Catrin Shi
Patrick Tiernan has joined the Corporation from Aviva following this publication’s revelation that he had been appointed to the role in January, with his arrival announced by Lloyd’s last week.
He takes on a new role at Lloyd’s – one which is much wider than the performance management remit held by predecessor Jon Hancock and encompasses a mandate to oversee the Corporation’s vast distribution strategy and global network.
We have previously described the role as “Hancock plus Vandendael”.
The incoming executive is well liked and respected by his market peers, and thought to be more than capable of taking on the expanded role. (See: New Lloyd’s chief of markets: Irish charm, hard-nosed decision-maker).
But what will be lying in Tiernan’s in-tray as he embarks on the role? We lay out four strategic challenges below.
1. Managing the market’s pivot to growth
After three-going-on-four years of major remedial work to turn around the profitability of the Lloyd’s market, there is a major question around market expansion for 2021.
CEO John Neal claimed at the announcement of 2020 results that 2021 would be the first time Lloyd’s would be in a position to permit growth for a number of years, after the full-year numbers showed a 5.4-point improvement in the attritional loss ratio.
Of course, there are caveats to this statement. The beneficiaries of that permitted growth will still be those who “earn it” – or the best performers in the market, and it is not clear what 2021 will look like for third and fourth quartile syndicates from a growth perspective.
The extent of the constrictions on growth – and forced disposal of business – is clear from the Lloyd’s premium numbers between 2018 and 2020, where jettisoned business cancelled out gains otherwise made on rate and currency movements.
With that in mind, managing this pivot to growth will be a careful balancing act on a number of fronts for Tiernan.
Lloyd’s arguably has already missed out on a year to 18 months of rate acceleration in London, with signs now becoming clearer that rate rises are starting to taper.
Estimates vary on how much longer the market will continue to rise, but nevertheless 2021 needs to be the year that Lloyd’s capitalises on the pricing environment to book profitable growth and set itself up for softer times ahead.
The first challenge here is how much growth to permit in the market without flooding it with capacity and extinguishing rate momentum in Lloyd’s.
The second is how to distribute that growth among the Lloyd’s market participants.
Ultimately, to bring the market to a more sustainable level of profitability the Corporation wants a greater proportion of market premium to be in the hands of the better performers at Lloyd’s.
However, restricting growth in a rising market will frustrate many middling to poor performers at Lloyd’s – with a real question around where these firms will find themselves if they lose the ability to grow in the harder phase of the cycle. Some mid-sized players feel their future would be exceptionally challenging if they do not reach some sort of critical mass.
Those London players with company market platforms are already starting to write more business outside Lloyd’s, and this flight of premium will accelerate if the transition to growth at Lloyd’s is not managed well.
2. Market oversight post-remediation
In this vein, there is a bigger question on what performance oversight looks like in this new phase for Lloyd’s.
CEO Neal has previously said that performance will be the number-one priority for the Corporation “forever”, but the landscape in this regard has now changed with improvements starting to show in the numbers.
The muscular approach Hancock took in the heavy remedial years doesn’t quite fit with the next phase of turnaround for Lloyd’s, as it moves to a period where it will look to maintain a base level of good performance and build improvement on top of that.
CFO Burkhard Keese has cited a sub-50% attritional loss ratio for Lloyd’s as the target.
What does the Decile 10 exercise mean in practice when your bottom deciles are moving towards – or already in – profitable territory? Will relatively less-profitable business be expected to be churned, even if it is still contributing to the bottom line?
What does oversight look like if you are a top-quartile, but not quite a light-touch, syndicate?
And how will the Corporation decide to manage the performance of those syndicates that drag down the results of the whole?
The differentiated oversight regime championed by the performance management directorate is still needed, as the variance in performance by syndicate is still vast – this publication’s analysis of syndicate 2020 results found the best-performing quartile of syndicates at Lloyd’s outperformed the market aggregate combined ratio by 13 points, while the bottom quartile underperformed by 23 points.
However, Tiernan will need to set a new tone and potentially a new approach to market oversight as Lloyd’s moves from the emergency measures stage to the portfolio optimisation phase.
3. Navigating a consolidated London broker market
Distribution is one of Tiernan’s key remits and he starts at Lloyd’s at a time when the landscape here is undergoing major change.
Following the acquisition of JLT by Marsh McLennan and soon Willis by Aon, London has seen four of its major brokers become two – both of which now wield serious (and much enhanced) market power in EC3.
Numbers for business production into Lloyd’s are not regularly made public, but in 2019 (pre-JLT deal) the top three brokers in Lloyd’s produced 41% of this business. Even with some remedy assets including Willis Re moving to Gallagher, it is hard to imagine that the big two will not originate upwards of half Lloyd’s risks by premium.
With a hyper-consolidated broking market comes a challenging tightrope walk for Lloyd’s.
On the one hand, it presents an opportunity. When Lloyd’s announced Blueprint One back in 2019 (publishing that 41% figure) it said that it was the home for just 14% of the business controlled by the big three.
Which is to say that the big three were very important to Lloyd’s, but that there was significant room for Lloyd’s to become more important to the big three if it could establish a sufficiently compelling value proposition.
That opportunity remains, and with two names to satisfy not three, Lloyd’s can be laser-focused on tailoring its proposition to what Aon and Marsh McLennan want.
But the flip side of this market concentration is that Lloyd’s is set to become over-reliant on just two trading partners. And excessive reliance on a small number of trading partners can tend towards worse terms of trade over time.
In a marketplace where acquisition costs are already very high, this structure likely diminishes the market’s ability to address one of its central competitive challenges.
Finding a way to address excessive costs at the same time as it enhances its competitive positioning with Aon and Marsh McLennan will be one of the defining challenges around distribution for Tiernan and Lloyd’s.
4. What does the Global Network look like?
Lloyd’s still has a physical presence in multiple countries globally, with representative offices in all corners of the globe and trading platforms such as Lloyd’s Singapore and Lloyd’s China still in operation.
A feature and strategic priority of the Levine-Nelson era, the outposts are a hangover from a time when bricks and mortar, and boots on the ground, were deemed the best and only way to really get closer to the customer and bring Lloyd’s expertise to them.
However, since then that perception has gradually changed.
The need to have a physical presence has dwindled as the global capabilities of the major brokers has expanded – with the intermediaries doing the heavy lifting in bringing business to the carriers. The pandemic and the age of forced remote working has diminished this need even further.
Lloyd’s Singapore continues to operate with 16 syndicates but a number of businesses have shuttered their operations there and bowed out. The trend is more pronounced on the Lloyd’s China platform, while it is unclear how much success Lloyd’s Dubai has had as a trading outpost.
One of the central existential questions at Lloyd’s is how it chooses to tackle distribution and a value chain which has become convoluted, complex and costly.
Future at Lloyd’s envisages matching more Lloyd’s capacity with the world’s retail broking network – simplifying the value chain and opening up the capabilities of Lloyd’s to the world via digital means.
The question for Tiernan is how Lloyd’s re-imagines that global distribution, and what role does the existing global infrastructure have to play in that?
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