Richard K Trubshaw Active Underwriter
The Lloyd’s syndicates have now published their results and, in some cases, added detail and an outlook for 2021. As in the past three years, IMN is summarizing the results from all syndicates that have a marine interest which have provided some information on the marine side.
Richard Trubshaw is renowned for giving a more personal and entertainingly insightful review of the Lloyd’s market than many other syndicates provide. Among other topics, he has firm opinions on pricing and capital provision that merit attention.
Trubshaw said in his overview of 2020 that the market had already been changing a year ago, in response to poor attritional performance, elevated catastrophic experience and depressed investment yields. How much this had been exacerbated by the impact of Covid-19 was difficult to judge, but there seemed to be three main issues.
Firstly, the effect on the liability side of the industry balance-sheet, with claimants in particular attempting to trigger business interruption coverage. MAP is not directly involved in most of the obvious high-profile areas, and even its US book is weighted towards small, regional personal lines accounts. Whatever the ultimate quantum, Trubshaw said that MAP was very likely relatively underweight. Few coverage issues have been finalized to date, and this was highly likely to be a long-term tax on the industry, whether it be litigation expense, defence costs, reinsurance recoverables and/or management time, in addition to ultimate indemnity.
“At present there is a large gap between stated market expectations of ultimate loss and held reserves. Somebody is always wrong, and how insurers digest this evolving risk will influence strongly how they behave in the marketplace going forward”, said Trubshaw.
Secondly, the impact on the asset side of the balance sheet, in terms of reduced investment yields, and potentially in increased pressures on solvency, as certain asset classes are re-based in a post pandemic world.
Trubshaw said that it should be easier for small, independent entrepreneurial businesses like MAP to compete in an increasingly risk-averse environment, given that MAP is not reliant on investment yield to underpin an unbalanced risk-return. Thirdly, the impact of the logistics of remote working. MAP was born 20 years ago, working from home, “so in a way we have simply come full circle”. He said that it was certainly relatively easier to operate if you have a small number of like-minded people, all of whom are principals in the business and all of whom are used to operating without branch offices or extended management reporting lines.
MAP wrote 40% more gross premium than in 2019, slightly exceeding its original business plan forecast. “On the other hand this only gets us back to where we were in 2012/13, and is only a little more than half our peak in 2006.”
Furthermore, 2020 was an elevated catastrophe year (Covid-19 apart), particularly in the US, and there were strong indications that claims cost inflation across many classes was running much higher than the general economy. “Doubtless lock-down restrictions are contributing to this, whether that be through extended repair-times, contractor availability or interrupted supply-chains”. Nevertheless, said Trubshaw, there was an observable, underlying inflationary trend that was often being missed by standard industry models, which needed to be evaluated correctly and priced for. MAP’s ultimate gross loss estimate for Hurricane Laura (which struck Louisiana in August, causing around $12bn of insured damage) across all years of account is $50.2m, of which $30.8m was incurred at year end. Roughly 95% of this loss would likely fall to the 2020 year of account. “Consequently, our forecast profitability at this early stage is less than planned, although, contingent upon the absence of any future major catastrophic impacts, the year should ultimately generate a positive return.”
Looking at the 2021 trading conditions, Trubshaw said that the September 2020 business plan forecast for 2021 envisaged gross volume rising by a little over 30% to £317m at year end rates of exchange, similar to 2008/9 in MAP’s history. “We were certainly less bullish than many of our peers, given that the forecast growth rate is less than that achieved in 2020, and early indications from the January renewal season would suggest it will not be easy to achieve”.
The market faced years of Covid-19 indigestion, “but it was noticeable that very few hard decisions were taken concerning coverage at year-end, (with even the UK Supreme Court ruling not coming until mid-January)”.
Trubshaw observed that most carriers were content to ‘kick the can down the road’, but he said that eventually the thorny issues surrounding reinsurance recoverables (particularly if collateralized) would need to be addressed.
He said that the market had been reasonably cogent in developing effective exclusionary language going forward, (despite the pig-headed posturing of certain broking houses), “not least because a product which every policy-holder can call on at the same time is by definition uninsurable”.
Trubshaw observed that insurance was “the ultimate leverage game”, relying on risk diversification through time, geography and amount: £100 of indemnity on average required 25p of premium and 25p of capital. He said that “a promise to pay policy limits to everyone at the same time is clearly false. (Global asteroid impact would be the nearest analogy)”.
New capital was (probably) less affected by the pandemic, and had already had a dampening effect on the market. This was not necessarily because of anything it the new capital was actively selling, but because its mere presence had caused the holding markets to be more defensive of their positions, particularly the Europeans. Trubshaw said that perhaps more pertinent was the background of the Capital Markets, “awash with cheap money and desperate for yield”, which was causing them to constantly look at the insurance industry as an asset class – despite the poor performance of recent years and questionable status as an uncorrelated exposure.
Trubshaw returned to his “perennial bugbear”: the inadequate calibration of so-called proprietary rating models. “The problem is that the intellectual barriers to entry in property reinsurance are negligible: all one needs is a large bank balance and a computer”.
The system was almost just ‘plug and play’, and Trubshaw said that most new entrants into the industry were easily seduced. However, as he noted, “the problem is, what they are being fed (via the counterparty’s intermediary) is risk-output from a severely under-cooked model”.
Trubshaw felt that it was particularly ironic that industry veterans were regularly opining on global warming and climate change, quite rightly pointing out the very real threats to the industry and societies around the World. “Yet their organizations are still pricing to the same miscalibrated metrics that were in place five years ago, despite the heightened catastrophic frequency since 2016, in both the Atlantic and Pacific, despite deterioration in loss estimates, despite the proliferation in wildfires in California and Australia – and that is observed reality, let alone whether the future will actually be even more extreme”.
The problem was, should these industry veterans deliver on their rhetoric and become more risk averse (and put their prices up), “they would be rapidly undercut”. In the past, after similar reality checks, (notably after Katrina in 2005), models were re-set to reflect the observed, empirical data. “For whatever reason, this hasn’t happened yet. Until it does, any business that operates with a more prudent risk metric, as we do, will pay the price of being relatively uncompetitive.”
Trubshaw also referred to contract terms and conditions – which were arcane to the outside observer, who is generally blind-sided by rate movements, but were absolutely vital to the seasoned practitioner. Trubshaw said that “the state of wordings in the bespoke Lloyd’s market is generally appalling, dominated as they are by the nefarious activities of the broking houses, who years ago arrogated to themselves the privilege of drawing up contracts (which legally belong to the seller)”. Trubshaw felt that trying to wind back “years of poor policy drafting” was very hard work, “particularly given the paucity of wordings expertise (or interest) in the Lloyd’s market”.
Trubshaw concluded on a more positive note. “Other areas of our business, such as casualty, marine, auto and PA, are coming out of the doldrums, but it is a slow process, with each risk underwritten on its merits. There is no magic wand.”
Chairman D E S Shipley observed that, uncannily, as with 9/11 in 2001, the impact of the Covid-19 pandemic came at a time when the market was starting to inch its way back to health, “after long years of inadequate pricing and poor underwriting”.
MAP’s mix of business shielded it from some of the most dangerous pandemic-related risks.
|2020||GWP||GPE||Gross claims||Net Op exps||Reins Bal.||Net tech res.||Net tech res prior accident yr||net tech provs|
|2019||GWP||GPE||Gross claims||Net Op exps||Reins Bal.||Net tech res.||Net tech res prior accident yr||net tech provs|
The active underwriter received the following remuneration charged as a syndicate expense: