The Corporation’s chief of markets, Patrick Tiernan, emphasised that the focus on cat pricing, and ensuring loss picks are realistic, did not mean Lloyd’s appetite for risk is changing.
In a market message presentation today, he said the Corporation was prepared to support syndicate growth, including with increases for mid-year 2022.
But portfolio risk management director Kirsten Mitchell-Wallace said that whereas cat risk was previously often assessed from the perspective of protecting solvency, it also needed to be viewed in terms of earnings impact.
She reiterated that 2021 and 2020 nat cat losses were actually close to the modelled mean, showing that they are not outliers when taking into account exposure changes.
In Florida, the number of coastal residents has shot up 60% since 1990, while 40% of US new build homes are in wildfire-prone areas, Mitchell-Wallace said.
“It is very likely that there will be more and higher losses in the future even without climate change,” she said.
Lloyd’s firms will be expected to articulate the differences between cat loss ratios from modelling in the business plan and from firms’ actual experience.
Mitchell-Wallace said the Corporation would also look for more information on a syndicate’s tolerance for major losses.
But she emphasised that catastrophe risk has a home at Lloyd’s and that volatility is part of the game. “We understand that the one [loss] number you are least likely to hit is the number quoted in your plan.”
This was echoed by Tiernan, who ahead of the briefing had told sister publication Insurance Insider that the proportion of its book that is currently cat-exposed is around 10 points lower than its outer limit.
“In no way is our appetite reduced, but you have to do it right,” he said.
During the briefing, he also said that the message on cat risk would have little practical implication for some syndicates. “Our best cat syndicates underwrite the class very well.”
Inflation also in focus
Other aspects of the briefing focussed on the need to adjust pricing in line with the higher inflationary environment.
After the acute focus on driving rates to bring down attritional loss ratios in recent years, Tiernan noted that if the market became “careless in not rating for inflation”, Lloyd’s would end up back at its 2020 level by the end of this year.
“We must not make the mistake that remediation is a once and done exercise,” Tiernan said, adding that inflation could quickly erode progress made in recent years.
Meanwhile, even though the market’s expense ratio has fallen, controlling and reducing the absolute level of expense was another key target for the Corporation.
