Don’t forget asset/liability matching, says Lloyd’s chief actuary
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The chief actuary of Lloyd’s of London has said the corporation’s syndicates will have to consider the impact of the current economic condition on assets and how it would affect their balance sheet.
Speaking at Lloyd’s Q4 market message conference at its office on Lime Street yesterday, Emma Stewart disclosed the solvency capital requirements for syndicates for 2023 will be £29.8bn, up 25% from £23.5bn in 2022.
She said the decision did not come as a surprise as the amount was set by Lloyd’s syndicates and they understand “how the various changes and exposure and economic conditions are affecting the capital that they need to hold”.
Stewart presented the drivers behind the increase in capital requirements in a video released on Wednesday but explained later that those drivers only represented half of insurers’ balance sheet.
“If [syndicates] are also going to be considering the impact on assets, then they should be also seeing increases in their investment returns through the accompanying high interest rate environment and therefore that being offset as well,” she said.
“The solvency strength will be maintained with appropriate asset liability matching,” she added.
Drivers of capital requirement increase
Stewart said a third of the £6.3n increase in capital requirements is driven by the strengthening of the US dollar, meaning the capital required in sterling to match a US dollar liability is higher.
Almost 20% of the increase in capital requirement was attributed to exposure growth - meaning the increase in premiums and reserves - but Stewart said this component was partially offset by growth in profitability.
“Profitability overall provides a £2.6bn reduction in capital requirements. Half of this is driven by improved expectations of underwriting profit, and the other half is driven by anticipated investment profit through increases in the high interest environment,” she explained.
Another major component driving the increase in capital demand was inflation. The volatility stemming from inflation has been recognised and built into insurers’ models, she said, as Lloyd’s has seen an increase in applications for major model change and appropriate adjustments made to inflation assumptions from economic scenario generators.
“Overall, managing agents have reacted in an agile way to changing economic conditions, and we are pleased with how the markets have responded,” she said.
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