On Wednesday, Coverys pulled the Danny Wright syndicate out of the capacity auctions by publishing an eccentrically worded announcement pointing out that it is "giving serious consideration to the possibility of ceasing to accept" business for Syndicate 1991 after 31 December.
It is difficult to see how a statement like this becomes anything other than a self-fulfilling prophecy given that DTW 1991 is reliant upon trade and Names capital, and given the implication that Coverys will not "underwrite" the syndicate's capital stack in the way it is said to have done last year.
In all likelihood, this means that capital flight has killed – or will kill – the Danny Wright syndicate, despite the Corporation's decision to greenlight the business plan.
The right question in this case is not why the capital decided that it did not want to support Syndicate 1991 going forward. (There are lots of reasons capital has been deserting such syndicates and we have covered them elsewhere at length.)
Instead, the first key question is why did Lloyd's approve the business plan in the first place?
In considering this question, we start from the premise that there is now a generally accepted principle that the Corporation of Lloyd's should act to place a floor on the underwriting results of the market to: a) defend the market's ratings; b) protect its reputation; and c) encourage underwriting discipline more generally.
There was a time when Tom Bolt set out an ethos that so long as the Kevlar vest of capital was placed around the Central Fund, syndicates could go around shooting themselves, but the argument has trended fundamentally against this view due to the strong negative externalities of that kind of behaviour. In essence, bad syndicates poison the well for everyone, and syndicates with approved plans need to be market-positive, not market-negative.
If this is the case, then there needs to be a mechanism for putting syndicates out of their misery.
As such, there is an urgent question to be asked about how a belief persisted on the 12th floor that Coverys 1991 was accretive to the market.
In part, this can just be judged on financial metrics and the syndicate's ability to deliver against plan.
But it could also be considered slightly more broadly to include intangibles, like whether it offers key products to policyholders, whether it answers difficult problems posed by distribution and if it enhances market leadership and underwriting expertise, while contributing positively to the Lloyd's brand.
It is not immediately obvious how DTW Syndicate 1991 could have passed this kind of dual test. Financially, the business is in huge deficit since its launch, and it established a track record as one of the market's consistently weakest performers. It has only once come within 10 points of delivering a calendar-year underwriting profit – the underwriting is capital destructive.
In terms of a broader contribution to the market, it is difficult to make the case. DTW Syndicate had a market share at Lloyd's of 0.5% in 2019. There are good syndicates at Lloyd's at the top end that are likely to grow more into 2021 than the whole size of its business. When it comes to scale, it is a rounding error.
And its product focus is on delegated authority business, an area where Lloyd's has grown too heavily and at acquisition costs which were too high through the soft market – and where it has been drawing back through a recent Bonfire of the Binders. This is not the cutting edge of new product development, or the crucible of innovation.
We would readily accept that realpolitik should form some part of the Lloyd's calculus on when to serve an eviction notice to a syndicate. But there is also no strategically important reinsurer or broking group standing behind DTW to exercise sway in its favour (as is arguably the case with some other serial underperformers).
Towards the end of Hancock's tenure as PMD, the Corporation gained a deserved reputation for steeliness, although also for wielding it bluntly at times. Indeed, our understanding is that Lloyd's had quite an active hand in the decisions of a number of syndicates to go into run-off (and more than just the Standard Club, which is held up by most as the "pour encourager les autres" moment).
Now that Hancock has departed, CEO-cum-PMD John Neal needs to prove that this line-drawing and ruthlessness did not leave when the former RSA executive departed to try and fix AIG's international underwriting.
Imposing these kind of standards will never be a one-time exercise. They will need to be applied consistently over time, or there will be recidivism.
The second important question is what the fate of syndicates that have fallen during the Great Lloyd's Cull tells us about starting up at Lloyd's.
And here the lesson is simple and intuitive. When it comes to the surplus lines, wholesale and reinsurance business where Lloyd's focuses, timing is absolutely crucial.
Businesses that were short of maturity when we hit 2013 and rates started to go off a cliff have had a hard time, and many of those that launched in the full throes of the 2013-17 soft market have performed terribly.
Most should never have been allowed to launch.
Lloyd's was not short of underwriting operations at this point. The market had capacity and choice to offer brokers and clients. Bringing new syndicates in at this juncture represented aimless franchise-building from prior Lloyd’s management that only served to intensify competition.
It is difficult to point to one truly innovative thing or groundbreaking product that this cohort of start-ups added to the Lloyd's market.
Market refresh is important, but if Lloyd's wants to avoid a repeat of the Great Lloyd's Cull in a decade (and this one is already a case of history repeating itself), it would do well to think about being open to start-ups only around the peak of market hardening.
Exceptions to the rule should be if established, quality businesses want to transfer in a chunk of their business – say if Fidelis (or Convex in a couple of years) decided that it wanted to novate a significant piece of its portfolio into a newly created syndicate.
Otherwise, perhaps there could be the odd exception for something super niche – a genuinely esoteric, innovative, mono-line writer that could front a consortium for existing markets, perhaps. Syndicate 1796, launched for insuring the transit of vaccines, is a good example.
So if we are going to have some new Lloyd's underwriting businesses to top up the stock, now is the window of opportunity. Not in 2023, when Future at Lloyd's may be bearing real fruit and the Hancock Remediation may be behind us, but when you can be pretty sure the soft market will be coming rapidly into view, if not already in full swing.
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