Walking the Tightrope of Risk In the Insurance

Walking the Tightrope of Risk In the Insurance

Walking the Tightrope of Risk In the Insurance Business Rupert Atkin CEO, Talbot Underwriting Houston Marine Insurance Seminar September, 2014 1 Tightrope of Risk in Insurance Starting a Lloyds business - Posgate 127/126/700/701 1982 FEAR/SUCCESS - Catlin 1003 1985-1990 - Atkin

1183 1990-today 1990 6,000,000 capacity, 2 people 2014 625,000,000 capacity, 300 people COMPLACENCY/ FAILURE FEAR/SUCCESS What makes a successful Lloyds business? COMPLACENCY/ FAILURE Page 2 Tightrope of Access to and Management of Capital Balance between investor return and capital adequacy for external constituencies

1991 Annual Venture, Individual Capital, Not paid up. Line size geared to credit at the bank. Only possible in Lloyds. 1997 Venture Capital, top line growth at wrong time in cycle. Solved one problem created another. Syndicate 1183 did not trade for 2000/2001, after 3 very difficult years of resisting merger. 2001 9/11 Fell off tightrope, complacency had overcome fear, needed to recapitalise within 2.5 months. $120m from the trade capital/private equity. Innovative layered structure. Again, only possible in Lloyds. RETURN ON CAPITAL INVESTOR, RISK APPETITE Page 3 Tightrope of Access to and Management of Capital

Dowling & Partners Securities LLC Lloyds is better valued with divergence growing since end of 2010. Page 4 Tightrope of Access to and Management of Capital Dowling & Partners Securities LLC Only 3 non-Lloyds businesses break into the Lloyds valuation range. Page 5 What Drives Value? Acquisition of capital and management of return are key drivers of value. Value Generated by ROE, not Loss Ratio Low correlation between longer term underwriting and market pricing. Pricing multiples vs. combined ratios Source : PWC London Market combined ratios (five year average to 2013)

Page 6 Lloyds Oversight Outsized losses of the few, threaten viability of the whole. Oversight of start ups new rules. PMD formed Business Plan Challenge ENTREPRENURIAL FLAIR REGENERATION - New Products - Broker fees Solvency II Capital Modelling. I work in Insurance vs I work in Lloyds. REGULATORY OVERSIGHT STABLE PERFORMANCE Page 8 Current Trading Conditions

Current conditions: Capital Modelling has crushed the cycle and volatility. Consequently the pricing freedom that comes with distressed opportunities will be hard to find explains change in Berkshire Hathaway. Modelling creates new risks - Enemies of judgement? - Systemic Risk as a result of limited choice? - Patchy record of forecasting loss but tool of rating agencies; still art as well as science. OVERSUPPLY OF CAPITAL CAPITAL MODEL WHERE

ARE THE DISTRESSED LOSSES OPPORTUNITY RISK SELECTION Page 8 Current Trading Conditions (2) Berkshire Hathaway/Aon transaction - Beginning of a new world or flawed transaction? Innovation/Reinvention? - Portfolio underwriting, Enemy of risk selection and Aggregate control - Portfolio underwriting because business better controlled as a result of capital modelling. - Risk selection among classes which are hard to model. - ILS, Hedge Fund, Pension money can only play in modelable business.

Will they ever meet a client? - Experts, individual decisions, clients needs and problems solved is Lloyds sweet spot. CAPITAL MODEL PORTFOLIO UNDERWRITING DISTRESSED OPPORTUNITY RISK SELECTION Page 9 Distribution The Brokers Tightrope Lloyds Syndicate 1183 is Talbots only platform. 100% business through brokers. Who is the broker working for? Larger brokers seeking to generate

CLIENT? BROKER AS AGENT income from their underwriters as well as their clients is this their tightrope? Clients must pay for the value they derive from brokers. CARRIER? - Fees must reflect this value. Tightrope for carriers as well pay to play if yes - business withers if no? Paying for services we do not want to have access to business. Brokers have overtaken Underwriters in their management of technology and data (GRIP, WillPlace). Lloyds has a seam of gold, yet to be mined. Xchanging/Central Services Refresh. Aons proposition is geared around creating tangible value for clients. Aon has invested heavily in recent years in developing the systems and tools to enable it to do this. Page 10 The Underwriting Tightrope Lloyds Capital gearing, minimal investment return underwriting

decisions are key to profitability. How to say no but still attract the best business is an art. Past: Unfettered Judgement, Generalists. Present: Underwriting Authorities, Models, Specialists. Onshore exposures drive need for modelling but not substitutes for judgement (Thai Floods). Pricing and exposure models vital tools and constantly improving, but remain imperfect. Importance of Interpreting Models by peril/geography. Validus Research as a competitive tool. Restores expert judgement, avoids systemic risk. PLEASE SHOW ME ALL YOUR BEST BUSINESS UNDERWRITER NO, CANT HELP

MR. BROKER BUSINESS PLAN, PRICING MODEL FLAIR, EXPERT JUDGEMENT Page 11 The Regulatory Tightrope Syndicates have 3 masters: Lloyds, PRA, FCA. Fines no longer offset expenses, go straight to Exchequer. Acknowledged duplication, accountable to different Masters Bank of England and Government. PWC: 72% costs increase; 41% Stifle Innovation; 49% prevented from pursuing opportunity. Lloyds Performance Management Directorate key to market revival. Regulator as enabler.

Conflict between caring for investors and caring for policyholders. Has Regulator given up? Overseas Policyholders subject to UK expectations to be changed? PRA ADEQUATE PRICING FOR SOLVENCY, NO UNDUE RISK. UNDERWRITER FCA POLICYHOLDER PROTECTION TCF Page 12 Vision 2025 Preservation: London based, subscription, International market,

Central Fund, Global Licences, Rating, Broker P & C focused market. Aspiration: Capital, people, Business attracted from High Growth Economies to reach 25%. Broker sensitivity BUT focus on new business, help us find it! Attractive status quo, well priced business. London Market Brokers What can we be? Increase High Growth Economies business to 25%. More competitive pricing. Local Brokers.

Page 13 Lloyds Market Association Cross Membership of LMA Board with Council and Franchise Board. Helps communication between market and corporation on strategy and many other topics. All managing and members agents are members. 2000 practitioners support panels. 4000 users of Lloyds Wordings Repositories. Shared services: Credit control Coverholder Audits Exposure Data Standardisation/Data Cleansing Cat Modelling Page 14 Marketing The Insurance Industry Contribution to the economy: taxes, employment, investment management.

Reputation is driven by reputation on settlement of claims, inevitable link with Personal lines. Claims free policy frees policyholder from uncertainty and fear. - Claims free policy ensures ships sail, planes fly, cars are driven, buildings are built and money is lent. - Claims free policy offers capital relief to banks. - Claims free policy can still benefit insured through Insurers/Surveyors/Engineers showing their knowledge of other policyholders losses to prevent/reduce risk of loss, pre hurricane planning, business continuity. Policy with claims can result in loss prevention measures for the future. - Attack on Sri Lanka Airport - Piracy in Malacca Straits and off Somalia, Well Control. Page 15

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