Independent Reviewers Conference. 12 th December 2017

Transcription

1 Independent Reviewers Conference 12 th December 2017

2 Closing the performance gap How are we doing? Lloyd s

3 That was the year that was 2017: a lot going on In May, we talked about closing the performance gap and having some straightforward & robust conversations We started the year in an incredibly competitive market and are closing the year in a different environment A year of big losses burning platform or great opportunity? An increase in regulatory focus is the market working for everyone? Working hard on performance now operating in a changing market place Is there still a performance gap to close? Lloyd s 3

4 We said: We have a performance gap 2016: 97.9% + RARC = underwriting loss Current year: 103.1% + RARC = bigger underwriting loss Note: Lloyd s is not saying these scenarios will occur, only that they might Lloyd s 4

5 And: We expect the market to shrink in 2018 Because... doing the same is not sustainable for underperforming syndicates doing more of the same is only an option for syndicates who deliver doing something different can drive sustainable, profitable growth Lloyd s 5

6 We also said: Let s work together to close the gap Our commitment A risk-based approach Provide clarity and direction Be consistent Make it easier to do business Be stronger / better in our oversight Your commitment Show true underwriting discipline Take brave and bold decisions Improve underwriting performance Manage down acquisition costs Act quickly Lloyd s Better conversations and greater impact Aligned to internal processes 6

7 At half-year 2017, Lloyd s performance was improving Lloyd s combined ratio vs. our competitor group -3.6% -5.4% -0.7% 2.6% HY % HY 2017 # Company Combined ratio 1 Arch 80.6% 2 Chubb 87.8% 3 Everest Re 88.3% 4 Partner Re 91.7% 5 XL Catlin 93.3% 6 SCOR 93.5% 7 CNA Corp 95.0% 8 Munich Re 95.5% 9 Hannover Re 96.5% 10 Lloyd s 96.9% 11 Swiss Re 98.6% 12 Allianz Global Corporate 98.9% 13 AIG 102.4% 14 Zurich 102.7% Source: Competitor financial statements, 30 June 2017 and Lloyd s pro forma financial statements, 30 June The competitor group has been revised and now comprises of 13 companies Lloyd s operating in the US, European & Bermudan markets: AIG, Allianz, Arch, Chubb, CNA Corp, Everest Re, Hannover Re, Munich Re, Partner Re, SCOR, Swiss Re, XL Catlin 7 and Zurich

8 A second half year of significant natural catastrophes that has to make a difference Industry estimates still vary widely Lloyd s estimates net losses of USD4.8bn but within expectations Event Low range estimate USD billions Harvey Irma Maria Total 54.5 to 175 Significant industry losses Market-turning event? Earnings event? Capital event? It s not only Harvey, Irma and Maria... and we should not be too distracted by them High range estimate USD billions Lloyd s 8

9 We said: Let s work together to close the gap Our commitment A risk-based approach Provide clarity and direction Be consistent Make it easier for you to do business Be stronger / better in our oversight Your commitment Show true underwriting discipline Take brave and bold decisions Improve underwriting performance Manage down your acquisition costs Act quickly Lloyd s Better conversations and greater impact Aligned to your internal processes 9

10 We said: We will take a risk-based approach Proposed changes 1. Account management 2. Better, faster, earlier communication 3. Fewer Minimum Standards reviews 4. Targeted portfolio review classes 5. Action plans for all underperformers 6. Centralised compliance 7. Changed delegated authority governance 8. Faster interventions 9. Fast turnaround on new proposals 10. Improved CPG process Actions New internal operating model to give clarity High-level plan with just eight data points Increased use of thematic reviews Minimum standards reviews reduced from 530 to 280 Portfolio review classes reduced from 220 to 150 Coordinated coverholder audits cut by 50% Dedicated account managers Zero-review philosophy Lloyd s 10

11 We said we had four priorities Hobbi es Acquisition costs Capital Operating expenses Competition expenses Rate Market facilities Cover Catastrophe cover Lloyd s 11

12 01 Jul 01 Oct Apr 01 Jul 01 Oct Apr 01 Jul 01 Oct Apr 01 Jul 01 Oct Apr 01 Jul 01 Oct Apr 01 Jul 01 Oct 2018 Catastrophe risk measure Lloyd s is still a leading catastrophe insurer and reinsurer Source: Lloyd s Catastrophe Model Lloyd s 12

13 We also said: The CPG process will be easier Lloyd s 13

14 The year ahead What is the best way to oversee the market? Lloyd s 14

15 What is the best way to oversee the market? The Lego or Duplo approach? Lloyd s 15

16 We choose Duplo! A different type of partnership Even more of a risk-based approach Continue to reduce the number of tasks and increase the impact More thematic reviews less agent-specific reviews New categorisation of syndicates and different oversight More centralised compliance activities centralised minimum standards reviews An even better CPG process No duplication in oversight and zero reviews for some Lloyd s 16

17 We all still have a lot to do There still is a performance gap Address those ongoing performance challenges deliver business plans Focus on underlying performance and accident year results Set the right price for the right cover beyond January Manage CAT exposure it remains critical Reduce expenses to allow the market to compete Lloyd s 17

18 The landscape has changed Now is the time for leadership Lloyd s 18

19 2018 Minimum Standards & Independent Reviewer Coverage Jane Adams Syndicate Capability Oversight

20 Minimum Standards Refresh Market Lloyd s review Q2/3 consultation (via LMA) Aug/Sep Published Oct 2017 Changes with effect from 1 st Jan , 1.2 & 1.4 Underwriting 1.3 Delegated Authorities 1.7 Data Quality 4 Risk Management Changes to business planning process Governance structure & TOR required KPI examples Audit review & premium monitoring to include OM & DA Impact of non-renewed business Sufficient resources DA strategy Controls and KPIs MRC and Consortia model slip Document issuance monitoring CVH permissions Problem case identification See also COP Read in conjunction with MS Data to inform strategy Granular binder MI required if DA more than 10% 3 Governance GDPR European Data Protection laws Committee objectives ORSA and stress testing Thematic validation issues 12 Operating at Lloyd s GDPR Cyber essentials Brand, ethics & reputation 20

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22 Independent Reviewers

23 Independent Reviewers List

24 External Independent Reviewers 92 external reviewers on Lloyd s list 72 listed on Of which, 5 do not state a specialism

25 Coverage by Lloyd s High Level COB 60% 30 50% 25 40% 20 30% 15 20% 10 10% 5 0% Property D&F Property Treaty Specialty Other Energy Marine Casualty FinPro Casualty Other A&H Aviation Casualty Treaty 0 GWP % Number of reviewers listed

26 Casualty Treaty Underwriting Performance Caroline Dunn Class of Business

27 Scope of the Review Classes in Scope Casualty XL in US and non US XF, XG and XH Classes out of Scope Motor XL, WC/EL (US), proportional treaty, business currently written outside of the following risk codes: XF, XG and XH Reasons for selection: A challenging underwriting environment Growth in the class A significant delay in understanding performance given the length of the tail Marginal results in recent years Review methodology Assessment of evidence 11 interviews with MAs covering thematic issues and Minimum Standards 27

28 Findings - Pricing Methodology Good practice observed and recommendations made to enhance underwriting controls Pricing models generally meet Minimum Standards but improvements could be made to improve pricing sophistication Pricing methods generally met pricing Standards but consideration could be given to capturing more factors in the benchmark price, and other pricing improvements Performance is generally monitored by referring to priced loss ratios. Consideration should be given to developing more specific risk adjusted return on capital metrics Pricing monitoring appeared to be relatively basic. Consideration should be given by syndicates to making improvements to tracking and monitoring of portfolio pricing 28

29 Findings - Aggregation Good practice observed and recommendations made to enhance underwriting controls Aggregation is considered by syndicates Biggest area of concern was non US London market business where the most sophisticated models existed Least concern around US treaty exposures due to mix of business written Formal documented risk appetites were not in place Consideration should be given to developing more sophisticated aggregation models and formal risk appetite measurements relative to those models 29

30 Findings - General Largely an experienced and technically strong market Terms and conditions widening but not seen likely to produce additional claims activity The scope of placements is widening bringing more lines, territories and structures together causing some risk appetite and pricing issues The discount rate change in the UK will not cause a large impact to the class due to the mix of business written Minimum underwriting standards generally being met; market participants were wellversed in managing this business Good practice observed and recommendations made to enhance underwriting controls of the business written in Lloyd s; would move compliance with standards beyond minimum levels and towards best practice 30

31 Recommendations Review risk coding for casualty treaty business Review guidance for casualty treaty business written by coverholders Syndicates to improve: Pricing models in order to improve security and retain more data Pricing methodologies used in models Return on capital modelling, and apply to cases and portfolios Syndicates to develop Improved aggregation models for peak and systemic exposures Improved techniques for tracking and monitoring of pricing 31

32 Property Pro-Rata Nigel Ralph Class of Business Ian Shelley Class of Business

33 Scope Examine property proportional treaty (risk code TR) and identify: major participants (leaders) pricing methodology underwriting and controls 8 syndicates selected 3 large 3 mid sized 2 small 33

34 Key Characteristics Relatively small but growing Prone to volatile results i.e. may not recover from losses after a bad year High acquisition costs, low margin and exposed to catastrophic loss Diverse in risk components Not just property treaty 34

35 Findings Not just property treaty Mainly written as a supporting line (volatile) Not all syndicates have written underwriting guides Wide range in integrated underwriting systems Accurate processing and reporting of aggregations Little appetite for business without event limits Widespread access to vendor cat models Limited opportunities for expansion 35

36 RARC for Property Cat XL Nigel Ralph Class of Business

37 Scope This review looked at the methodology for recording RARC rather than the data itself Examine RARC returns for selected property cat xl programmes and identify major participants (leaders) outliers from the mean data missing data 7 syndicates selected 4 large 3 mid sized Source: PMD Underwriter s Guide 2016 v2.0 37

38 Components of RARC Change in limit/deductible Change in breadth of cover (T&C) Other changes Change in pure premium Source: PMD Underwriter s Guide 2016 v2.0 38

39 Findings The larger syndicates with multiple hubs were generally more systematic in their recording of rate change London centric syndicates that tended to rely on underwriter s judgement were less systematic Principles of RARC were generally well understood and seemed fit for purpose with exceptions A general over-reliance on manual input for RARC data Most deviations were due to the manipulation of raw exposure data and not from model variations 39

40 Recommendations A general upgrading of underwriting systems to improve automation, integration and interrogation of data at contract and portfolio level Adopt the principles promoted by Lloyd s as de minimis and/or Improve the integration and formatting of data from syndicate to Lloyd s Where syndicates rely on underwriter judgement protocols and parameters should be established 40

41 Focus for 2018 Caroline Dunn Class of Business

42 Improving Our Risk-Based Approach Portfolio review continue focus on underperforming business Enhanced rate monitoring Class of Business reviews: Underwriting performance review learning lessons from Harvey, Irma, Maria Thematic Oversight Property Marine Hull Overseas Motor Cyber underwriting cross class and PRA SS Follow up reviews Non US PI 42

43 Cyber Christian Stanley Class of Business

44 The Cyber Market 2017 global gross premiums estimated to be $3bn - $3.5bn with predictions of continued growth to $7.5bn to $20bn by 2020 Risk codes established in 2013 Lloyd s have historically had approx. a third of the market 77 Lloyd s Syndicates only top 35 write income >$3.5m GWP top 10 MA write 85% of Lloyd s market share via 20 syndicates Lloyd s aggregate limit available approx. $650m Approx. 85% of business written in Lloyd s is US domiciled 44

45 PRA SS4/17 - July 17 Sets out the PRA s expectations of firms regarding cyber insurance underwriting risk. Set of prudential risks emanating from underwriting insurance contracts (affirmatively or non-affirmatively provided) that are exposed to cyber-related losses resulting from malicious acts (e.g cyber attack, infection of an IT system with malicious code) and non-malicious acts (e.g, accidental acts or omissions) involving both tangible and intangible assets. PRA s expectations are split into three broad areas: Non-affirmative cyber risk Cyber risk strategy and risk appetite Cyber expertise 45

46 Lloyd s Forthcoming Cyber Oversight Lloyd s new bulletin PMD updated approach to oversight due December 2017 addresses Adoption of PRA requirements 2018: Attestation that syndicates currently meet PRA requirements by 31 st March 2018 Lloyd s 2018 cyber-attack and RDS reporting requirements Bulletin Y5131 Lloyd s working with AIR on a cloud failure scenario report Review of compliance with PRS SS4/17 Cross class cyber exposure review 46

47 2018 Review: Cross Class Cyber Exposure Scope: To establish how the market is handling cyber exposures within the cyber and traditional lines markets How, and to what degree, underwriters are: identifying quantifying risk coding pricing providing cover 47

48 Contract Quality Triage Tool Ian Shelley Class of Business Mark Haverty ImageFast Limited

49 Carrier Business Process D o Not Turn Pre-renewal Bulk upload of expiring wordings into CQT Tool Receive draft contract from broker Scan/upload new and/or expiring contract into CQT Tool Run relevant CQT Tool checks and review results Pre-bind Peer review Refer to underwriter/ senior underwriter/ wordings specialist via CQT tool Make underwriting decisions and carry out negotiations with broker Agree final contract Post-bind Download CQT Tool results Internal Audit of CQT Tool output Carrier s DMS PPL IMR PPL Re-run of documents through CQT Tool checks throughout negotiation Carrier s DMS Key step Optional step Lloyd s 49

50 Four main functions Compare one document with another Run Lloyd s PBQA checks for both OM and Binder against uploaded documents Run wordings checks against Lloyd s Wordings Repository or other electronically held wordings/clauses Create own specific rules against which to check uploaded documents e.g risk appetite, compliance checks 50

51 Conduct Risk Gabriella Barker Policyholder & Third Party Oversight Lloyd s

52 Conduct Risk in the Lloyd s Market UK/ EEA Eligible complainant numbers H as at H as at H as at ,374,350 16,521,144 14,990,065 5,000,000 4,000,000 3,000,000 2,000,000 1,000, /06/ /12/ /06/2017 Lloyd s 52

53 Conduct Standards Reviews to Sept MAs reviewed Thematic Review of Conduct Risk MI Follow-up to MI Thematic Review Approach Prioritised planning Holistic reviews of all 18 Conduct Standards & 7 Complaints Principles FCA Interaction Lloyd s 53

54 Review Sept RAG Ratings From Time of RAG Ratings At Original Review Sept Red Amber Green Red Amber Green ,167 review action points (an average of 46 actions per review) Approx. 76% of all actions closed 4 agents have business restrictions Lloyd s 54

55 Culture & Governance CR1 CR2 CR3 CR17 Red Amber Green Good Visibility of Board involvement in delivering conduct message Not so Good Lack of Board engagement in setting the culture Board involvement in decision making on conduct issues Appointment of a non-exec to be a Customer Champion and the voice of the customer at Board meetings Lack of Board involvement in taking important conduct related decisions or an absence of any relevant Board commentary on conduct risk around the time of business planning Very limited, if any, evidence of Customer Challenge during either Board meetings or POG meetings Lloyd s 55

56 Culture & Governance Good POG a standard feature in the market - use of sub POGs and appointment of POGs at significant coverholders or service companies Incorporation of conduct into the wider risk framework e.g. Risk Appetite, Risk Register, internal audit Training delivered general managing agent/role specific third parties Setting conduct objectives particularly for customer facing staff and those with greater conduct responsibility Good decisions taking appropriate account of customers interests Not so Good Lack of evidence of customer challenge at POG Inadequate consideration of conduct within the risk framework Limited or non-specific training Lack of specific conduct objectives Lack of appropriate consideration of customer s interests e.g. in reviewing policy wordings and claims decisions Lloyd s 56

57 Risk Assessment CR5 Red 9 Amber 32 Green 6 Good Not so Good All business reviewed Cover all areas of Product risk Not completed for all products Lack of oversight of completion of risk assessments Identifies specific risk areas Automatically rate CR5.8 products as high Territory used as a factor Too much variant in type of consumer Lloyd s 57

58 Product Design and Controls CR4 CR6 CR7 CR8 CR14 Red Amber Green Good Framework detailing what controls are in place for each level of risk Oversight of controls in place for specific products Not so Good Inability to monitor effectiveness of product controls Controls considered post-bind Customers needs and demands being considered Lack of clear guidance and procedures Customer challenge Lack of clarity over material changes Lloyd s 58

59 Sales and Distribution CR9 CR10 CR15 Red Amber Green Lloyd s Good Audits for HPR coverholders with a conduct focus and monitoring audit reports to assess an auditor s conduct risk expertise Drafting a standard endorsement for all binding authorities prohibiting advised selling and cold calling without consent Reviewing sales scripts (whether used for cold calling or other call centre-related activities) to ensure they are appropriate Putting SLAs in place and regularly monitoring them to ensure that expectations are being met Tailored CPB questionnaires based on nature of product and / or coverholder Not so Good File reviews undertaken by auditors not including appropriate conduct focused questions, particularly for HPR business Underwriter visits not including a focus on conduct Underwriter visits not being taken into consideration when setting the audit scope Charging fees for cancelling a policy (and being unable to justify those fees based on the actual cost of cancellation) Reliance on audit to ensure that there are no barriers 59

60 Claims and TPAs CR11 CR16 Red 5 4 Amber Green 1 6 Good Claims philosophy communicated to third parties and measured Risk appetite for customer outcomes from claims defined and monitored by front line, POG and Board Documented process around denials including guidance, detailed records and regular analysis and feedback to underwriters Proactive and regular management of coverholders and TPAs Not so Good Not measuring claims philosophy No risk appetite statement for claims service Not recording denials and limited involvement in the claims team in complaints root cause analysis Standard SLAs for TPAs, TPA self assessment, audit recommendations not followed up Lloyd s 60

61 Management Information - Ratings for CR13 Red 6 Amber 38 Green 3 Good Conduct data is now being obtained from the majority of HPR coverholders Where there is difficulty obtaining data from third parties alternative means of monitoring have been introduced The illustration of the minimum metrics to report on from the MI Thematic has generally been adopted Improved use of narrative commentary in MI packs Not so Good Lack of clarity in MI packs where data is still missing Some MI packs are still not presenting data consistently with trend analysis and some still present data in the aggregate without identifying outliers Some MI packs are still missing key metrics despite the guidance in the MI Thematic Analysis of MI only begins at POG resulting in issues being identified and addressed too late Lloyd s 61

62 Management Information Good Managing agents using tolerances within MI to identify areas to investigate Increasing automated production of MI improving quality and accuracy Inclusion of specific data quality and accuracy checks within third party audits Not so Good Perceived inability to set any tolerances until more data is available Many agents still need to develop a more tiered approach to reporting conduct MI Delays in the implementation of systems used as an excuse for a lack of meaningful MI Few agents have undertaken quality assurance tests or audits of their MI packs Lloyd s 62

63 Complaints - Ratings for CR12 Red 10 Amber 31 Green 6 Good Staff handling complaints generally have a good understanding of the procedures Generally a positive attitude to handling complaints fairly Proactive root cause analysis Not so Good Most procedures have required updates to be in line with the Lloyd s Complaints Code Using a one size fits all approach internationally Lack of tolerances around minimum and maximum expected complaint levels Inadequate instructions to third parties around complaints handling and inadequate ongoing oversight Lloyd s 63

64 conduct oversight plan is still in development but the key principles for future oversight activity will include: - We will not recommence a cycle of conduct reviews - risk based approach - Review activity will be coordinated with the Standards Review team in Syndicate Capability Oversight - Likely to undertake more focussed reviews of agents that relate to specific risk areas - Increasing use of market thematic reviews (e.g. at product level or distribution method) - Continue to engage with the FCA Lloyd s 64

65 Brexit - Lloyd s Brussels Subsidiary Hayley Spink Operations

66 What Can be Insured by Lloyd s Post Brexit? GWP (EUR MN) based on 2016 reported figures, excluding Life Do nothing World Trade Organisation Rules Lloyd s Brussels Subsidiary 1,202 1,445 1,202 1,447 Accessible Reverse solicitation Prohibited Accessible via Lloyd s Insurance Company 2,891 Lloyd s 66

67 functional relationships tax maximum compliant leveraging expertise Designed with 8 principles in mind 1 Maximum Reinsurance back to syndicates 2 Commercially viable, a functional model 3 Easy to use with minimal disruption 4 Maintain distribution network relationships 5 Outsource activities, leveraging existing Lloyd s market expertise 6 Future proof for market modernisation 7 Reasonable risk appetite to enable delivery to tight deadline attractive deadline easy delivery enable Lloyd's market fast requirements maintain future EU/EEA regulatory proof 8 Fully regulatory and tax compliant Lloyd s 67

68 How the Lloyd s Brussels subsidiary will work Business reinsured to syndicates 100% owned by the corporation Lloyd s Brussels Subsidiary (Credit Rating to be maintained) Syndicate + Branches + UK Branch Managing Agent (UK) Coverholder (EU Country) Broker Policy holders Business flow Lloyd s 68

69 Lloyd s Managing Agents Lloyd s Insurance Company Brussels Next Steps Phase Phase 2 H Phase 3 H Phase 4 H Start up - understand model and impacts to your firm, activate your Brexit team Get ready implement changes and prepare for Market Acceptance Testing Prepare for Go Live complete testing and training. Start binding risks Go Live go live! October 2017 Regulatory application submitted Q Market Acceptance Testing begins Q Company set-up July 2018 Operationally ready Q Market onboarding begins 1 Jan 2019 March 2019 UK exits EU Lloyd s 69

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