New pricing standards at Lloyd's require improvements in underwriting systems

Jump to Section: Part 1: Improve your pricing maturity score at Lloyd’s using Optalitix Quote, Part 2: Tips for insurers Part 3: Use Optalitix Quote to meet Lloyd’s pricing and rate requirements. The new Principles for doing business at Lloyd’s will encourage syndicates to digitize their processes, especially underwriting. The new standards set out the Lloyd’s’ expectations for its syndicates and managing agents. These standards will be difficult to achieve for syndicates that have not migrated to the cloud. These principles cover 3 main areas:

• Performance: For example, underwriting, catastrophe cover, reinsurance, customers, claims and reserving
• Solvency: Capital, solvency and liquidity
• Operational: Governance/risk management, regulation, resilience and culture

Four of these principles are critical, and require closer attention as they drive the pricing maturity level used by Lloyd’s to set premium capacity (i.e. the ability to grow business and profitability):

• Underwriting profitability
• Reserving
• Governance/risk management
• Culture

If a managing agent fails on any of these standards , it can negatively impact its pricing maturity and be subject to “interventions”. These interventions  include removing the right of the syndicate to write a class of business, or reduction of premium capacity (effectively reducing profits in a competitive market).In our regular series of blog posts, we will share tips for syndicates to improve their pricing maturity, covering their underwriting and reserving capabilities. We will demonstrate how our product, Optalitix Quote, could be used to meet Lloyd’s requirements, improving pricing accuracy, regulatory compliance and profitability.

Part 1: Improve your pricing maturity score at Lloyd’s using Optalitix Quote

Boosting the syndicate's profit requires an upgrade on the pricing maturity score to obtain more premium capacity from Lloyd’s. This article shows how syndicates can use Optalitix Quote to achieve this. Lloyd’s has published pricing guidelines for managing agents and cover holders. These guidelines include requirements for closer oversight of pricing and underwriting functions. The requirements need to be confirmed by a senior board member, and improvements are expected as part of the managing agents' pricing process. The full details of the price and rate monitoring standard can be found in this link to the MS3 pdf. There are significant benefits for managing agents that improve their pricing process, including increased premium capacity and lighter oversight by Lloyd’s, as well as potentially reduced capital requirements. Optalitix has built Optalitix Quote to meet the stringent pricing and rate monitoring standard set by Lloyd’s, with the aim of giving users a stronger regulatory framework and better pricing outcomes.

Part 2: Tips for insurers

There are good reasons for insurers to boost their pricing maturity score with Lloyd’s. The boost in your pricing maturity score means your premium capacity will increase, and for those on the bottom level of pricing maturity, it reduces the likelihood of intervention by Lloyd’s in your business.Here are seven tips on pricing that will help companies achieve an improved pricing score.

1. Use external data in the pricing process: External data allows insurance syndicates to improve their understanding of risk and become more competitive. External data helps insurers to price for catastrophe risk, credit risk, fraud, management quality, etc. This can significantly improve risk outcomes.
2. Ensure rates are reviewed annually: The risk and underlying measures of risk can change frequently. Companies that review their pricing regularly (i.e. at least annually) are able to identify these changes and adjust.
3. Peer review of pricing: Lloyd’s has stated a preference for peer review, and in particular recommends using independent consultants to review pricing for larger, more significant rating classes. This ensures pricing reflects the latest industry pricing standards and actual emerging experience.
4. Use GLMs for more granular data classes: In some classes of business, there is significant claims data available and a number of different risk measures available to set prices. Lloyd’s has recommended the use of Generalised Linear Models (GLMs) for these classes as they are a more accurate method of pricing, and allow a more systemised and disciplined pricing approach.
5. Improve management information for pricing: The ability to understand pricing risk exposure early ensures management are able to steer underwriters to set prices based on risk appetite. Getting exposure information early can significantly improve risk outcomes and prevent unexpected losses.
6. Review actual vs expected pricing experience: Checking claims outcomes against pricing expectations ensures that pricing rates reflect the best information available on risks written. Keeping loss ratios and profitability by risk factors under review will allow a quicker response to changing environmental and risk conditions.
7. Improve the link between the reserving and pricing teams: Claims can many months, even years to fully emerge. Pricing teams need to co-ordinate with their reserving teams to ensure their projections of claims reflects the most recent views of their reserving teams.

Part 3: Use Optalitix Quote to meet Lloyd’s pricing and rate requirements

The key requirements that Lloyd’s expects its syndicates to meet on pricing and rate monitoring in their guidance (see link here) are summarised below. There are 5 key requirements that are important and require Board level sign-off. Optalitix Quote allows the client to meet these requirements, giving them assurance of pricing quality oversight and governance in their underwriting department. This is also explained in the table below.

‍What Lloyd’s expects syndicates to do How Optalitix Quote helps

PRM 1.1 - Price and Rate Monitoring Framework

‍Syndicates must have in place an effective pricing and rate monitoring framework. This extends to board-level review of pricing and implementation of systems. The Board of a syndicate is ultimately responsible for pricing, and wants reassurance about the process the syndicate has in place. Optalitix Quote provides full oversight of all underwriting models, with dashboards providing information to the Board to track progress against their business plan and gives confidence that they meet their risk appetite.

‍PRM 2.1 - Overarching Pricing Methodology

‍Managing Agents have appropriate pricing methodologies for each managed syndicate. Pricing insurance is a complex process and carries the opportunity for significant profit, but also the risk of losses. Lloyd’s wants syndicates to track this activity closely. Optalitix Quote manages all pricing functions and maintains audit control of pricing models and quotes issued. It provides full tracking of premiums and links to claims, ensuring experience can be tracked and appropriate premium rates are used with full audit governance

‍PRM 2.2 - Pricing Methodology for Delegated Authority Business

‍Syndicates writing delegated authority business  can price each insurance contract and assess its expected performance prior to acceptance. Delegated authorities write insurance policies that they underwrite and price using the syndicate’s own balance sheet, hence the importance of tracking this activity. Delegated authority business can be managed and monitored on Optalitix Quote’s underwriting workbench which is directly linked to the syndicate. This allows full tracking of business written and premiums offered. Syndicates will always be aware of the business taken on by delegated authority business.

‍PRM 3.1 - Price Adequacy and Rate Change Management & Monitoring

Managing Agents have effective price and rate change management and monitoring in place on all sources of business. The risk and cost of insurance is changing all the time – Lloyd’s expects syndicates to keep track of these changes.Optalitix Quote gives assurance to the Board on pricing. It tracks pricing and can be enabled to only use pricing models signed off by appropriate people and to expire these models when a review is due.

‍PRM 3.2 - Price and Rate Monitoring Audit and Review

‍Managing Agents have effective systems and controls to audit and review pricing and rate monitoring. Optalitix Quote maintains all pricing data in its databases, and publishes real-time dashboards on quotes issued, risks carried, and exposure. Pricing systems are version-controlled and tracked, with full permissioning systems built in.