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  • Mark Geoghegan

Profit beats scale any day

Updated: Nov 30, 2019


David Slays Goliath By Gustave Doré - Doré's English Bible, Public Domain, https://commons.wikimedia.org/w/index.php?curid=10732050

Why is it that just as one cohort of Lloyd’s businesses is heading for the exit, another far larger group should be lining up on the other side of the revolving door to get into the Room?

It is certainly an odd week that witnesses two syndicate run-offs announced in the same breath as 40 potential new entrants via the Syndicate-in-a-box scheme.

This week Vibe and Pioneer said they would be putting their relatively youthful Lloyd’s Syndicates into run-off. With The Standard Club and Skuld this makes four such fledgling Syndicate shutdowns in the past 13 months.


The usual suspects were blamed.

Chief among these was a lack of scale. The idea runs that Lloyd’s compliance and bureaucracy means that there is a substantial minimum cost in doing business there which is measured in the millions. This means you need to be writing a GWP number in the hundreds of millions or you will be forever dragged down by a major expense disadvantage.

It sounds logical and is easy to nod your head along to, but there is a problem.

It has no basis in fact.

A fabulous study by The Insurance Insider into costs in the summer found no correlation between the size of a syndicate and its administrative expense ratio.

Meanwhile recent work by Mckinsey across a far wider spectrum than Lloyd’s found that increased scale and profitability didn’t necessarily go hand in hand.

The scale argument has been comprehensively discredited.

Go back to the story on the Mckinsey report and see that it contains a far more important word – profitability.

The quartet of small syndicates had a lack of optimum size in common, but their most important shared trait was their consistent lack of profits.

If scale was all there was to it in insurance, surely smart investment bankers would be lining up to bolt these four subscale units together to produce a viable Lloyd’s business, worth much more than the sum of its parts?

The brutal reason why they are nowhere to be seen is that they don’t see great reserves of superior underwriting talent in these firms. AIG has proven conclusively that even monstrous global scale won’t make you a good underwriter.

Or sticking to Lloyd’s, just contrast the fortunes of MS Amlin 2001 with Meacock 727.

The former is over 20 times the size of the latter but it is Amlin that is in the dog house.

Size is no guarantee that you will not one day lose your way, in fact quite the opposite can be true. MS Amlin’s straying into non-core lines and territories as it pursued continuous growth cost it dearly and the retrenchment to its core will be painful and take time to bear fruit.

Meacock knows how to make consistent underwriting profits, so no-one dares to say the relatively tiny business lacks scale. In any case its expenses are in line with peers.

Criticise the Meacock managing agency for a lack of ambition if you must but you will have to fight all of its Names to the death for a chance to provide capacity to the Syndicate, especially now the market is turning up.

As Lloyd’s peruses its impressive crop of potential new entrants, and decisions are made as to who gets boxed and who doesn’t, one hopes that it will neither be innovation wow-factors nor scalability, but rather the potential for

long-term profitability that trumps all other considerations.

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© Mark Geoghegan 2020

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