Delivering a first class underwriting result at Lloyd’s

1. Delivering a first class underwriting result at Lloyd’s Performance Management Division Lloyd’s 6th June 2019

2. Today’s conversation- some positive signs but a lot more to do Setting the scene Jon Hancock, Performance Management Director Market context Premium growth: 2019 and beyond 2020 business plan objectives Underwriting trends we are seeing Caroline Dunn, Head of Class of Business Market oversight activity Peter Montanaro, Head of Syndicate Capability Planning process and priorities Looking forwards Jon Hancock Questions

3. Setting the scene

4. Market context- highly competitive market which is here to stay • You’re all still trading in a very competitive market • same supply vs demand dynamics of the past few years • Signs of greater underwriting discipline • will it hold? • is it enough? • Capital – traditional and alternative • still plentiful… but asplentiful? • Lloyd’s drew some lines last year • and so have others

5. Lloyd’s market performance • - disappointing, but beginning to turn a corner? • Significant improvement in the underwriting result was required • signs of progress, but still more to do • Combined ratio of 104.5% Attritional loss ratios improved by 1.3pp Acquisition costs continue to rise as business mix changes Administration costs flat • Strong premium growth • FX and underlying exposure growth . . . • . . . and seven consecutive quarters of positive rate

6. Combined ratio traditionally better than peers - but lagging behind in recent years Competitor differential Breakdown for 2018

7. Myths and realities

8. Things I’ve been hearing... • - many differing views “It’s a hard market” “There’s a long way to go” “London is hardening more” “US is hardening more than London” “Lloyd’s is too soft” “Lloyd’s is too hard” “Lloyd’s is too cheap in Florida” “Lloyd’s is not writing new business” “The shackles should come off” “The shackles should stay on”

9. Things you’ve been saying... • - …self-fulfilling prophecies • “I won’t be able to renew your binder, I’ve run out of capacity” • “Commission caps imposed by Lloyd’s” • “GWP caps are in place” “Any request for more premium is being declined”

10. Topline growth • - you should not miss out on good opportunities • Have you done what you committed to do? • and is it working? 32 requests received in 2019 1 Ongoing with the syndicate • Does it improve your Net Combined Ratio? • and are you attacking good and bad? 2 Approved • Rate growth is probably good • price adequacy? • Exposure growth is also probably good • price adequacy? • expertise? Declined 3 Ongoing with Lloyd’s On message = turnaround in 5 working days

11. Business plan objectives

12. Objective for your 2020 plans A first class underwriting result… …starting with a better combined ratio than 2019 Shorter process No HLP Greater emphasis on SBDs Understanding each other Faster turnaround 4 weeks for “on message” plans Plan and capital aligned Light Touch approach Pilot through this plan cycle Less public Needs us all • This is a plan where we: • maintain underwriting discipline • continue to get better at the execution • differentiate between the best and the worst performers

13. Principles for 2020 plans- returning Lloyd’s to a first class underwriting result What’s new for this year? Shorter Faster Plan and Capital aligned CROF Light Touch pilot

14. Catastrophe exposure

15. Catastrophe Risk Operational Framework - understanding catastrophe risk beyond the modelled numbers A tool to help us manage Catastrophe Risk Appetite Link syndicate contributions to operational capabilities Identify those managing cat risk really well Incentivise excellence Increase confidence Moving from minimum standards to best practice

16. Catastrophe risk and planning - detailing the Lloyd’s approach • “The Catastrophe Risk Appetite metric must not deteriorate – nor should a syndicate’s contribution to the Lloyd’s-wide metric increase between plans” 2020 planning will see the first implementation of CROF Our assessment will be communicated during Strategic Business Discussions Amount of growth for individual syndicates will depend on: • appropriateness (determined by materiality and maturity via CROF) • contribution to the overall Lloyd’s Catastrophe Risk Appetite

17. Light Touch oversight

18. Light Touch pilot has been launched- noticeably different oversight for consistently best performers The criteria The benefits • Upper quartile • Combined Ratio Significantly less oversight Significantly fewer information requests • Green across all minimum standards Remove duplication in reviews and reports Less involvement in Thematic Reviews • 3+ years operation • Green Solvency II Business plan: submit when you want to Business plan: file and use • Lloyd’s view

19. Underwriting

20. There are still too many loss-making syndicates • - profit erosion is worse than the same point last year • Loss-making syndicates will continue to be a focus through this year’s planning cycle • profit erosion 2016-2018 has deteriorated compared to 2015-2017 • 2018 cat events were only slightly worse than average • we expect to see a credible plan to return to profitability 2011 ---- 2013 23% profit erosion 81% premium profitable 42% of syndicates unprofitable 2016 ---- 2018 60% of syndicates unprofitable 48% premium profitable 120% profit erosion

21. …And still too many loss-making classes - Decile 10 will continue through 2019 planning • Loss-making classes will continue to be a focus through this year’s planning cycle • Decile 10 will be a focus through planning • you must close the class if there is no credible plan to return to profitability • Continuous improvement approach means greater focus on Deciles 1 and 2 • Decile 10 GWP drives 162% profit erosion Cumulative profitability 2016-2018 Deciles 1 & 2 drive 93% of profitable business 162% profit erosion Deciles 1 & 2 Decile 10

22. What you said you would do - continuous improvement for 2020 planning Improve or remove Protect and grow Rest of market Rest of market Improving profitability Deciles 1 & 2 Decile 10 Decile 10 Profitable growth Reducing GWP

23. Market oversight and 2020 planning

24. Expense ratios in majority of syndicates exceed 40% • - high Acquisition costs rarely result in low Administration costs Worse than average Better than average

25. Acquisition costs remain high, action is still required - inconsistent across the market What Lloyd’s is doing What you need to do What we know • Acquisition costs remain high • No sign of reduction in overall expense cost reduction • No correlation between Admin and Acquisition costs • Inconsistent approach to managing acquisition costs • Specific requirements following Thematic Review • Defining best practice • Introduce consistent definitions across the market • Review existing KPIs, reporting requirements and improving data • Address acquisition cost spend as part of planning • Manage Acquisition and Admin costs in tandem, to reduce overall expense ratio • Embed strong governance and new minimum standards to manage acquisition costs Every 1% reduction in total expense ratio = £250m bottom line improvement

26. Administration costs do not depend on size of syndicate • - market average expense ratio is 14% Worse than average Administration cost Better than average Size of syndicate

27. Administration costs review underway • - Thematic Review underway to address high Administration costs Key objectives of review • To review overall approach to the management and governance of Administration costs • Understand MI used to monitor and manage costs • determine efficacy • does it enable Board and senior management to make informed decisions? • Review actions in place to reduce Administration costs, and how they are governed • Develop benchmarks • Delivery Q3 2019

28. Board governance review • - concerns regarding Board challenge and debate Key findings of the review to be communicated June 2019 • Evidence and level of Board challenge • Correlation between good quality MI and boardroom debate • Correlation between culture of openness and constructive boardroom challenge

29. Streamlining this year’s planning cycle - a shorter plan process • High Level Plans discontinued • Strategic Business Discussions • focus on portfolio management and continuous improvement • Decile 10 • Deciles 1 and 2 • European business strategy • Phased approach • tailored to Capital requirements • Four-week turnaround for “on message” plans

30. What’s next?

32. To deliver The Future at Lloyd’s, we need to get our house in order - some positive signs but a lot more to do Delivering a first class underwriting result at Lloyd’s… Maintain underwriting discipline Lloyd’s continuing to lead the way Better execution Differentiating the best and worst Protect and grow the best Improve or remove the worst, quickly …starting with a better combined ratio than 2019

33. Time for questions

34. Disclaimer