Are you getting to grips with Lloyd’s ‘Principles of Doing Business’? Launched in 2022, Lloyd's 156-page framework outlines the responsibilities of all managing agents and underlines what great looks like across an insurance business: from pricing and underwriting to governance and culture. But 156 pages is hardly light reading.
To help you out, our experts have dived into the sub-principles of Lloyd’s Principle 1 (Underwriting Profitability). They've pulled out 13 best practices across six key themes to achieve pricing excellence.
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First, a quick recap on the Principles.
Why Lloyd’s ‘Principles of Doing Business’ matter
Lloyd’s ‘Principles of Doing Business’ (also known as Project Rio) have been designed to help the best speciality insurers flourish and help underperforming insurers improve. The 13 principles cover performance, solvency and operational tasks with scores ranging from ‘unacceptable’ to ‘outperforming’.
Top performing syndicates will benefit from lighter touch business reviews, reduced syndicate loading and external Lloyd’s promotion as a ‘preferred partner’. On the other hand, underperforming insurers could face restrictions on business plans, mandatory remediation of certain business lines and even forced personnel change.
While agents are not expected to nail every principle first time round, it’s clearly in their interest to aim for excellence. It’s time to dig into what that looks like.
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We cover the following best practices (with extra commentary) in our on-demand webinar available here.
13 pricing best practices for Lloyd’s syndicates
Underwriting profitability is a fundamental tenet of an insurer's success and so it’s no surprise to see it encapsulated in Principle 1. Lloyd’s has broken it into eight outcome-based Sub-Principles covering areas like underwriting controls and robust portfolio management.
Sub-Principle 6, known as the Pricing Maturity Matrix, provides detailed expectations for the pricing frameworks used by the best syndicates. To help you on your path to excellence, our experts have analyzed Lloyd's criteria for pricing frameworks (all 13 sub-sections) to distil best practices for each
Lloyd’s wants to see technical pricing across a large majority, if not all of your lines of business. 100% coverage may not be sensible in all cases, which Lloyd’s seems to understand, but even achieving very high coverage is hard – especially as you move beyond rolling out pricing tools to core products onto smaller more niche products with lower premium volumes. Here’s what you should do:
1. Aim for coverage that you can reasonably achieve without risking quality
To find that target, perform an internal audit on what’s possible by looking at your internal resources and pricing tools. Can you easily maintain and improve them? Will they evolve over time? Do you have the technology to get that coverage? For example, you’ll likely have a much lower coverage target if your pricing technology only allows you to deploy new pricing tools on a monthly basis.
There’s a balance to consider, too. An unreasonable target will likely result in high coverage of low value/quality pricing tools as your pricing function invests all its resources into rolling out more pricing tools with no focus on developing existing ones to a market leading standard.
2. Test and refine your pricing models, especially in new business areas
Trying to obtain strong technical pricing in an area you haven't written business before is difficult, so use the first release of a pricing tool as an extended testing phase. Take on feedback from underwriters, use all the data that underwriters are entering, and look to refine the pricing model year-on-year.
3. Ensure you use a common technical price definition across the business
With some built by underwriters and others by actuaries, technical price definitions are often inconsistent, so having centralized oversight over one common definition ensures everyone is on the same page.
Lloyd’s wants a clear link between your planning loss ratio and the implied loss ratio from your pricing tool, so there’s no disconnect between what your pricing team and pricing tool are telling the business. Advanced syndicates should:
4. Set up a feedback cycle and ensure underwriters are engaged in the process
Involving underwriters from the start is essential. They need to know why a feedback cycle is happening and when it's happening (an annual review is a good start), so they can feed into the process. It’s therefore important for actuaries to think about what workflows might be affected and how they can help underwriters with this. For instance, if underwriters are using the pricing tool rate adequacy level for referral purposes, then it could be wise to adjust this threshold in line with any adjustment in technical price so it aligns with the plan view.
5. Use appropriate pricing methods and technologies
Whether it’s exposure pricing or experience pricing, all pricing methods should continuously evolve and improve over time with regular use (it’s not a case of set and forget for five years). Use technology that enables that. Interestingly, Lloyds highlights the use of machine learning within your pricing toolkit, suggesting they want the market to be ready to adopt it more widely in the future. In the London market, machine learning is rarely the silver bullet that some would claim it to be, but there are instances where it can add significant value. Unfortunately, deploying machine learning models is often deterred or at least delayed by various legacy technology barriers. Ensuring your technology is future proofed so you are able to make the most of AI and machine learning as its use cases evolve is a worthwhile investment.
6. Validate your models and make them simple for underwriters to use
Having a strategy for how you will validate and refine your models is crucial for delivering value to underwriters through pricing tools. Validating model accuracy requires you to link claims to pricing data, ideally at individual exposure level. This lets you compare a model’s predicted loss experience to your actual observed loss experience. You can then take steps to improve model accuracy and close the gap – a critical effort to prevent pricing tools negatively affecting underwriting.
You can improve your model by bringing external data into the tool and making it available to underwriters at the point of pricing. This will make the their lives easier, which is a fundamental objective of a good pricing model.
For Lloyd’s, a best practice technical price definition will include loadings for internal expenses, acquisition costs, reinsurance, and the cost of capital. Mature syndicates should:
7. Implement multifaceted and fully verified loadings
Actuaries typically use a flat load for the cost of capital (i.e. applying 5% for property lines), but Lloyd’s wants to see a more sophisticated cost of capital allocation from its ‘advanced’ syndicates and agents, which take into account riskier or more volatile layers – applying, for instance, 30% cost of capital loading for excess layers but only 5% for primary layers. Make sure you’ve verified all your loadings (i.e. you can’t just say your internal expense load is 20% without verification) and they are as accurate as possible.
Senior leaders need oversight of pricing, so Lloyd’s wants to see pricing data available as management information. When developing a pricing tool, you should:
8. Create compelling and digestible reports
You first want to capture rich data from underwriters, but then you need to package that data clearly, so it’s available for leaders in one easy-to-read report. Think about what KPIs you need, what level of automation will be required to report them frequently enough, and who the right audience is for your reporting. You might create the best reports in the world, but they’re not going to have any impact if no-one's looking at them.
9. Deliver timely information and data to underwriters
Just as senior leaders can make better-informed decisions with detailed pricing reports, underwriters can make better-informed quoting decisions with data-driven rate changes. From tweaking deductibles to changing quote premiums, underwriters are in a more powerful bargaining position if they know what rates or rate change the company is aiming for and can see what rate change they are achieving at the point of pricing. Similarly, the ability to see relevant portfolio information at the point of pricing, such as what rate change they have achieved from a specific broker in the last month, can truly augment the underwriting process.
For actuaries, the task is getting this level of information to the underwiters at the right time. Instead of sending out Excel spreadsheets on a monthly basis, you could have underwriters open up a digital browser or dashboard with all the relevant risk details they need to get a technical price. When they’re in the room with a broker, this info is ready and on hand to help them negotiate more rate.
10. Use tech to enhance your pricing and management information capabilities
Spreadsheet mail-outs no longer make the grade now that syndicates can automate real-time updates to rate changes, retention, and rate adequacy, and can easily centralize all portfolio information to improve management decisions. On the pricing side, that means technology that can deploy machine learning, make real-time changes, and ingest external and unstructured data at the least.
11. Engage tech with the right security controls
Lloyd's are wary of syndicates that have all their data on a SQL database where all pricing actuaries have admin rights, as it’s very easy to accidentally delete an entire table and suddenly lose the last five years’ worth of data. Instead, they want to see infrastructure in place to make sure that your data is secure as well as accurate.
Lloyds prefers syndicates with pricing tools that capture rich granular data. Syndicates looking to improve their performance rating should:
12. Work with underwriters to understand their data needs
As a minimum, Lloyd’s expects the top performing syndicates to capture submission data, quoted data, bound data and interesting analysis, such as prior loss experience of a customer client. But this data must then be easy for underwriters to use. Partner with your underwriters, understand their needs and incorporate this data seamlessly into their workflow.
13. Use technology that processes unstructured data
For example, imagine receiving an email with a word document, excel spreadsheet and PDF with loads of useful information about a risk. Instead of trying to type it all up into a factsheet, Lloyds wants to see the use of in-house tech or external tech capabilities (i.e. ChatGPT4), which can automatically process all of that data and pre-populate it. In other words, you simply click ‘ingest external data’ and the full picture is there without your underwriters actually having to do any work for it.
Maturity standards never stand still
There is a lot for advanced syndicates to master when it comes to pricing frameworks. At the end of the day, better pricing practices is better for business, so it’s worth investing the time and effort in maturing your approach.
It's important to keep in mind that achieving best practice pricing isn’t a one-and-done effort; Lloyd’s expects its advanced syndicates to be continually updating and improving their frameworks.
It’s also worth noting that the Pricing Maturity Matrix is recognized by Lloyd’s as being less mature than other components of the framework underpinning its ‘Principles for Doing Business’. It expects the matrix to evolve over the coming years as it becomes clearer what best in class looks like for the market. We’ll be here to help translate any new and updated guidelines into practical takeaways for your continued success.
hx Renew – your shortcut to pricing excellence
And for those looking for solutions to help achieve these standards effectively and efficiently – our pricing decision intelligence platform, hx Renew, is designed for world class pricing and underwriting. For the details on how hx Renew can help you meet Lloyd’s criteria for Underwriting Profitability, check out our breakdown in this reference guide.
From delivering technical pricing across all lines of business to ingesting unstructured data with machine learning, hx Renew is your ticket to a pricing framework that outperforms the market.