Lloyds publishes its 2024 Market Oversight Plan

Lloyd’s of London recently published its 2024 Market Oversight Plan. The plan builds upon Lloyd’s work with managing agents (MAs) in underwriting portfolio management, and simultaneously focuses on maintaining market resilience in the current macroeconomic conditions.

Additionally, Lloyd’s makes clear that meeting regulatory expectations, such as those on operational resilience and the Consumer Duty, is core to its plan.

What does this mean?

The plan consists of the nine key areas discussed below.

Sustainable market performance

Lloyd’s confirms that it will enhance its oversight over the three classes of businesses where it sees the greatest uncertainty; these are: Directors & Officers, US general liability and cyber.

Recognising the risk and opportunity presented by technological advancement, Lloyd’s will work with the Lloyd’s Market Association (LMA) to develop an oversight framework for AI / augmented underwriting.

On pricing, Lloyd’s will perform Pricing Maturity Matrix assessments to improve oversight and capabilities. Lloyd’s will also review the pricing metrics reports it receives, and will engage with MAs through workshops to improve its understanding of these reports. On reserving, Lloyd’s will focus on how current casualty underwriting conditions and remediation actions have been taken into account in setting initial loss ratios for long tail classes.

Lloyd’s will develop a Delegated Authority Strategy in consultation with the LMA. Lloyd’s also plans to continue its engagement with legacy syndicates to ensure its oversight is aligned with that of the live market. This includes developing reverse stress scenarios to assess reserve concentration risk within an individual syndicate.

Managing volatility

Lloyd’s will assist the market with exposure management oversight, to ensure the market keeps pace with the risk profile of the market. This includes Lloyd’s three year plan to strengthen the oversight of cyber risk; a focus on exposure management capabilities for the political violence and terrorism class of exposures; developing granular oversight of the increasing exposure to natural catastrophe risks; and focussing on outwards reinsurance, such as monitoring reinsurance counterparty risk.

Sustainability including climate risk

Lloyd’s makes reference to its recent roadmap for a swift and orderly transition to net zero, and lists several oversight activities that it plans to conduct this year. The activities include seeking to understand syndicates’ modelling approaches and allowances in capital for climate change.

Macroeconomic uncertainty

Lloyd’s will seek to understand if MAs are monitoring and mitigating inflation, investment, and liquidity risks in the current uncertain geo-political environment. Lloyd’s focus is to ensure MAs are allowing for inflation to arise in claims, whilst stressing the impact of any downgrade on their asset portfolio, and continuing to ensure they manage their own liquidity risk in line with their risk profile.

Claims strategy

Lloyd’s states it will monitor the progress of changes made in 2023 to enhance claims handling capabilities. These include the release of the Claims Outcomes and Actions Dashboard for improved data insights on lifecycle performance, case reserves and expert management.

Operational resilience and Blueprint 2 cutover

Lloyd’s refers to the work it has done with MAs to assist them with their preparation for the PRA and FCA’s March 2025 operational resilience deadline (SS1/21 and PS21/3). It plans to issue another survey in Q4 2024, to allow it to understand how MAs are progressing ahead of the deadline.

Lloyd’s reminds MAs of its planned Blueprint 2 cutover due on 1 July 2024. Lloyd’s states all agents must ensure they have a suitable internal readiness plan in place.

Customer focus and culture

To ensure MAs are prioritising customer needs, Lloyd’s will carry out a review into compliance with the Consumer Duty, and will issue guidance where appropriate.

Lloyd’s confirms it has seen instances of MAs not applying suitable governance controls or following existing guidance on fair value and product governance. Given the growth in cyber products for SMEs in recent years, Lloyd’s will assess whether these products in particular are providing fair value.

Lloyd’s makes clear that it takes non-financial misconduct seriously, and that it will take steps to ensure respect and inclusion are maintained in the market. Further Lloyd’s states it is developing its Culture Principle, and as part of this it is considering how it can align its expectations with the FCA’s and the PRA’s policy proposals on Diversity and Inclusion.

Regulatory change and compliance

Noting the evolving UK and international regulatory landscape, Lloyd’s stresses it is important that MAs maintain effective compliance risk and control frameworks. Lloyd’s further confirms that it will continue to engage with the PRA and HMT on Solvency II reform, and that it is committed to pass any Solvency UK simplification in requirements on to syndicates.

Lloyd’s reminds MAs that they must not have direct contact with international regulators, and that all contact must be made through Lloyd’s.

Lastly, Lloyd’s highlights the importance of financial crime controls and plans to conduct financial crime assurance work. In addition, Lloyd’s plans to conduct a review into how MAs are addressing the risks AI capability poses from a financial crime perspective.

What do firms need to do?

Lloyd’s expects MAs to grow sustainably particularly during times of market uncertainty, taking into account the opportunities and risks presented by emerging technology.

MAs should ensure they have appropriate readiness plans in place for the Blueprint 2 cutover in July 2024.

MAs should be prepared for the upcoming surveys and reviews that Lloyd’s plans to undertake following recent regulatory initiatives, such as the Consumer Duty and operational resilience.

Macroeconomic conditions and heightened geopolitical tensions mean Lloyd’s is focused on MAs' financial resilience, risk management practices, and governance controls. MAs should be prepared for scrutiny in these areas, including via data and other information requests.

MAs should ensure that their risk management and control frameworks have been robustly tested and remain valid in light of the risks highlighted by Lloyd’s.

MAs that underwrite casualty classes such as cyber risks, should assess the impact of non-natural catastrophe losses on their capital positions and financial resilience. From an operational resilience point of view, MAs should assess their impact tolerances under a range of severe but plausible scenarios, including cyber-attacks.

MAs should ensure they have appropriate sustainability strategies and responsible investment policies in place. Lloyd’s will be requesting sight of these documents to ensure that MAs are on track with its transition to net zero priority.

Ahead of the launch of the Lloyd’s Delegated Authority Strategy, MAs may wish to review their Delegated Authority arrangements to allow them to better understand each party’s roles and responsibilities.

MAs should ensure they continue to embed the Consumer Duty requirements into their business processes, and that they are prepared for the March 2025 operational resilience regulatory deadline.

“As Lloyd’s is at the forefront of underwriting complex and rapidly evolving risks, it is important that syndicates are able to measure, monitor and mitigate against any potential catastrophes, geopolitical shifts, or cross-class accumulations.”

Lloyd's Market Oversight Plan