Lloyd’s is forecasting peak inflation for the end of this year that will taper off next year, says chief of markets

Global insurance marketplace Lloyd’s of London’s gross written premium (GWP) for the close of 2022 is expected to reach £48.9bn, but it expects top line growth of 14.3% next year on top of this.

If achieved, this would see total GWP for 2023 reach £56bn GWP.

This projection came according to Patrick Tiernan, Lloyd’s of London’s chief of markets, who spoke during the marketplace’s Q4 Market Message, delivered last week (7 December 2022).

He told attendees: “These are extraordinary times and this is evidenced by the new past time of wrestling the current pressures we face.”

These presures were defined by the four-pronged confluence of high inflation, rising interest rates, elevated catastrophe losses and uncertain capital flows.

He continued: “We are pleased with the work the market has done on inflation from an underwriting reserving and capital perspective. The Lloyds market is forecasting peak inflation around year end 2022 and tapering off as we go through 2023.”

Tiernan warned that if this tapering off did not occur, Lloyd’s expected the market to take measures to further combat inflation.

He made clear that this expectation was not a performance focus for 2023, but rather an attempt to make sure that the market functioned at optimum levels to compete with peers outside of Lloyd’s.

Exclusionary language

Russia-Ukraine, meanwhile, remains a manageable financial event for Lloyds according to Tiernan – with a net loss estimate of £1.1bn.

Back in September, Lloyd’s said that it expected a price correction or a complete unbundling of certain specialty covers from the composite rating treaties.

Tiernan explained: “However, one of the later emerging features of this renewal season is exclusionary language starting to appear in the treaties that may cause coverage gaps with the underlying covers.

“So, as a result, we expect syndicates to be working through net exposure retentions, unexpected aggregations, revised rate requirements, structure, potential run-off of an economic lines of business and the resultant impact on capital and diversification factors.”

Growth, inflation and rate change are pretty much in line with the Lloyd’s book as a whole, although it is not decreasing its focus on this critical area.

Cyber and D&O

Two areas highlighted in the market message were cyber and directors’ and officers’ (D&O) insurance.

Tiernan said: “Cyber continues to be the fastest growing class in Lloyds – we continue to be cognizant of our role in the maturing of this market because we manage over 20% of the global premium.

“We know [some] of our actions are not universally popular, but we must understand and be able to measure exposures in order to have the confidence to allow the market to grow.”

On the other hand, D&O was the only major line of business seeing a mixture of positive rate changes but negative work.

“As a result, we did not support growth for this class in the aggregate for 2023. I know that a sweeping statement and global D&O was not particularly helpful so there are obviously regional nuances,” Tiernan added.

Two-fold inflation impact

Going back to the impact of inflation on capital, Emma Stewart, chief actuary at Lloyd’s, said these impacts were twofold.

She explained: “Firstly, the additional allowance for inflation in the plan and reserves has a knock-on impact on capital. Secondly, greater inflation volatility has been recognised and built into models.”

But overall, managing agents have reacted in an agile way to changing economic conditions and Lloyd’s is pleased with how the market has responded, Stewart noted.

“As we go into 2023, it is going to be critical to keep up the offensive strategy to protect against inflation by using levers in real time that have the potential to combat inflation, but also to continue to monitor experience, understand the impact on your business and maintain a balance sheet that continues to be robust in light of the uncertainty through appropriate reserves and capital,” she added.

Fair value

Lloyd’s will also look to understand in more detail managing agents’ compliance with an approach to the newly implemented FCA rules regarding the fair value of assessments of insurance products.

Peter Montanaro, Lloyd’s market oversight director, said: “We will also seek to understand how managing agents will adopt the consumer duty paper published by the FCA this year. Importantly, the principles of consumer duty were taken into account in putting together the Rio framework.”

Project Rio was launched at the start of 2022 – Rio stands for reimagining oversight. The project is intending to explore changes to the Lloyd’s framework and work towards a more joined up approach.

Montanaro continued: “We will need to ensure that managing agents are able to obtain and utilise relevant [management information] and data to demonstrate good customer outcomes and to build consumer understanding of their products. We will work with managing agents and the Lloyd’s Market Association to support these areas.”