The firm’s founder, Robert Kiln, was legendary in the business, having quite literally written the book on reinsurance, and has been credited with the creation of a number of forms of treaty during his time in the market.
Given that history, some will view the decision to drop treaty as a sad development, even though for a number of years now reinsurance has made up less than 10% of the premium written by Syndicates 510 and 1880.
But it is also further evidence that it is increasingly challenging to write reinsurance from London and more specifically, Lloyd’s - as we have previously laid out in detail (See: London’s fading star in reinsurance).
TMK faced both company-specific as well as market-wide factors in the run-up to this latest decision. Below, we look at those pressures in detail.
TMK’s remediation journey
TMK has been through an intense turnaround effort in recent years as it worked to improve on a prolonged streak of underwriting losses and underperformance within the wider Lloyd’s market.
The work has been led in the past two years by CEO Brad Irick and CUO Matthew Shaw, installed in early 2020. In 2021, TMK’s performance (encompassing both syndicates) showed a marked improvement on previous years as it booked an 88% combined ratio.
While Kiln, the Lloyd’s business Tokio Marine Holdings bought in 2008, was historically a leader in reinsurance, it has scaled back in the class significantly under its new owners, with reinsurance coming in at less than 10% of gross written premium (GWP) in 2021 and for several years prior to that.
A key part of the work started in 2018, alongside a laser-like focus on TMK’s attritional loss ratio, was rebalancing the portfolio away from cat exposure by growing its share of non-cat lines such as marine, energy, aviation and liability. This was part of an effort to both improve profitability and reduce volatility at group level.
TMK was still, however, perceived as leader in US cat treaty business up until the announcement of the treaty shutdown.
The business’s patience with reinsurance, however, appears to have run out.
In 2021, Syndicate 510’s £95mn reinsurance book, comprising cat, per-risk, aggregate excess-of-loss (XoL), pro-rata and retro business, produced an underwriting loss of £9.3mn. This result, driven by Winter Storm Uri, Hurricane Ida, European flooding and tornados in Kentucky, was better than the 2020 loss of £24.4mn, but a loss none the less.
Its withdrawal from treaty, given this journey, is perhaps at least partly to be expected, even if market historians are sorry to see the waning of reinsurance legend Robert Kiln’s influence on the company.
It also comes after parent Tokio Marine also sought to dispose of reinsurance unit Tokio Millennium Re in 2018, which was in part but not fully driven by volatility concerns.
The company continues to write treaty reinsurance business through Tokio Marine HCC – which also has a Lloyd’s syndicate and company market platform. (Although notably the amount of property treaty written by Syndicate 4141 has also decreased in recent years.)
Reinsurance doubts
The closure of the TMK treaty department, however, can be read as another indication of the difficulty with writing reinsurance business in London broadly, and the global market’s fears around cat business more specifically.
TMK’s treaty withdrawal comes in a context in which it is increasingly difficult to write reinsurance business in London compared to other locations that have grown in importance in the past three decades.
London’s market share in the class has reduced from 14.2% of global reinsurance GWP in 2010 to 12.5% in 2018, the latest available figures.
As this publication has previously highlighted, this shrinking proportion of reinsurance business in London is due to a multitude of factors.
Lloyd’s takes a more cautious view on cat risk than it historically has done, having found itself “in the penalty box” on cat risk around 2017, as CEO John Neal put it at the time.
After rating agency pressure around its exposure, the Corporation went through an extensive exercise to “de-cat” the market. Even today, it is still a major focus for the performance management directorate, with controls in place around expansion.
But there are a host of disadvantages facing writers of reinsurance trading within Lloyd’s.
Chief among these are the way in which proportional treaty, thanks to Lloyd’s calculations, swallows up stamp capacity.
And in the view of many underwriters, the Corporation also has more stringent capital requirements for writing cat treaty business than Bermuda, for instance.
Lloyd’s businesses also have a diminished ability to lead reinsurance programmes in the modern underwriting world. Three decades ago, the small line sizes offered by multiple syndicates did not count against 1 Lime Street as Lloyd’s was viewed as a coordinated market, working together to put down a single line.
Now, however, cedants and their brokers are reluctant to go to the trouble of collecting a 20% order in tiny increments when some of the behemoth company markets can provide the same capacity in a single throw.
In the decade following Hurricane Katrina there has been a shift of ownership of Lloyd’s businesses towards multi-platform insurance groups (such as Tokio Marine Holdings) and away from independent, London-centred businesses.
Firms with multiple platforms therefore have the option to shift reinsurance business away from Lloyd’s and to other operations that might be more advantageous.
We have previously laid out what Lloyd’s must do to address this situation, summarised below but outlined in greater detail here.
But putting aside those challenges to Lloyd’s businesses specifically, there are also increasing fears about the viability of some reinsurance, especially cat risk.
The most extreme example of this aversion was Axis Re’s shock decision to drop property reinsurance entirely, closing down a $700mn book of business.
Other carriers have pulled back from cat exposure, including Everest Re, Fidelis and Scor, citing fears over climate change and pricing inadequacy in the face of increasingly severe and frequent events.
There are multiple wider questions highlighted by the TMK decision that still go unanswered.
Is cat reinsurance still a sustainable product line, after several successive quarters of rate increase?
Do carriers and their investors fully understand climate change and its impact on exposures?
And as the cat treaty market changes and matures, are Lloyd’s and its managing agents adapting?
The chief unanswered question, however, is that as cat and reinsurance capacity exits the market, will London and Lloyd’s innovate to fill the gap, or cede the opportunity to other global markets?
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