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. 

The US property and casualty sector slumped in the first nine months of the year to deliver a $20bn underwriting loss after a trio of hurricanes pushed the industry combined ratio to the highest level in five years, according to rating agency AM Best.

Cat losses had already reached $38.4bn before the beginning of the fourth quarter, which brought Hurricane Nate in the Gulf of Mexico and wildfires that ravaged California.

The claims bill is almost double the figure from last year, climbing 89 percent, and higher than AM Best’s $36.1bn estimate for full year 2012, which includes Hurricane Sandy.

As a result, AM Best estimates that catastrophes added 9.8 points to the sector-wide combined ratio, a significant increase on the 5.4 point estimate the rating agency forecast last year.

The events pushed the industry’s combined ratio to 104 percent in the first nine months of the year, up 4.3 points from the same period in 2016.

Stripping out reserve releases for the latest period exposes a combined ratio that is even further in the red at 105.7 percent.

The underwriting loss calculated by AM best for the year so far is almost 10 times the $2.3bn deficit the rating agency reported this time last year.

It said that an 11.3 percent uptick in incurred losses for the period more than offset a 4 percent increase in net premiums earned.

“The industry benefited from a $2.5 billion increase in net investment income earned, which was negated by a $4.1 billion loss in other income, reflecting the impacts of a retroactive reinsurance contract entered into in February 2017 by AIG and National Indemnity,” AM Best said, referring to the Berkshire Hathaway subsidiary.

The rating agency said – for the first nine months of 2017 – the deal helped drive down the industry’s total pretax operating income by 65 percent to $10.8bn.

But, despite a $7.9bn decline in net income, industry surplus grew to $699.8bn during the period driven by $11.2bn in unrealized gains, mostly from Berkshire Hathaway-owned 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.

Lloyd’s CEO Inga Beale has signalled that the Corporation will shift its syndicate oversight activity to focus on all elements of the combined ratio, rather than almost exclusively on the loss ratio.

In a half-yearly circular sent to the market earlier today, Beale said the move was designed to better protect the Central Fund in the current “challenging environment”.

However, at an individual class and aggregate level the Corporation will continue to focus on the loss ratio and downside risk management.

Beale also reiterated previously announced plans to spend more time helping underperforming syndicates to improve their underwriting performance while leaving the good performers to “get on with running their successful businesses”.

On acquisition costs, Beale noted that the Lloyd’s oversight team had collected data from a number of managing agents, and would soon contact the market on the next possible steps to help reduce costs across the entire value chain.

The Lloyd’s CEO also said that while progress against the Corporation’s objectives for 2017 had been “encouraging so far”, the fact that the market was expected to shrink this year and next showed there was still a performance gap to address.

In addition to improving efficiency, cutting costs and maintaining underwriting standards, Beale said that targeted market oversight, innovation and talent would be key to closing this gap.

She went on to reiterate an earlier pledge from the Corporation to conduct fewer minimum standards reviews and focus on high-impact areas, and to have fewer portfolio review classes.

Beale’s letter also detailed the strengthening of Lloyd’s capital position following the issuance of a £300mn ($382mn) Tier II bond and said that “good progress” had been made on the Target Operating Model (Tom).

At present there are 19 brokers and 80 carriers, including six MGAs, signed up for electronic placing, while more than 5,000 risks have been bound across three lines of business.

“We need to maintain this momentum. As new lines of business come online, I would encourage all of you to get on board. The more people use it, the more effective it will be,” she said.

The ability to process claims and premiums electronically had increased the “right first time” rate from 60 percent to more than 90 percent and speeded up the flow of funds to carriers by about 30 days, Beale said.

And next month structured data capture will be tested, which will help carriers reduce data capture costs and improve data accuracy.

Beale also referenced the Corporation Operating Model programme, which includes moving to an account management system for managing agents.

“A pilot scheme with six managing agents of various sizes is currently underway, and we aim to roll out account management to all managing agents by the end of the year,” she said.

AM Best has said it will not directly use Solvency II results in its rating assessments over concerns the regime does not provide an accurate picture of carriers’ balance sheets.

In a statement released today to coincide with the first solvency and financial condition reports under the new regulations, the rating agency said while Solvency II represented the European regulatory position and is intended to be risk-based, it would instead continue to use its internal Best’s Capital Adequacy Ratio (BCAR) model.

It said: “It is AM Best’s opinion that [Solvency II] may not provide a reliable picture of the underlying economics of an insurer’s balance sheet at either the detailed or corporate level, and neither does it provide comparisons across insurers on a global basis.”

The agency added that it did not believe the quantitative data of the entire regime gave a “complete picture of a company’s credit risk”, much less a single ratio.

However, it noted that data from the regulations could influence the inputs into the BCAR model, particularly information related to available capital in life insurance operations for European carriers.

While the regime has led to an increased burden for all European (re)insurance subsectors, life insurers are set to be the most heavily impacted by the changes, AM Best said.

Fellow ratings agency Fitch said in early 2016 it would also opt not to use Solvency II metrics in its ratings as it said the data was not comparable between insurers because of the varied calculations in use.

Hugely successful London based insurance company requires a Qualified Accountant with Strong Reinsurance experience and Business Partnering experience for a Financial Controller role.

As part of a small team you will be a subject matter expert for Reinsurance across the business. The role requires a strong Accounting background and Reinsurance understanding. You will liaise across the business talking with Finance, Underwriters and heads of Business Units on a daily basis.

You will be responsible for managing a small team of Accountants and deputising for the CFO when required.

Insurance/Reinsurance experience, Qualified Accountant (ACA, ACCA, CIMA), Business Partnering.

Successful London Market Insurance Company requires a Qualified Accountant to lead a Financial Shared Service function providing services to the wider group.

Services include Production of Monthly MI, Expense allocations, accruals and prepayments, Reporting for all entities under US GAAP, Local GAAP reporting, Reserving Accounting, Treasury and Bank Reconciliations.

As the FC you will be responsible for Management/Delivery of all accounting processes as well as production and reconciliation. You will also work on continued improvement of the function

Candidates should be ACA, ACCA, CIMA Qualified, with insurance and reinsurance experience as well as experience of managing a team.

Hugely successful London based insurance company requires a Qualified Accountant with Strong Reinsurance experience and Business Partnering experience for a Financial Controller role.

As part of a small team you will be a subject matter expert for Reinsurance across the business. The role requires a strong Accounting background and Reinsurance understanding. You will liaise across the business talking with Finance, Underwriters and heads of Business Units on a daily basis.

You will be responsible for managing a small team of Accountants and deputising for the CFO when required.

Insurance/Reinsurance experience, Qualified Accountant (ACA, ACCA, CIMA), Business Partnering.

Large City based Insurance Company requires Qualified Accountant with Reinsurance experience to manage the Financial reinsurance reporting team.

Ensuring accurate US GAAP Financial Information and develop and implement new systems to ensure appropriate environment of control for reinsurance reporting.

Maintain relationships with various teams.

Manage monthly review and conversion of outwards reinsurance premiums.

Develop in depth understanding of the business.

Candidates should be Qualified with knowledge of US and UK GAAP, Lloyds Market reinsurance accounting and reporting experience. Experience of implementing reinsurance reporting processes and controls.