Lloyd’s of London released their annual results for 2021 last Thursday, providing us with an important indicator of how the insurance market is fairing and what the future looks like for our clients’ policies. Lloyd’s comprises over 80 insurance syndicates that are supported by capital from all over the globe (Australia is their fourth largest insurance market, behind the USA, UK and Canada). It is without question the centre of the insurance universe, and their results provide a real guide for sentiment within the market.
A positive result
For calendar year 2021, Lloyd’s produced a profit before tax of £2,227m, turning around a loss of £887m in 2020.
A closer look
Very simply, an insurance company drives profits in two ways:
- Underwriting performance: An insurer endeavours to collect more in premiums than they spend in claims and operating costs
- Investment performance: They invest that premium until such time as they need to pay out claims
Insurance companies need to invest conservatively to ensure they preserve capital to pay out claims. The large majority of funds invested by insurance companies are therefore in fixed income (bonds) and cash. Accordingly with global interest rates at record lows, investment returns from insurance companies have been low over recent years.
The best measure of a successful insurer is their underwriting performance. This is simply assessed by a common ratio called the “Combined Ratio”. A combined ratio is the ratio of claims and operating costs, against premiums collected. So a combined ratio of 100% is breakeven (before taking into account investment returns). Conversely a combined ratio of 95% essentially means an underwriting profit of 5% of premium.
The Lloyd’s combined ratio in 2021 was 93.5% – the first profitable result in five years, as shown in the table below.
Lloyd’s Combined Ratio (%)
*Impacted by COVID
*Source: Llloyd’s 2021 Full Year Results
What does this mean for Australian businesses and their future premiums?
These results confirm what we have been experiencing through our contacts with the Lloyd’s market. That is, there is a sense of optimism after years of loss making and the significant premium rate increases over recent years should lessen as syndicates return to profitability.
It’s not good news for all policy holders however, as there are always pockets of over and underperformance.
In this years’ results Lloyd’s raised concerns about casualty insurance (Liability, D&O, Professional Indemnity) claims trends and specifically reference “social inflation” In Australia and Canada – i.e. increased regulation and litigation in those territories . Whilst we are seeing some softening in market conditions, the market continues to be challenging for Liability / Professional Indemnity insurance in the construction sector in particular.
To understand more about market conditions in your sector, please contact Peter Conquest or your broker at PNOinsurance.