing agents running around 100 syndicates writing only £35bn ($46bn) of business at a 40 percent expense ratio, was clearly not sustainable. 

Mergers or fold-in acquisitions make a huge amount of sense given current pressures and the potential benefits on offer. 

Most obviously – as demonstrated this week by pending redundancies at Barbican and China Re – the mergers generate cost synergies. 

Where there are two managing agencies, one can be closed down. Two marine teams writing similar subscription books do not need to be retained. Operational staff are also duplicated. 

These cutbacks – often of very expensive staff – can make a dent in the expense ratio. 

But alongside this, there are two further important Lloyd’s merger benefits. 

The first is capital synergies, with complementary books potentially unlocking substantial capital benefits for merged syndicates. 
The second is a kind of escape card on growth. By merging two syndicates, management can ease top-line pressure, creating scope for an axe to be taken to the worst performing parts of each portfolio. 

And there is still lots of remediation work needed to purge the ills of the soft market. 

Following a rocky coming into line process for a number of syndicates, it is reasonable to assume that closures and mergers will continue through 2020. 

As much as it is always sad to see individuals lose their jobs, the firms that are making roles redundant as they pass through integration processes are doing the right thing. 

Because just as there needs to be fewer underwriting entities at Lloyd’s, there also needs to be fewer underwriters. 

Headcount in the London market must fall if it is to address its cost problem. And fewer of the people who work for Lloyd’s businesses need to be located in prime EC3 real estate. 

Figures from last week’s Lloyd’s presentation show pretty limited progress on expenses, with admin expenses actually projected to rise 20 bps year on year to 12.5 percent – albeit after an expected 110 bps improvement this year. 

I think these mergers represent one answer to the fundamental question that Lloyd’s is grappling with in so much of its blueprint thinking. 

That question is: how do you maximise the benefits and minimise the challenges of being both many and one? 

There are many different ways into this question. 

But among the crucial benefits of the manifold nature of the market are the capital spread that can be offered to clients, and among the key disadvantages are the duplication of cost – and associated complexity – of having many underwriting businesses appraise then write the same risk. 

The Canopius-AmTrust deal – which saw AmTrust take a mid-teens stake in Canopius and Canopius take on direct management of the merged business – is one model for consolidating underwriting while maintaining a capital spread.

Whether through paper deals or simply in-market sales, M&A is one answer to a fragmented Lloyd’s structure which does not make sense 

But M&A is not the only way to achieve this. The Lloyd’s modernisation plans create scope for other structures which achieve this outcome without shareholder changes. 

New approaches to the way that subscription business is placed, with follow-only syndicates and turbo-charged consortia, open the door to a situation where underwriting work is concentrated in a smaller number of hands, but capital diversity is retained. 

However the market gets there, it needs to find a way to drive to an outcome where regardless of how fractured the capital is on the front end, the number of entities underwriting on the front end must consolidate down. 

Lloyd’s market planned premium growth for 2020 will be a few points higher than the market-average risk-adjusted rate increase of 5 percent, The Insurance Insider understands.  

Sources who attended a market presentation today led by Lloyd’s performance management director Jon Hancock and CFO Burkhard Keese told this publication that all classes of business, with the exception of accident and health and personal accident, are expected to have rate rises in 2020.

The market growth expectations come after a planning process which subjected syndicates to the same level of remedial rigour as last year, with Lloyd’s maintaining its “improve or remove” stance on planning. Many underwriters had been concerned that the Corporation’s firm stance on growth would prevent them from taking advantage of the improving rate environment in London.

It was suggested that the improvement in rate would also help drive a better market performance in 2020. The planned combined ratio in 2020 is said to be a few percentage points lower than the plan for 2019, driven predominantly by the loss ratio.

All syndicate business plans are now complete, with the official coming-into-line deadline on 3 December, and during the planning process Lloyd’s continued with its differentiated approach on oversight.

It is understood that the “light-touch” cohort of 15 syndicates – who are granted automatic business plan approval as a result of their good track record – will grow significantly more than the market average in 2020. This growth will predominately be through exposure growth in existing classes but some have chosen to enter new lines of business.

Conversely, the “high-touch” cohort of around 20 syndicates, which represent 45 percent of market premium, will grow less than risk-adjusted rate.

It is understood that a syndicate can also be designated high-touch because of its materiality to the market due to size or cat exposure – it is not necessarily an indication of poor performance.

There is also differentiation between the level of oversight within that high-touch cohort, but generally it requires more intervention and communication with the performance management directorate (PMD) on areas such as reserves and results.

The Decile 10 process continues and planned premium for the lowest-performing decile of business will reduce by a few hundred million pounds, sources said. The combined ratio for Decile 10 business will also improve by 3 points year on year.

Meanwhile, planned premium for deciles 1 and 2 will grow by several hundred million pounds. The middling deciles will grow in line with rate.

As previously reported, business plans could only gain approval with a reduction in expense ratio, and this publication understands the overall planned expense ratio for 2020 is 0.5 percentage points lower than that planned for 2019.

This is due to lower acquisition costs due to a changing business mix. The admin ratio is also improving but to a lesser extent than last year.

In terms of capital, the Lloyd’s market will hold more capital for 2020 plans than 2019, due to the additional premium which will come into the market. However, it is understood that as a proportion of premium, the amount of capital held is lower, due to a higher level of profit written into the plans.

It is also understood that there were fewer capital loadings this year than last.

Lloyd’s PMD had committed to an improved business-planning process this year, including a four-week turnaround for those plans on message. This planning season 75 percent of plans were put through within that timeframe.

The market also asked for more feedback in the process, and Lloyd’s provided it on 92 percent of plans within 10 working days. Lloyd’s also provided immediate feedback after the capital and planning group meeting, with 85 percent of plans responded to within 24 hours.

Sources said the PMD was pleased with this improved process compared to last year but still had more work to do on this front.

Market participants who refuse to amend inappropriate behaviour must be removed from their roles even if they bring in large profits, the Lloyd’s CEO has said.

John Neal said at the Insider Progress event yesterday: “I don’t think there are ‘rainmakers’. The organisation is bigger than the individual.

“If they are not behaving and they cannot change, they should go.”

Neal’s comments came after Financial Conduct Authority CEO Andrew Bailey said in September that he had seen instances within the financial sector where management had quashed complaints about “loose cannon” individuals because of the profit they brought into businesses.

It also comes after AJ Gallagher UK CEO Simon Matson was forced to issue a public apology after a court case revealed him and commercial director Vyvienne Wade had used racist and abusive language about departing staff. Both currently remain in post.

The Lloyd’s culture study revealed that just over a fifth of respondents had seen people in their businesses turn a blind eye to inappropriate behaviour, and sparked a programme of measures from the Corporation that aim to create an inclusive culture within the market.

Neal noted that despite the figures in the survey and Lloyd’s messaging on diversity and inclusion (D&I) since then, some individuals were not yet on board with the initiative.

“I am genuinely worried that people still don’t get it,” Neal said.

“They say, ‘it’s not as bad as you think’. I don’t care how bad it is, it’s not a Richter scale of behaviour.”

Neal pointed out that the average age of the industry had been rising over the past two years, rather than falling, as efforts faltered to recruit the next generation.

Younger people do not consider a career in insurance to be fulfilling and, according to the executive, improving the culture was a key part of attracting in millennial staff.

Neal said that when the Corporation launched next year’s culture survey in early summer, he wanted it to attract substantially more responses than the 6,000 it received this year.

The CEO detailed Lloyd’s actions on culture and inclusivity so far, explaining that the Corporation was in the midst of checking D&I policies within each Lloyd’s business, and ensuring each had the ambition to change.

Lloyd’s has also set up an advisory group chaired by Fiona Luck, non-executive director for talent and culture. This board will include independent experts who will hold the Corporation to account on D&I and report each year on the market’s progress in Lloyd’s annual report.

The Lloyd’s market made a £2bn ($2.8bn) pre-tax loss in 2017 as £4.5bn of major claims took their toll.

The market made its first underwriting loss in six years, as the Lloyd’s combined ratio worsened by 16.1 percentage points to 114.0 percent. Lloyd’s plunged into the red after making a £2.1bn pre-tax profit a year earlier.

Lloyd’s had an underwriting loss of £3.4bn in 2017, compared to a £468mn underwriting profit the year before.

Gross written premiums increased by 12.3 percent to £33.6bn, driven by new products such as cyber cover and expansion in the US market.

The £4.5bn major claims tally more than doubled from 2016, as hurricanes Harvey, Irma and Maria battered the 332 year old market.

Gross of reinsurance, Lime Street paid out £18.3bn in claims over the year.

Along with major cat claims, the market also had to contend with a rise in non-cat losses.

According to the Lloyd’s annual report, published today, the underlying accident year combined ratio, excluding major claims, deteriorated by 4.5 percentage points to 98.4 percent.

The rise in non-cat claims was linked to underlying claims inflation, an erosion in deductibles and pricing weakness.

Lloyd’s chairman Bruce Carnegie Brown said in a statement today: “After a number of relatively benign catastrophe years, the second half of 2017 demonstrated the precarious nature of the world in which we live.”

Carnegie Brown said the market losses were “not a surprise”.

“Last year it was clear that the benign claims environment was masking the impact of tough trading conditions and so it has proved,” he said.

Prior-year releases were £706mn in 2017, compared to £1.15bn in 2016. That improved the combined ratio by 2.9 points compared with a 5.1 point uplift from reserve releases the year earlier.

Lloyd’s made an improved investment return of £1.8bn, compared to £1.3bn in 2016.

Lloyd’s CEO Inga Beale said the market faced two challenges: modernisation and improving diversity.

Beale called on the market to “speed up the adoption of the market’s modernisation programme, which will digitise processes, reduce unsustainable expense ratios, and make Lloyd’s more attractive to do business with”.

She continued: “We need to attract the best talent from around the world if we are to continue to innovate and provide customers with the products they need in today’s fast-changing risk landscape. That is why we are working hard on closing the Corporation’s gender pay gap.”