Lloyd’s Focuses on Delegated Authority Arrangements as Looming Market Risk

While the Lloyd’s market reported its best first-half profit in 17 years, it isn’t resting on its laurels. It is carefully monitoring areas where potential vulnerabilities have been identified.

During a recent market briefing, Rachel Turk, Lloyd’s chief underwriting officer, Lloyd’s, focused on five key areas that occupy her time and attention: property, cyber, U.S. general liability, the legacy market, and, last but certainly not least, the issue of delegated authority arrangements, which she highlighted as a major concern.

Delegated authority business is an area of concern that “seeks to chip away at my overall positivity [about the market’s performance],” Turk said during the Q3 market briefing on Sept. 20. (Lloyd’s reported an H1 profit of £4.9 billion with a combined ratio of 83.7 on Sept. 5.)

“This is an area of concern that I think I share with many [market practitioners], based on the number of times it comes up in conversation,” she said. “Currently 39% of gross written premium is generated through delegated arrangements and that’s excluding service companies.” (See below for more details about the four other areas of concern for the Lloyd’s market oversight team.)

The reason for Turk’s concern is that the poor performance of the delegated book was one of the contributors to the deteriorating loss ratio from 2013 onwards. “We must not make the same mistakes again,” she said.

As Lloyd’s is a global leader in the global MGA and delegated authority business, there is reason for caution.

Taking a look at the largest market for MGAs — the United States — of the estimated $102 billion written by U.S. MGUs, more than $14 billion was written by fronting companies, and around $7.5 billion was binder business written by Lloyd’s syndicates, according to a report published by Global Insurance Law Connect (GILC) — Innovation abounds opportunities for growth in the global MGA market.

“Despite recent excellent results, and a favorable current climate, Lloyd’s (and others) believe that delegated business remains a potential risk for the market, especially if conditions change,” said Ross Baker, partner at London-based law firm Beale & Co, a member of Global Insurance Law Connect, in an emailed statement.

“It remains more important than ever that the right delegated business providers are selected to help avoid the traps of inappropriate risk selection, unrealistic pricing and problems flowing from inadequate terms and conditions,” he added.

Baker said that Lloyd’s recognizes “that poor delegated business arrangements were a key contributing cause of the deteriorating ratios in the years 2013-2019 and is very keen that history does not repeat itself.”

“Lloyd’s has made it clear that there must now be a laser sharp focus on the framework in place for the selection, oversight and performance management of delegated providers, requiring swift action to exit poor service providers,” Baker continued. “The provision of out-of-date data was a particular bugbear, and the expectation going forward is that real time performance data should be of the highest quality.”

“Thoughtful delegation can bring greater efficiencies, enhanced modeling and alternative access to business so it can and should be a hugely valuable part of the market,” Turk said during the market briefing.

However, given the materiality of this portfolio, syndicates should expect increased performance oversight on this topic going forward, Turk emphasized.

“We expect both open market and delegated portfolios to be constantly course correcting to prevent poor risk selection, inadequate pricing, and terms and conditions getting away from us,” she continued.

Dynamic Portfolio Management

Turk then homed in on an area she described as “bizarre” in 2024: the fact that syndicates are still receiving bordereau data that is out of date. “With that in mind I want to see us all focusing on achieving quality, timely, and ideally, real time performance data, and it is only through this that you can truly execute on dynamic portfolio management ambitions.”

She said that syndicates are expected to have clearly articulated strategies to determine when and where to delegate their authority and that they are responsible for holding their delegates to account.

It’s important that interests are aligned, she said, emphasizing it is vital that syndicates have a framework that allows them “to appropriately select, oversee, challenge, performance manage, and promptly exit if necessary.”

Baker noted that MGAs are “a hugely valuable part of the insurance market, bringing true innovation and agility.”

He added: “Their growth in recent years has been prolific, backed by the easy availability of private equity and the promise of stable cash flows, following three and a half years of outstanding underlying combined ratios in the low 80s recorded at Lloyd’s.”

MGAs have long provided a unique environment for new insurance ideas, “allowing small teams to innovate and demonstrate agile approaches to service and claims,” according to the GILC report.

“MGAs can also enable start-up entrepreneurial underwriting teams to gain backing from good quality capacity without the need to be directly regulated,” the report noted. “As a result, the number of MGAs has grown in most major global insurance markets over the past decade, particularly in the US and UK.”

More recently, the GILC report added, less developed insurance markets have recognized the innovation that MGAs can bring to insureds and some have taken steps to encourage the development of their own MGA ecosystems.

“In short, new ideas can get to market more quickly through the MGA distribution model, and with lower risk to large carriers who are interested in experimenting with a new idea,” the report went on to say.

The moral of the story, Baker stressed, is that delegated authority business is a valuable part of the global insurance ecosystem but must be carefully selected and monitored.

Other Market Risks

In addition to her concerns about delegated business, Turk also pointed to four other key risk areas that she is monitoring carefully in her market oversight: property, cyber, U.S. general liability, and the legacy market.

For property, cyber and U.S. general liability she focused on the importance of managing exposures. For legacy deals, she pointed to concerns over the lack of proper market oversight of these transactions, given the risks of reserve adequacy.

Property

Discipline must be maintained in managing a property portfolio, reflecting the uncertainty that climate change brings, Turk said in her discussion of the property issue.

“The clearest near-term climate signaling events such as wildfire and flooding have had unprecedented impact in recent years and the numbers of costly severe convective storms have outpaced other perils by a large margin,” she said.

In Lloyd’s market oversight, Turk continued, “[W]e have shown our commitment to accept increased exposure for natural catastrophe [business] for those syndicates that consistently demonstrate strong capabilities to price, measure and respond adequately to catastrophe events.”

Understanding Cyber and Liability Exposures

Turning to the area of cyber, Turk said, the CrowdStrike event provided a “warning shot for our industry.” She described the event as a reminder “of the critical necessity to deeply understand our exposure to real or potential events impacting our market.” (On July 19, the cybersecurity company CrowdStrike distributed a faulty software update that caused nearly 8.5 million Microsoft systems to crash, which affected many industries, such as airlines, banks, hospitals and hotels.)

Another key risk area discussed by Turk was U.S. general liability. While positive steps have been taken “to materially reduce line sizes as well as more sophistication around how and where capacity is deployed,” she questioned whether such corrective actions have been enough.

“We do not believe that challenges in this class are just contained in the back years and thus those employing constant scepticism will be better placed for success,” Turk continued.

“We’ll be vigilant about plans that expand into areas that serve to threaten the green shoots of positivity and we’ll continue to remind you that absent of any meaningful tort reform, claims inflation remains a major headwind to price adequacy in this class,” she said, noting that Lloyd’s insurers are expected to maintain sufficient capital to withstand 45% deterioration in reserving levels.

Legacy Market

Turk then moved on to discuss the legacy market, which also carries its own reserve adequacy issues. Legacy insurance deals involve the transfer or acquisition of legacy or old-year liabilities in order to close a book of insurance business. Turk explained that Lloyd’s “performance oversight risks being undermined without taking a more sophisticated lens in this area.”

In an emailed statement, a Lloyd’s representative explained, in the “live” market at Lloyd’s, any significant changes must go through an approval process, but legacy transactions are not captured within this process. “Thus, there is a risk that a significant transaction is undertaken within the Lloyd’s market on which Lloyd’s has no prior knowledge, or one in which reserve strength is significantly undermined,” the representative continued.

As a result of these oversight concerns, Turk said, from Jan. 1, 2025, all new legacy deals within and between the Lloyd’s market will require a pre-transaction review and approval by Lloyds.

Despite the five oversight concerns she listed, Turk emphasized that she would “be doing the market a disservice” if she didn’t reiterate “that market performance is strong.”

Underlying combined ratios exclude major claims, and Turk noted: “Underlying combined ratios in the low 80s are perhaps only seen once in an underwriting career, so together we should celebrate this success, and I have every confidence that sustainable profitable performance will remain given the laser focus on consistent portfolio management and managing the bottom line.”