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.”

The International Underwriting Association (IUA) is seeking regulatory leeway on a proposed threshold after which European carriers with consumer-facing operations would have to convert their UK branches to subsidiaries for Brexit.

The Prudential Regulation Authority (PRA) has since December been consulting on a proposal to supervise European Economic Area (EEA) commercial carriers as third-country branches after Brexit, instead of making them become separately capitalised subsidiaries.

The proposal will relieve most of the 80 EEA carriers operating branches in the UK from the need to convert to subsidiaries that are controlled and capitalised locally. However, it is contingent on what the IUA considers an ill-defined proviso that their operations do not involve retail insurance.

The proposal specifies a threshold of £200mn ($278.4mn) for “Financial Services Compensation Scheme-protected liabilities”, above which the branches would have to become subsidiaries. The IUA fears the relatively low limit could pull in a number of commercial carriers.

CEO Dave Matcham said: “The IUA hopes that such a limit will not be rigidly applied and that other factors offering policyholder protection will also be taken into consideration,” the organisation said in comments released to this publication.

“We would like to see greater clarity about the new factors to be considered alongside current requirements for third-country branch authorisation.”

Overall, however, the executive welcomed the PRA’s plan for dealing with Brexit.

“It suggests there will continue to be a high degree of supervisory cooperation between the UK and EU and that, provided they are not conducting material retail business in the UK, firms may apply for authorisation as a branch,” Matcham added.

In its December consultation paper, the PRA noted that it has a “greater ability to mitigate risks in subsidiaries as it has access to a wider range of supervisory tools and legal powers. Accordingly, we expect a firm above a certain threshold to subsidiarise.”

It also noted that the proposed £200mn threshold for FSCS-protected liabilities as not a “hard limit”.

Despite qualms over the retail threshold, the PRA’s blueprint in the main represented a major unilateral concession to EEA insurers and banks as the regulator marked a pathway for cooperation with peer supervisors. Its plan for the insurance sector mirrors its thinking on banks.

In December the PRA made the proposals subject to Brexit negotiations yielding no unexpected surprises and to it garnering “sufficient supervisory cooperation and assurance on resolution” from carriers’ home state regulators.

In tandem with the PRA December announcement, the UK Treasury said it would legislate to ensure that EEA carriers in the UK could continue to pay claims on existing policies after Brexit.

However, the outlook for contract fulfilment for UK insurers operating in certain EEA countries is less certain, save for those which already have plans to establish EU subsidiaries in train.

The London Market Group noted in November that £6bn ($8bn) of premium written in the London market emanates from carriers with an EU base.

About 2,400 EU nationals work in the London insurance market out of a workforce of 52,000, while EU carriers have 6 million policyholders in the UK.

The PRA began accepting applications for branch authorisations at the start of the year. It expects about 200 applications between now and March 2019, up from an average of 12 a year.

Its consultation on the branches proposal ends on 27 February.

Lloyd’s has estimated that male employees across the Corporation are paid 27.7 percent more on average than female staff.

The Corporation published its gender pay gap figures today, as all UK companies with more than 250 staff are required to do by 4 April.

On a median basis, Lloyd’s gender pay gap is 32.1 percent.

The gender pay gap is the difference between the gross hourly earnings for all men and the gross hourly earnings for all women.

There is a higher proportion of men than women in senior roles across the Corporation, Lloyd’s said in commentary on the figures.

Although Lloyd’s has a 50:50 gender balance on the executive committee, there is almost double the number of men than women in the highest-paid quartile of the Corporation, at 66.2 percent compared to 33.8 percent.

In the lowest-paid quartile this is reversed, with over twice the number of women than men, at 66.2 percent compared to 33.8 percent.

There is also a higher proportion of part-time female employees, which can result in slower career progression and impact remuneration, Lloyd’s said. About 11 percent of Lloyd’s employees are part-time. Of these, 92 percent are women.

Lloyd’s CEO Inga Beale said: “We know that access to senior roles has historically been limited by the culture of the insurance sector that was much less inclusive and welcoming than it is now.

“While there has been good progress, particularly over the past 30 years, progress is simply not happening fast enough. We must turn this situation around, not just to benefit women, but to benefit the whole sector.”

For bonuses, men working at the Corporation are paid 36.7 percent more than women on a mean basis, and 40.7 percent on a median basis.

However, the percentage of female employees receiving a bonus is slightly higher than for men, at 87.3 percent compared to 84.7 percent.

“Our mean bonus gap of 36.7 percent is based on actual bonuses paid, and is impacted by the fact that the calculation does not take into account pro-rated bonuses which reflect the reduced hours worked,” Lloyd’s said.

The gender pay gap is different to equal pay, which is men and women being paid the same for the same work or work of equal value and is a legal requirement.

Lloyd’s said it did not believe it had an equal pay issue. However, it said this was reviewed annually.

“Lloyd’s is committed to closing the gender pay gap by working to increase the number of women taking up senior roles across the Corporation, and improve the gender and broader diversity balance across all levels,” it said.

The Corporation said redressing the gender imbalance would require a long-term approach, and said it had set a diversity target of having at least 40 percent women in the top 25 percent-ranking employees in the next five years.

It outlined four 2018 objectives to reduce the gender pay gap over time. These included mandating a 50:50 gender split for all external recruitment long lists, reviewing current succession plans and the execution of a bespoke female development programme.

Lloyd’s will also conduct a full review of family care policies and continue to improve flexible working for all employees.

The Corporation also said it had a number of ongoing initiatives to improve gender equality, including inclusive hiring and unconscious bias training, enhanced progression opportunities for all employees and a gender equality employee network.

In comments published today in the Financial Times, Beale called for a rethink of the reporting requirements for partnerships, such as law firms. Since partners are not deemed to be employees, they do not feature in gender pay data. Beale suggested the omission masked the extent of the gender pay gap at certain firms.

The head of insurance supervision at UK regulator the Prudential Regulation Authority (PRA) has said the watchdog would probe deeper into the impact of facilities on carriers.

The move came after participants in a recent survey expressed worries about a lack of transparency and the potential for conflicts of interest.

In a 22 June letter to insurance CEOs, PRA director David Rule noted that most firms that took part in a recent market-monitoring exercise “had concerns about changing distribution channels”.

Worries included higher commissions, difficulties in exposure management and the implications of moving from case to portfolio pricing, he noted.

“Views differed as to whether broker-insurer facilities were significantly increasing acquisition costs. Some firms stated that increased commissions could be offset by a reduction in their own claims administration,” he wrote.

“However, a common point of feedback was the importance of managing the potential for conflicts of interest and transparency of commission arrangements. Several firms mentioned increases in different types of commission and fee arrangements that could be perceived as going against the benefit of the insured.”

Rule said that the PRA survey found that the Lloyd’s market is expecting the decline in open market placement and growth of delegated underwriting to continue.

He noted that a company’s distribution strategy is a “commercial decision, but it may have an impact on a firm’s ability to monitor, manage and assess risks”.

The regulator continued: “This is an area we will seek to understand in more depth as part of our ongoing reviews into the underwriting and exposure management of a number of firms in the London market.”

The PRA’s work on the area, which was revealed earlier this month by this publication, marks a change from a previous more laissez-faire approach to carriers’ arrangements with brokers.

The underwriting and exposure management review is one of several initiatives detailed in Rule’s letter.

The regulator is working with large carriers and zeroing in on a select number of lines of business.

Rule said the PRA is also looking at the impact on those firms of broker facilities, MGAs and other delegated underwriting arrangements in which they participate.

In these cases, “we will be assessing how they ensure that they understand the impact of business written on their overall risk profile and their results”, he wrote.

The PRA is also conducting a thematic review of distribution practices across smaller Lloyd’s managing agents.

This publication reported earlier this month that the PRA’s work on facilities and other underwriting practices will feed into separate studies the Financial Conduct Authority (FCA) is conducting on value in the insurance distribution chain and the wholesale insurance market, which are due to end in the business year beginning April 2018.

Facilities and rising acquisition costs are also expected to be one of the areas of the FCA’s focus.