Results emerging from the Lloyd’s market are excellent, but will the soft market cause problems for the future?

Not a day goes by without another set of stupendous results announced by a Lloyd’s market player. Amlin, the latest to report, has delivered a 37% return on equity to its shareholders, underpinned by a 72% combined ratio, and this at a time when investment returns are at a low point.

What a contrast this is to the results being announced more generally in the UK insurance industry, where one bit of bad news seems to follow another, and where claims inflation and frequency are rising, with claims farming and credit hire affecting some insurers significantly.

But is it all good news for the Lloyd’s market? Certainly its recently published strategic review for 2010-2012 has been well-received by the market. Best described as evolutionary not revolutionary, it seeks to build on the undoubted current strength of the Lloyd’s market.

Like most of its peers, with the exception of AIG, Lloyd’s has not been hit by contagion risk from the banking sector crossing over into the insurance industry. Some would argue that the global recession has actually been beneficial to Lloyd’s, as clients have sought to spread their risks, resulting in an re-emergence of the subscription market. But this ignores the fact that economic activity has fallen, resulting in less insurance and reinsurance being purchased, which has created over-capacity in the markets. Historically, this has been a recipe for disaster, so what has changed this time?

It is difficult to argue that surplus capacity does not exist at Lloyd’s and this has emerged in a relatively short timescale. Very strong underwriting results arising from low levels of catastrophe losses in a period of strong premium rating have largely been the cause. Lloyd’s 2010 capacity, which market commentators believe is in the region of £23bn, is the highest it has ever been.

The Lloyd’s strategic review focused on the need for strong performance management in the market, however, and this was noted as being a critical factor in success of Lloyd’s in recent years. The risk that might arise from the lack of underwriting discipline has clearly been recognised.

I was interested to read the recent interview with Lloyd’s director of performance management, Tom Bolt (4 February). He acknowledged that the role of the performance management directorate was constantly evolving and that the transition as head of the unit from Rolf Tolle to himself had been a smooth process. He also noted that while there had been a drift at a market level to more volatile classes of business, this has been against the background of a strong premium rating for catastrophe classes of business.

Lloyd’s is monitoring the business mix at a market level and in many ways is acting as a soft regulator. For any new entrant considering knocking on the door, Lloyd’s is seeking something new, be it geographical or product diversification. More of the same will just not do.

At a time when results announcements from the Lloyd’s market are at a high, generating strong goodwill for the Lloyd’s market, it will be the monitoring by Lloyd’s of disciplined underwriting that will be key. Every indication from the Lloyd’s strategic plan and from the actions of the franchise performance directorate to date suggests that Lloyd’s is aware of the issue and on the case. IT

Ian Clark is a partner in Deloitte’s corporate finance insurance practice.