WSIA’s U40 2021 Webinar SeriesJuly 12, 2021

London Market 101

Presented byPeter Montanaro, Head of Market Oversight and Delivery, Lloyd’s

Lloyd’sPeter Montanaro, Head of Market Oversight and DeliveryMarkets

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Classification: Confidential

Lloyd’s originsResulting from two human activities coming together

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• 1745 legal difference between insurance and gambling defined

• 1772 from Coffee House to Society

• 1843 Concept of “Lloyd’s member” introduced.

• 1871 Statutory recognition of Lloyd’s - Lloyd’s Act 1871

• Development of the non-marine market

Lloyd’s in the eighteenth & nineteenth century

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• 1927 Lloyd’s Central Fund set up

• 1996 Reconstruction & Renewal

Lloyd’s in the twentieth century

6© Lloyd’s 2021

Robust financial strength

Complete confidence

Excellent financial security

2020 Annual Report, published March 2021 lloyds.com/annualresults2020

AA-Fitch Ratings (Very Strong)

A+Standard & Poor’s (Strong)

AA.M. Best (Excellent)

AA-Kroll Bond Rating Agency (Strong)

Lloyd’s Chain of Security

£55bn Syndicate level assets

£31bn Members' funds at Lloyd’s

£3bn Central assets*

*Central assets exclude subordinated debt liability and the callable layer. For more information please see the annual report.

Gross written premium

£35,466m

Why Lloyd’s?

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Writing international business

To write non-marine insurance internationally, Lloyd’s needed to arrange:

• Licensing as a single entity (e.g. “Underwriters at Lloyd’s, London”)

• Meeting local financial requirements

• Legal actions against Lloyd’s underwriters

• Payment of taxes

© Lloyd’s 2021

Global network

Serving clients in200 countries and territories

Cross border reinsurance only

Cross-border/onshore reinsurance

Onshore insurance/reinsurance licence

US Cross border/onshore reinsurance and surplus lines insurance

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• 2002 Chairman’s Strategy Group

• 2013 Regulation by the PRA & FCA

• 2019 Future at Lloyd’s Prospectus

Lloyd’s in the twenty first century

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Classification: Confidential

How the Lloyd’s market works

Business flow Capital flowThe market

The Corporation – Supporting the market2020 Annual Report, published March 2021 lloyds.com/annualresults2020

50 managing agents - managing syndicates

76 syndicates - writing insurance and reinsurance directly

12 special purpose arrangements set up solely to write a quota share of another syndicate

2 syndicates in a box: writing innovative new business

Distribution channels

350 brokers distributing business

427 service company locations

4,030 coverholderlocations

Customers transferring risk

Global commercial organisations

Small and medium sized enterprises

Individuals

Other insurance groups

Members (capital providers)

Trade capital

Institutional capital

Private capital (via members agents)

11© Lloyd’s 2021

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Sharing risk with leading insurance brandsThe Lloyd’s market is home to leading insurance brands

lloyds.com/annualreport2018

12© Lloyd’s 2021

Classification: Confidential

Partnering with global capitalby source and location

2020 2019

19.1%

14.0%

12.2%11.3%

9.8%

9.8%

9.8%

8.5%5.5%

17.3%

14.9%

14.6%10.2%

9.6%

9.2%

10.5%

8.3%5.4%

US insurance industry

Bermudian insurance industry

UK insurance industry

Japan insurance industry

European insurance industry

Private capital, limited & unlimited

RoW insurance industry

Worldwide non-insurance

Middle/Far East insurance industry

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• Delegated Underwriting Business

• Capital and Planning Group

• Market Oversight

• Standards to Principles

Market Oversight and Performance Management

© Lloyd’s 14

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Coverholders & Service

Cos38%

D&F37%

Treaty22%

Lineslip…Lloyd’s Premium**

Pre-determined

rates59%

Full authority24%

Prior submit14%

No discretion3%

Coverholder Underwriting Permission*

Coverholders: – an introduction

© Lloyd’s

Coverholdersǂ

4,031Service Companiesǂ

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US$44 bn2020

Coverholder Community*

Lloyd’s Involvement53 Managing Agents

Global ReachOperating in 60 countries/territories

*Delegated Authorities team showing office locations (PINS) not legal entity count, May 2021 **Gross Signed Premiums sourced by Xchanging and LDR ǂPINs (Office locations), May 2021

Who are they? • Coverholders are insurance intermediaries appointed by a managing agent to bind risks

on their behalf. Outside the Lloyd’s market they may be referred to as MGAs/MGUs.• Service companies are in-house coverholders that are owned by a managing agent • Coverholders can vary considerably in terms of size, product and complexity• Many brokers are also approved coverholders

What do they do? • Coverholders’ authority to underwrite (bind) policies or pay claims is set out in an

outsourcing agreement called a Binding Authority (i.e. ‘binder’)• Coverholders and Service Companies are primarily focussed on writing SME and

consumer business – but some will write commercial lines

Why do they matter?• Coverholders and Service Companies represent 38% of Lloyd’s premium. They are a

local distribution channel and carry our brand• They provide an excellent route to access SME/Consumer business that would be

difficult or uneconomic to source via open market• They are also an effective fast-track route to market for innovative new entities (e.g.

parametric solutions)

Where are they based?• Coverholders are mainly based in our key markets – especially North America, UK,

Australia and Europe• Service Companies, especially those based on Lloyd’s overseas platforms, tend to write

local/regional reinsurance business – e.g. Asia and Middle East

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Coverholder73%

Service Compani…

Unmatched Binder*

4%

© Lloyd’s Source: Gross Signed Premiums (GSP) sourced by Xchanging and LDR; by calendar year, based on the location of the policyholder. *Data Health Warning: Not all delegated authority premium is processed via Xchanging and LDR (approx. 80-90% is) or can successfully be matched due to deficiencies in data entered manually. Those are indicated as Unmatched Binder; Parts of Lloyd’s Asia DA business is not processed via Xchanging or LDR.

Coverholders are key distribution partners at Lloyd's

Coverholders write mainly insurance business, with c.70% of policyholders being based in North America. Business grew steadily from 2015-2019 but reduced in 2020 due to performance management.

Insurance…Facultative

7%

Non-Proportiona…

Proportional Treaty…

US$17 bn2020

US$17 bn2020

DA business is 73% Coverholders and 88% insurance

Policyholders in the Americas account for c.70% of DA business

Americas69%

EMEA19%

APAC12%

Lloyd’s DA business by location of policyholder

US$17 bn2020

Location of policyholder: 5 year CAGR

Americas 7%

EMEA -4%

APAC 4%

Overall DA business grew c.$4.5bn from 2015 to 2019, but fell by c.US$1.5 bn in 2020

Lloyd’s DA premium trend

13,752 14,774

16,202 18,168 18,255

16,717

0

4,000

8,000

12,000

16,000

20,000

2015 2016 2017 2018 2019 2020

GSP

(USD

mn)

7.3% CAGR2015-2019

-8.4%2019-20

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A single, seamless Delegated Authority ecosystem

1

2

354

7

NEW DA systemExisting system

3. Lloyd’s Coverholder Workbench (optional) Integrates quoting, binding, document generation, billing & production of fully compliant data

2. Delegated Contract Manager (replacing BAR)Consistent, transparent data-based registration of contracts & optional construction of right-first-time contracts

6. Future at Lloyd’s Middle & Back-officeVision to streamline accounting & settlement processes

– enabling reduced complexity, errors & delays

7. Delegated Audit Manager (AiMS) Scheduling, scoping & follow-up for Coverholder & DCA audits. Will introduce risk-based optimization of audits &

provide insights on performance to market.

4. Future at Lloyd’s ClaimsVision includes automated straight-

through claims processing

1. Delegated Oversight Manager (replacing ATLAS)Smarter approval & data-based oversight of Coverholders & DCAs

5. Delegated Data Manager (DA SATS)Will act as a centralised Coverholder reporting data store,

reducing burden of regulatory reporting (when fully adopted)

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Syndicate Oversight Lifecycle This view shows the end to end view of how oversight is applied to a syndicate from cradle to entry point to exit

Enter the Market*

Exit the Market*Assessment

ProcessCommunication

Planning

Monitoring & reporting Scan

Year 3 onwards: based on risk profile

Years 1-3: high touch

Annual Oversight

Cycle

Synd. Plan Approval

Performance Monitoring

Specific Reviews

Decisions

Communications

Assessment Closure

New Synd AssessmentHigh-Level PitchPrelim ApprovalMaking It HappenApprovalCommunication

Market Planning

Market MessagingMkt Oversight PlanMA LettersMA EngagementMA Negotiation

Syndicate Plan ApprovalSBF SubmissionLCR Submission

CPG ProcessMA Comms

Reg Updates

PerformanceMonitoring

Combined RatioPricing

Written premiumsPaid claims

Claim reservesModel changes

Specific Reviews

Thematic ReviewMin Standard RevAdditional OversightChange of Control

Survey ResultsRegulatory Reviews

DecisionsNew entrantsBusiness planCapital plan

Change of controlAuthority to underwrite

CommsDecisions to MAsOversight Plans

MA LetterThematic review

reportsReg ReportingRating Agency

ClosureSynd run-off

Synd retirementForced closure

RITC

Market Planning

* NoteEntering and exiting the Market are not annual processes, they are exceptional

Key InterventionsRemove

permission to underwrite

Approve / reject a

business plan

Impose a capital loading

Approve / reject a RI contract

Approve / reject a new

syndicate application

Impose operational risk loading

Impose conditions on appointment

of Board member

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Key Decision Processes

The following slides define the key oversight decision making processes with their high-level inputs, key stages, approvals and outputs. In summary, those key decision-making processes are

Enter the Market

Exit the Market

Annual Oversight

Cycle

New Entrants Approval

The process to receive and review applications

for new entrants into Lloyd's from initial pitch

to full approval, confirming that they support the Lloyd’s

brand and meet Minimum Standards

Business & Capital Plan Approval

The process to receive, review and approve

annual syndicate business plans and

capital requirements, ensuring they align to Market Messages and

Lloyd’s strategy.

Market Oversight Planning

The process to plan appropriate,

proportionate oversight which is suitable to the

current risk environment and in accordance with Lloyd's risk appetite and regulatory requirements.

Change of Control ApprovalThe process to receive, review and approve any

changes in control of syndicates, MAs,

members agents and their parent

organisations, e.g. following a merger

Exit the MarketThe process to manage the exit and/or run-off of

syndicates and managing agents from the Lloyd’s market in a controlled, managed

way to mitigate any risk to policyholders,

investors or the Central Fund

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Three key interlinking elements of the Oversight Framework have been developed in parallel

© Lloyd’s

Syndicate categorisation

Oversight Principles

Clear syndicate categories driven by Lloyd’s view of performance against Principles and a syndicate’s

materiality

High-level principles, across 13 dimensions, supported by guidance, that allows Lloyd’s to differentiate from non-compliance through to best practice

An escalating scale of interventions that are linked to principles and overall

syndicates categorisation

Growth and development opportunities for the best run

businesses

Development opportunities

Oversight and

interventions

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Oversight Principles: A clear overarching principle is set for each oversight area, supported by a small number of underlying statements

Dimension Overarching Principle Dimension Overarching Principle

PERFORANCE

Underwriting Profitability

Managing agents should produce and execute syndicate business plans which are logical, realistic and achievable and ensure long term sustainability including expense management S

OLVENCY

Capital Managing agents should ensure syndicates Solvency Capital Requirement (SCR) appropriately reflects their risk profile and is calculated using a SII compliant internal model.

Catastrophe Exposure

Managing agents should ensure syndicates maintain appropriate control of Catastrophe risk (natural and non-natural) in line with agreed risk appetites

Investment Managing agents should ensure syndicate investment risk taking is effectively controlled, informed by wider business strategy and adheres to the Prudent Person Principle (PPP) requirements.

Outwards Reinsurance

Managing agents should define and execute syndicate outwards reinsurance strategy and purchasing plan which reflects the wider business strategy

Liquidity Managing agents should ensure syndicates (and their members) they have contractual access to sufficient liquidity in order to withstand a severe liquidity event (defined by Lloyd’s), underpinned by a robust liquidity risk management framework.

Claims Management

Managing agents should deliver a high quality claims service supported by efficient and effective claims management solutions and underpinned by a clear claims commitment which ensures fair and timely claims handling and good customer outcomes. O

PERATIONAL

Governance and Reporting (Subject to ELG review)

Managing agents should have governance structures and internal risk management and control frameworks in place which enable well-informed, timely and effective decision making and consistently accurate and timely reporting to Lloyd’s.

Regulatory, Compliance and Financial Crime

Managing agents should have robust regulatory and financial crime frameworks in place to meet and adapt to relevant legislation and guidance. Frameworks should support well informed, transparent relationships with Lloyd’s and regulators.Customer

OutcomesManaging agents should embed a culture and associated behaviours throughout their organisation to ensure they consistently focus on good customer outcomes

Operational resilience

Managing agents should maintain robust and resilient operations, embedding cyber resilience and effective third-party risk management.

Reserving Managing agents should ensure syndicates set reserves which are underpinned by a robust reserving process. All Actuarial Function requirements should be met in line with Solvency II.

Culture Managing agents should be inclusive and representative, creating a high performance culture.

© Lloyd’s

The 13 Principles set out the fundamental responsibilities expected of all Managing Agents in order to support the Markets’ overall performance, capital strength, financial and reputational credibility

QUESTIONS

WSIA’s U40 2021 Webinar SeriesJuly 12, 2021

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