Lloyd's Needs a Phoenix Moment

March 11th, 2021

The efforts of Lloyd's to modernise over the past decade have reached a turning point. With tough results beckoning for a long-closed underwriting room, now could be a unique window of opportunity for digital to take hold.

Given the scope of the subject matter – and this author's enthusiasm for it – this is a long read. Make sure to follow Supercede so you can find it again later.

A Grim Outlook.

At the end of this month, many will watch anxiously for the announcement of Lloyd’s Annual Results for 2020. As this article and its analysis uncovers, the news is unlikely to be good for the three centuries' old marketplace.

Add to that, the fact that Lloyd’s in its physical manifestation is currently closed, and unable to excel on the basis of its traditional hooks of footfall and eccentric Londonisms. Read on if you are wondering what Lloyd’s value proposition offers today, and what it might look like tomorrow.

Then, add to that, the fact that Lloyd’s in its digital manifestation remains in a state of flux, with blueprints replacing blueprints, systems switching suppliers and target operating models all but vanishing. Read on if you too are asking when the runaway train of digital transformation left the station, and why it still hasn’t arrived.

Lloyd’s path to digital greatness has been beset in recent years not only by a pandemic, but also by a culture crisis, the rise of cyber threats and the need to continually reassure investors its market oversight is effective. Perhaps greater than all of these obstacles, though, has been the need to overcome its own identity as a great big room with a bell in the middle of it.

Since my own tenure on the Corporation of Lloyd’s staff, a readiness to challenge these fundamentals has been brewing steadily. In today’s unique circumstances, our former daily experiences at Lloyd’s have been rendered – we hope temporarily – a memory, an idea, an imagination. Thus we must ask: are these the ashes on which the Future at Lloyd’s will be built? Or, as some may contend, are we simply watching it burn?

This article is not intended as a critique of Lloyd’s, but an invitation to debate, with more facts available than the most recent set of visionary statements alone. Because, although the latest blueprints – and the perhaps too aptly named Future at Lloyd’s – offer us hope of the phoenix Lloyd’s may one day become, the question is, ever more urgently, when

Yes, Change Started Before the Pandemic.

But not that long before, as this article discovers through a thousand-foot view of the market results, initiatives and buzzwords of the last ten years. The findings show a stark contrast between the missions of 2011 and 2021, through the Corporation’s management of a critical transition of focus; from stewardship of a past identity, to investment in one that could be sustained into a digital future.

Readers at the time probably did not notice that the word ‘innovation’ was entirely absent from Lloyd’s 146-page Annual Report of 2011. And, although the term was permitted entry more frequently in the years that followed – even thirty-plus times in 2016 and 2019 (also the only two years in which ‘InsurTech’ featured) – it notably appeared just once in the Interim Report for 2020.

It is of course fair to say that Lloyd’s has had other things to focus on beyond innovation during these periods. ‘Underwriting discipline’ featured every year between 2011 and 2019, with Lloyd’s primary focus remaining the protection of its brand and chain of security, anchored for much of this period around a strong Performance Management division and preparations for Solvency II.

For the most part innovation, where mentioned, had been reserved for low-commitment activities. The favourite fallback was to support underwriters' efforts to develop new products, invoking Cuthbert Heath and summoning the nostalgia of insuring zoo animals, the first satellites and celebrity body parts. As a concept, innovation lived quite separately to market modernisation initiatives, which focused mostly on improving claims processing – an area in which Lloyd’s has, to its credit, earned a deservedly strong reputation.

At several moments in the last decade, that passive approach to innovation has looked ready to change; as it does now, with the Future at Lloyd's. But from this author's own experience as part of the team designing the Lloyd's Index, innovation is one of the first cards to fall when the table wobbles unexpectedly. Whether the latest initiatives can survive a pandemic remains to be seen.

An Identity Crisis as the Trigger.

Let's go back to the beginning. From an absence of innovation in 2011, when did things start moving towards the prevailing levels of innovation mania?

Arguably the turning point came with the contents of a report released in 2014, entitled ‘London Matters’. By holding up a statistical mirror to the market, which showed cracks, longstanding perceptions of London's exceptionalism were rocked. Challenged as to whether London actually was the centre of the insurance universe, action had to be taken.

Lloyd’s new Director of Operations, Shirine Khoury-Haq, wrote a memorable description of the situation in the annual report for that year : 

“It makes me think of frogs sitting comfortably in what they suppose is a warm bath, but is actually a pot on top of a hot stove, slowly coming to the boil. By the time we realise there is a problem it could be too late.”

Khoury-Haq’s piece is very compelling and worth reading in full (see p. 31 of the report), particularly her note that “we cannot wait for a burning platform that forces us to act – for a disruptor to come in and show us how it should be done”. 

Crucially though, she highlights that the greater challenge of modernisation is less in the execution itself, but rather in earning the support of the market towards getting it done. With outright defiance from some practitioners, we may remember that Lloyd's enormous array of market participants has not only been its greatest strength, but also its greatest weakness. As Khouray-Haq put it, diplomatically:

“If we can be clear about what drives individual competitive advantage in our market, and if we can be equally clear about what will bring value to the cluster but not the individual organisation, we can demonstrate the benefits of market modernisation and shared global services.”

Collectivising the opinions of the market's various associations and their members would set the foundations for many joint ventures to come, but it would also signal to Lloyd's the costs and impracticality of achieving consensus.

Should London Matter?

Many leadership figures responded positively to the call to arms, championing the market’s initiatives through their own companies’ efforts and the collective force of the LMG. However, an unintended side effect of drumming up interest in the London Matters report was that the costly quirks of doing business in London were alerted ever more emphatically to a widening group of international stakeholders:

“London’s expense ratios were 9 percentage points higher than its peers in 2013, driven by higher acquisition and transaction costs, putting it at a price disadvantage for more price sensitive risks.”

The group of worried observers included not only customers, brokers and markets considering where to trade, but also the parent companies of Lloyd’s and London Market businesses. Parent companies who had previously turned a blind eye to the ‘unique’ performance characteristics of their London subsidiaries were now seeing the risks of rising investment requirements for an already expensive distribution channel.

With empty seats in the carriage, doubts began to grow in the minds of those who had already boarded the innovation train at an earlier stop. Not only was it an expensive ticket for syndicates paying the 0.1% market modernisation levy, but it wasn’t clear how long it would take to reach the destination. 

Market practitioners were also wary of celebrating the ‘pioneering contract’ signed with Ebix too early, with failures of Inreon, Kinnect and Ri3k still in recent memory – the latter having come painfully close to adoption in 2008, before being pivoted many years later into what is now called PPL

Perhaps in an attempt to calm everybody down, the London Matters Report was refreshed in 2017 (and later, in 2020 too) and somewhat scaled back its narrative on the dangers of London’s process and technology dawdling. But with numbers that spoke for themselves, it couldn’t mask London’s dwindling relevance on the global stage either.

By questioning whether it deserved to be special, London had opened Pandora’s box: it was now impossible to escape the narrative that Lloyd’s and the London Market were old-fashioned, expensive places to do business. With an average expense ratio of 39.5% at Lloyd’s (2016-2019), it is a reputation well-earned: even if the administrative component of that ratio does appear to have fallen steadily from 14.0% in 2016 to 11.2% in 2019.

TOM To the Rescue, Briefly.

In 2015, the momentum stepped up a gear again, with eight new strategic priorities drawn up for Lloyd’s. With a quarter of the strategy represented by Innovation and Ease of doing business, the Corporation had paved the way for a major investment in the colour orange.

It will be hard for many to forget the signs around Lloyd's that affirmed, with cultish enthusiasm, that we all supported TOM; that is, the Lloyd’s Target Operating Model. It seems TOM, though, could only take us so far: as this page reads, its baton is now carried forward by several other runners in the relay race, while it is laid to rest.

Since the demise of TOM, however, these runners appear to have split off onto slightly different paths. And, directed from the old TOM site to three different organisations – LIMOSS, PPL and the Future at Lloyd’s – the innocent reader finds difficulty comprehending which of these entities is now in the driver’s seat.

After a bit of digging, they might understand that LIMOSS is the body which has been put in place – under the direction of the LMG – to manage the London Market’s portfolio of common technology and business process services: “the Bureau (XIS and XCS), TMEL, PPL and the Market Services developed by the LM TOM including, among others, DA Audit, DDM, SDC and the Data Glossary”.

Though a little baffling, the distinction of ownership here is important. PPL had been an LMG initiative, with some governance from Lloyd’s, but not control: adding to an already long list of committees, entities and projects in which Lloyd’s had a partial stake, but limited power.

Should the Future at Lloyd’s initiative – and the blueprints that seem to focus on Lloyd’s, rather than the London Market as a whole – be interpreted as a strategic fissure between these tangled webs of committees, entities and associations, and an independent Corporation of Lloyd’s, vying for its own future?

Digital on the Menu at Last.

Let’s return to our journey through Lloyd’s Annual Reports.

2017 was the first year that the word ‘digital’ was used by a Lloyd’s Annual Report to refer to itself, after very occasional usage in reference to third parties in prior years. A very small section on Technology in the CRO’s report on the External Risk Environment read:

“In other industries businesses are delivering their products and services through online platforms. We need to keep pace with these changes. While the most complex risks will continue to benefit from face-to-face negotiation, simpler risks can already be written digitally”.

But it was still only a small nod to the idea of digital, for an organisation that wasn’t outwardly ready to supersede its face-to-face narrative.

That transformed in 2018, with a change in the guard. Not only did investment in Lloyd’s digital future make the new Chairman’s Statement at the front of the Annual Report, modernising the market also took centre stage in the CEO’s letter. In that piece, too, we saw a championing of the new Lloyd’s Lab and the very snazzy furniture that came with it.

But that was just the appetiser. In 2019, through a series of press releases and a change in allegiance to the colour blue, a bold new strategy called the ‘Future at Lloyd’s’ was announced – today complete with its own microsite. After pausing to complain that the FAL acronym was already in use elsewhere at Lloyd’s, practitioners across the market reportedly welcomed the news with ‘overwhelming support’.

Culture Eats Strategy for Breakfast.

Lloyd’s received more enthusiasm than expected for the ambitious proposals in its Future at Lloyd’s vision. One wonders whether approval had been its intention, or whether the lofty aims put forward were originally intended to buy time and generate debate, rather than signal a commitment to any immediate action. Instead, a lack of anticipated consternation created the opposite effect: more pressure to get on with delivering what was now a promise to change. 

Perhaps they should not have been surprised. In addition to kickstarting the TOM, outgoing Lloyd’s CEO Dame Inga Beale had encouraged tremendous progress on culture, imploring practitioners to look beyond the four walls of the underwriting room and, at the same time, to better understand the people who worked within them. To acknowledge and understand how the wider world was changing, and through dialogue, to decide how it too wanted to change.

Inclusion at Lloyd’s initiatives like the first Dive In Festival in 2015 gave individuals across the market a voice towards setting expectations for the modern, globally-minded marketplace Lloyd’s needed to become, in a long overdue challenge to the old boys’ club, its culture and its firm grip on the status quo. It feels in many ways appropriate that the newest Lloyd’s leadership was tasked with overhauling culture and technology simultaneously.

With no small task ahead, Lloyd’s understandably wanted to refine the Future at Lloyd’s vision, at least a little, before getting stuck in. And so began the blueprints.

Blueprint After Blueprint.

No detailed analysis is provided here on each individual blueprint prepared by Lloyd’s, as excellent resources already exist: see Oxbow’s Blueprint One (September 2019), Update to Blueprint One (February 2020) and Blueprint Two (November 2020) in-a-nutshell summaries, for example. Instead, they are considered here collectively to help us guess at whether Lloyd’s has enough Blueprints by now, or will require a third or fourth. 

With peak momentum towards a mindset of change, and a vision largely approved by the market, new management likely shared the concern that irksome cooperation with so many market bodies – the LMA, the IUA, the LMG, LIIBA, BIBA, PPL, Xchanging and now LIMOSS, to name but a few – would hamper its already creaky agility when it came to ‘getting on with it’. 

Thus, in an effort to master its own fate, the Lloyd’s Corporation announced in its first blueprint an intention to ‘acquire a financial interest in PPL, to help influence and fund its future direction’. Shortly afterwards, we saw Lloyd’s raise £300m to fund its own ‘overhaul’, presumably to support the acquisition of the aforementioned PPL stake, in addition to financing the many other initiatives named. 

But whether this move garnered any further control for Lloyd’s remains unclear. Its latest blueprint confirmed that in contrast to its earlier ambition, Lloyd’s would not be building its own platform after all, but would instead continue investing in a replatformed PPL. Yet despite announcing a shortlist of vendors for the replatforming back in 2019, no successor to Ebix has yet been formally signalled (unless extremely quietly). 

Amidst these murky power struggles, the arrival of the Covid-19 pandemic in 2020 did little to help, as Lloyd’s tried to wrap its arms around the execution stages of its vision. Not only an unwelcome logistical distraction for changemakers, the pandemic would also amount by Lloyd’s own measure to the worst ever loss for the insurance industry.

Was realising the Future at Lloyd’s vision still enough of a priority? Or was it now more of a priority than ever before? 

Reinsurance Hits the Road.

At the end of last year, Lloyd’s CEO John Neal reassured the Voice of Insurance that Blueprint Two is when the ‘rubber hits the road’. While that might prove the case for insurance and delegated authorities, for reinsurance, the plan to plan on planning looks set to continue (for better or worse). As Oxbow put it:

“Other customer journeys (like reinsurance and automated placement) take a back seat and will undergo further consultation in 2021.”

With yet more consultation giving cedents, brokers and reinsurers limited direction, many are already turning to free-to-use, Lloyd’s-recognised platforms like Supercede – also a recent Voice of Insurance guest – to access a desirable digital placement experience and stay in compliance with Lloyd’s latest mandate. 

But this is a smart move. By recognising the best independent platforms, Lloyd’s avoids a power struggle with the big brokers – the platform ‘kingmakers’ – who they would otherwise have had to persuade to drop their usual platforms for something Lloyd’s-specific, for just one small component of their global reinsurance deals. 

Supporting the growth of private technology providers – such as through initiatives like the Lloyd’s Lab – may prove a far more cost-effective approach than trying to build or maintain in-house: in which case, PPL might even be seen as a stopgap until a ‘survival of the fittest’ plays out its natural course between third-party providers. Lloyd’s proposal in the meantime, to introduce standards for vendor-built platforms and a Core Data Record (first iteration announced today!), is a thoughtful strategy towards keeping this door open.

The Pandemic Changes the Mission.

With London still under lockdown, bringing the Future at Lloyd's to fruition feels more urgent than ever. And, while the physical Lloyd’s model sits in tatters, creating an entirely remote Lloyd’s no longer seems unthinkable – perhaps creating a unique window of opportunity to get the job done.

Of course, we are all looking forward to Lloyd’s reopening on May 17th, even if on a rota by line of business. Claire’s barbers and One Under Lime will remain closed: though it is noted the latter establishment already faced its own demands for change, not on the grounds of pandemic, but of culture.

Work has already started on a virtual room, now extended to all classes of business for UK users, whilst consultation continues on what should happen to the old room. Lloyd’s needs to be ahead of the game here, with rent on boxes being infamously expensive and the EC postcode in general being far from cheap.

Operations teams must be considering their options, and those evaluating the costs of both a syndicate and a London Market operation face an especially tough decision. Substantial efficiencies are the reward for firms that can remain remote and still develop business digitally, while returning to business-as-usual may mean a more pronounced cost disadvantage than ever before.

Will any of the traditional players move to fully-remote, as Cytora has just announced, and as Supercede has been operating since 2019? Or is the promise of a post-pandemic resurgence of interaction and socialisation too alluring to abandon ship for now?

There’s Not Much Proof in the Pudding.

Assuming firms want to maintain access to Lloyd’s – digitally or otherwise – legitimate questions arise as to whether a return on investment can be made.

Lloyd’s results have not been spectacular this last decade, despite a blissful 5-year period between 2012-2016 where combined ratios averaged 90.8%, and Return on Capital, 12.5%. In fact, the other years were bad enough to bring the average Combined Ratio to 98.0% and Return on Capital to just 6.4% (2011-2019). 

And these are the results that tested negative for Covid-19.

Going into the 2020 Full Year results at the end of this month, we have already been warned about the devastating impact of Covid-19 claims. According to Lloyd’s own special report on the pandemic, the sector as a whole will pay out $107bn, while also seeing the value of its global assets drop by $96bn: the combination driving by far the industry’s largest ever loss. 

Lloyd’s reported that its 2020 Half Year Combined Ratio would have sat at 91.7% with pandemic-related losses excluded. Included, the bill sat instead at 110.4%, translating to a chunky £2.4bn in Covid-19 claims and a loss of £400m.

The Full Year Results Might Be Worse.

Not surprising then, that syndicates are already off-course for a bumper results announcement in 2020. Likely the worst is yet to come, if the trended relationship between Half Year and Full Year results are anything to go by. 

Full Year Combined Ratios typically increased by 3ppts on average versus the Half Year announcement between 2011-2019, and in more recent years, by 7ppts (2016-2019). And, though this is usually driven by natural catastrophe activity in the third and fourth quarters, last year was hardly quiet on that front.

A report by Munich Re characterises 2020 as a record hurricane season, with more storms in the North Atlantic than ever before. The focus of their report on climate change – also covering the ‘historic wildfires’ seen in the western United States, suggests the impact of global warming on natural catastrophe risk is now also being treated as a trend, not a blip.  

Having announced a Combined Ratio of 110.4% mid-way through 2020, we might expect Lloyd’s to be in contention for its worst results in a decade, claiming the title from the 114.0% Full Year result seen in 2017, after a Half Year announcement of 96.9%.

Unfortunately, the prognosis is similar for Return on Capital, with a Half Year announcement already below zero at -2.8% and typically reducing a further by -3.6ppts (2011-2019) or, more recently, by -8.6ppts (2016-2019) with the arrival of the Full Year numbers. Could we see a double-digit negative Return on Capital for 2020?

The Lloyd’s Value Proposition, Revisited. 

These results do not position Lloyd’s as an outperformer, at least not from a capital perspective, and its cost of doing business remains frankly, astonishing. However, with a customer base that has doubled in size since 2008 (from just under £18bn to £35.9bn in 2019), it has evidently retained its appeal to those looking to transfer risk.

The extent to which its physical manifestation forms a part of this appeal is certainly up for debate. Yes, CII students are regularly reminded that London is a great place to do business, because of its stable legal environment, access to great talent, and time zone positioning between global financial markets. 

But in the wake of Brexit, and writing this myself from a new home office in the countryside, perhaps a building on Lime Street will not remain at the core of Lloyd’s future value proposition for very much longer. Those special privileges conferred by the various Lloyd’s Acts depend neither on the brilliance of Richard Rodgers nor the red-coated waiters of old. No, Lloyd’s is a whole lot more than a room with a bell in it. 

Londoners missing the Londonisms must now carry the burden of proof towards showing that a physical Lloyd’s can reopen and operate at a sustainable cost. Meanwhile, it will fall to our increasingly remote workforce to determine how the promises of Lloyd’s – and the Future at Lloyd’s vision – might be delivered without need for a physical presence. 

In the early days of Vision 2025, the Corporation set out eight benefits of Lloyd’s (p. 14) to market participants, underpinned by brand strength and reputation: 

  1. Market Access
  2. Security and Ratings
  3. Capital Advantages
  4. Central Processes and Services
  5. Product Offering
  6. Claims Payment
  7. Underwriting Expertise
  8. Market Oversight

Reasons why all of the above could not be provided digitally are hard to come by. And with this same vision refreshed in 2018 to focus on becoming a ‘dynamic, tech-driven market’, change only seems to be moving in one direction, albeit rather slowly.

A Phoenix Moment for Lloyd’s.

It’s hard to imagine a (re)insurance world without Lloyd’s. But what Lloyd’s will mean to us – beyond our increasingly hazy memories of face-to-face – may change, as the former coffee shop rises from the ashes of its toughest year in recent memory.

What our Lloyd’s market will look like next, and how quickly, will be the unenviable balancing act of the Future at Lloyd’s.

With a physical model out-of-action and now, a widely-supported mandate to effect change, Lloyd’s: the stage is yours.

Read next: Reinsurance broking in the garden: do emerging challenger brokers have what it takes?