Asleep at the wheel: what went wrong with Lloyd's private motor insurers?

Lloyd’s lives off its reputation: worldwide, it is known as the premier insurance market.

But in UK private motor market, right on its doorstep, Lloyd’s has fallen short. In the last year, Insurance Australia Group subsidiary Equity Red Star received £207m reserve strengthening, KGM clocked up large losses before being taken over by Canopius, and Hampden Underwriting recently revealed it would be reducing participation in motor syndicates for 2011 following a £58,000 loss in the first half of 2010.

Perhaps most worryingly, the FSA has launched a section 166 investigation into Equity Red Star, over its reporting of bodily injury claims. The authority is now demanding an independent body to conduct a review over Equity’s corporate governance and controls.

Lloyd’s has its own internal regulatory system, with the Council of Lloyd’s at the centre, but suddenly finds the FSA parking its tanks on their lawn. So where did it all go wrong?

The devil's in the lack of detail

There is a view that this lack of detailed information, and a less effective management of that data, has meant that Lloyd’s private motor insurers are behind the curve compared to non-Lloyd's insurers.

A source says: “They’ve been caught by surprise because of the way they kept their data over the years. Their data is not as detailed as the company markets area.

“It’s just the way that the Lloyd’s market has always been a bit different in their approach to distribution - in the way they manage their analytics. Company markets have moved on quite a bit from the old days. So it’s an evolution and, for the Lloyd’s of motor, the quality of the data needs to improve.”

Failure to reserve

Aside from the information aspect, there’s also a question over whether Lloyd’s needs to improve the way it oversees the reserving of its motor syndicates.

AXA claims director David Williams says some insurers saw the dangers of bodily injury claims inflation as long as six years ago, and have been reserving strongly ever since.

AXA and Aviva, for example, have even been able to release prior years' reserves this year to improve combined operating ratio.

So why wasn’t Equity Red Star reserved more strongly?

On 12 August, Lloyd’s requested that Equity produce a written statement for its future claims-reserving strategy as well as pricing and underwriting. However, the damage had already been done.

It's not just us

Lloyd's vigorously defends its position, however, stressing that bodily injury inflation has hit all UK motor insurers.

A spokesman said: "The UK motor business in general has seen poor performance over the last 18 months. This is driven by a number of factors, including 'claims farming' that subsequently leads to an increase in claims frequencies.

"This has resulted in unprofitable business and an increase in reserves for many UK firms, including Lloyd's syndicates. Significant rate increases have been seen, which will address the performance of the business.

"Lloyd's have reviewed the reserving of all the major motor syndicates at half-year 2010. There has been a continued deterioration in most books, and some have been very significant. Lloyd's is satisfied with the half-year positions and approaches, but would note the increased uncertainty that currently surrounds UK motor and will continue to monitor the situation closely."

Lloyd's also stands by its reserving strategy, claiming that reserve oversight is greater than any UK company.

A spokesman said that Lloyd's reserving is measured on a relative and absolute basis, with feedback provided to managing agents.

The spokesman added: "We leave it to Managing Agents to run their business, but we do comment and consider in the capital requirements if a managing agent does not meet our standards."

Lloyd's may have a worldwide reputation for excellence, but as far as overseeing its UK motor business, it appears to have nodded off at the wheel. But at least it is now waking up and paying closer attention to the road.