Still plenty of capacity despite mass marine exodus at Lloyds

The annual Lloyds day in Hong Kong witnessed the usual strong presence of London syndicates this week. But the conversation among many was often of the decimation of a marine syndicates, which has led to many seasoned underwriters losing their jobs. The drastic shakeout began in in the second half of last year. Lloyds representative in Hong Kong, Thomas Haddrill was on hand to explain the rationale.

“The marine insurance market has faced challenges for a long time,” he notes.

“There has been abundant capacity and an underlying sector that has grown very rapidly but has increasingly faced its own profitability and development challenges. In supporting them we have faced challenges around being able to provide solutions that deliver a profit overall.”

Compounding the excess capacity has been the arrival of increasingly complex risks. They maybe environmental – Lloyds Hong Kong for example has witnessed its greatest marine losses in the last couple of years to mega-typhoons. Alternatively, says Mr Haddrill, “We also have extremely complex man-made risks associated with huge accumulations of value on vessels or in ports that haven’t necessarily been appropriately adapted to.

“A good example of that was the Tianjin port disaster (2015) where you had high value goods next to extremely dangerous gods that were not being properly stored or managed.  There were huge lessons to be learned there around the fact this accumulation of risks has literally exploded.”

It all amounted to a real challenge to profitability for the insurance industry. “We write promises to pay and at the moment we are having to pay quite a lot,” says Mr Haddrill.

It was unsurprising then that when Lloyds decided to undertake an across the market review following a US$2.6bn loss in 2017, marine business would be in the firing line.

“The review was focused on the sections of the business that were driving the largest impact on losses. This included a portfolio of business that had been performing especially poorly and had done for a long period of time. Of those a number of those were marine classes,” explains Mr Haddrill.

“We found there was a good response to that review. But it has resulted in many people withdrawing capacity in some areas and reducing their available line size for some marine risks.”

But is this not a good thing – the possibility that marine hull business might make an overall profit for the first time in a generation?

“For the profitability and the health of the insurance sector it’s a good thing,” he says.

“But what we do not want to see is people being left high and dry without access to insurance. Fortunately, that is not something we are noticing as a particular consequence here. There is still plenty of capacity in the market. It’s just about finding the appropriate solution for different insureds, at the right price, that will deliver a sustainable return. We do not want to see the old boom and bust cycle return,” he adds.

Turning closer to home, a lot of the risks arising out of China’s Belt and Road initiative, and some of the mega-projects associated with it, are so complex and so multijurisdictional as to really require an industry response. Given Lloyds flexible market structure means it is well placed to soak up the risks and gain a mighty shot in the arm for the marine insurance sector.

Lloyds is rapidly evolving into a digital insurer. There are two strands to the strategy: large and complex risks will still be underwritten and brokered with the expert interaction between underwriters and brokers. But the actual transaction and placement of the risk will be entirely digital. The second strand will involve a complete digital ecosystem where Lloyds can transact less complex risks in a completely automated and online process.

“It’s an exciting prospect. Where traditionally Lloyds has felt a long way away, whether you are a complex commercial customer or buying household contents cover, this initiative brings Lloyds much closer to customers. We have a global presence but in the past people have associated us with London. Through technology we can become ubiquitous,” Mr Haddrill concludes.

 

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