The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

Search archive

Advanced search

Some things we accept, not just because they are there already but because it seems like they've always been there. Lloyd's is a bit like that. It is so well-established, so big, such a permanent feature of the London market that people tend to forget that it can be examined, assessed, criticised and, if need be, changed.

Yes, the results are carefully scrutinised, the cat losses tallied up and the way in which underwriters price business is noted. But the way that people look at Lloyd's rarely escapes these narrow parameters that place the focus squarely on operational performance.

The pressure that comes from the normal course of business and the stymieing force of habit means that Lloyd's itself in the broadest possible sense isn't examined in depth from one year to the next.

The infrastructure, the processes, the governance and the culture are not questioned. People are more concerned about whether the Franchise Board has decided to allow Willis or White Mountains in, or what it is going to say about proposed expansion in offshore energy.

Here we want to put Lloyd's under the microscope and bring a new, refreshed perspective to bear on it. It is important not to allow familiarity to obscure the fact that Lloyd's is a very strange specimen. We've never seen anything quite like it before and it seems unlikely that another one will ever turn up, regardless of the New York Exchange's ambitions.

Here, the task is to assess the merits and demerits of the Lloyd's market's many unique features - and to do that through the perspective of the people who earn their daily bread there.

Lloyd's is great
Click to enlarge To avoid unnecessary circumlocution, to begin with there is a widespread view in the London market that Lloyd's is great. Many (re)insurers and brokers believe it is the best insurance institution in the world bar none. Stephen Redmond, Antares managing director, insists for example that "Lloyd's is the global market of choice".

In addition, it offers a number of different benefits to its members where it is able to leverage its collective strength. "The brand, the rating, the financial security, the licences - all of this enables Davids to turn into Goliaths," David Gittings, CEO of the Lloyd's Market Association (LMA), argues.

"Lloyd's offers some of the advantages of being a small business to its members and some of the advantages of scale too," he adds.

These points recurred throughout conversations. BMS Group chairman Hugo Crawley describes the Lloyd's brand as "phenomenally strong", while Redmond thinks it "vital". With reference to the 75 licences that Lloyd's has secured, Crawley says: "Even if you're a massive global reinsurer, it is still difficult to get those licenses."

The Central Fund was again eulogised as a massive selling point for the market and as the guarantee that its 237-year streak of not defaulting on claims will continue.

Another systemic advantage for the Lloyd's insurer is the lower capital requirements compared to other writers. Redmond says that the "capital-efficient" structure at Lloyd's, where letters of credit can be used, allowed much higher premium-to-capital ratios in the market than elsewhere.

Two sides to every story
As with so many attributes of Lloyd's, however, the strengths have attendant weaknesses - in this case, cost. In his keynote speech at last year's Xchanging London Market Conference Stephen Catlin said that it cost his company 10 percent more to transact business in Lloyd's than in the company market.

Click to enlarge Although they may grumble at the cost of maintaining the Central Fund and the central infrastructure, those inside have decided that it works as a value proposition. "It's expensive, but it's worth it," says David Foreman, CUO of Ark Underwriting. Redmond adds that, in his view, the additional costs at Lloyd's are associated with tangible benefits.

However, one chief underwriting officer at a small respected London market carrier believes that if he were to set up at Lloyd's it would be "unbelievably expensive" and, as such, would just not be an option.

Lloyd's also writes business in an unusual way as a subscription market. This again provides advantages and negative side effects.

Performance management director Tom Bolt has picked out the subscription market as one of Lloyd's key strengths, while Ark's David Foreman tells IQ that the "second set of eyes" at Lloyd's sets the market apart from the "big monoliths".

He says: "If you've missed something, someone down the slip is going to pick it up." He adds that this self-policing quality in the underwriting was one of the main reasons that Lloyd's avoided the worst of the problems during the financial crisis. But while a second set of eyes, and sometimes even a third or fourth, can improve decision-making - they also slow the process down.

"We need to respond quicker both on underwriting and policy issuance and on the claims side," says Ian Fantozzi, chief operating officer at Beazley, while discussing the multiple reform projects that are now underway.

Both on the underwriting and the claims side more patience is needed, as Lloyd's will never be able to match 100 percent writers for speed. The pooling of risk and expertise cannot be achieved without a price being paid.

Although Tom Bolt was too modest to point it out to IQ when asked, one of the most appealing aspects of Lloyd's to underwriters is the Franchise Board.

It has only been in existence since 1 January 2003 and Bolt is only the second man to fill his role, but already Lime Street is unimaginable without it.

"The Franchise Board was a much needed injection of professional oversight," says Hugo Crawley. "Fifteen years ago an underwriter could start a syndicate with traditional Names backing and it was frankly, too easy. The process today is rigorous and much more professional."

Most agree that the checks and balances brought by the Franchise Board's superintendence have immeasurably strengthened Lloyd's, but as with its other strengths there have been unintended consequences.

"The price of the Franchise Board is that some enterprises won't get off the ground in the way they did 25 years ago," Crawley says.

A senior Lloyd's underwriter develops the point. "The Franchise Board is going to slightly stymie the market's entrepreneurialism and maybe some of the entrepreneurial spirit has gone out of it now."

This feeling, which can approach nostalgia with some market practitioners, seems to be widespread, but is fairly shallow. No one who knows the Lloyd's market well wants a return to the volatility of pre-Franchise Board days.

Heavy regulation
Such nostalgia is also fed by a sort of regulatory fatigue usually blamed on the Franchise Board. "The Franchise Board for all its benefits has added to the regulatory burden," the unnamed underwriter says.

Antares boss Redmond picks up the point: "One of the principal negatives is the duplication. We have to report so many things to so many different departments."

The Franchise Board oversees business planning, capital setting, underwriting standards, claims standards and back-office processes, and undergirding all of this are data requests and a visit from Tom Bolt's Performance Directorate.

As a consequence of Lloyd's regulation, management often has to face internal auditing, Franchise Board oversight, Financial Services Authority assessment, parent company supervision and shareholder scrutiny.

Bolt acknowledges that Lloyd's has a weakness in its perceived complexity and in the challenges posed by compliance. "I think some of the strengths of the model can also be a weakness. We have a tremendous depth of talent and a unique model that gives our clients security, but we can also be perceived as complex to navigate and it can be a challenge to deliver market-wide initiatives like Solvency II."

The enduring image of Lloyd's is of brokers on the floor trading with underwriters at their boxes. There is again overwhelming support for face-to-face trading and an insistence that it creates value, irrespective of concerns that it is an anachronism.

One broking source praises face-to-face broking for preventing underwriters from hiding behind their emails, but he points out that for all the process reform in London "we still have highly paid brokers standing in queues".

Concerns about this inefficiency tie in with a wider concern about process. The market recognises that things have moved on in recent years and that projects like the Electronic Claims Forms (ECF) represent progress.

However, there is still an overreliance on paper and this makes things cumbersome. "On the processing of things that are purely mechanical, we need to be more efficient," Gittings acknowledges.

More worryingly, perhaps, there is some scepticism about the outcome of reform initiatives.

RFIB CEO Marshall King says: "The market's success in such projects has suffered from some participants seeing the changes as trying to replace broking rather than support it."

Beazley COO Fantozzi admits that there is a history of failure, but argues that things have changed with ECF and e-Endorsements.

"Where initiatives have failed in the past we haven't worked well with the brokers before we've gone away and invested in the projects," he says. "These new process reform initiatives are a lot more collaborative now and consultation-based."

Tom Bolt acknowledges that there was a similar situation with claims, where past changes have left considerable room for further improvement.

"I think we've made good progress, but we still have some way to go and we have a lot of work going on to address this," he says.

Most parties are adamant that reform must not be allowed to water down face-to-face broking. "Face-to-face contact is vital to develop the trust between brokers and underwriters - process reform must concentrate on streamlining the back office processes rather than replacing face-to-face contact," King says.

The two faces of broking
At the last count Lloyd's had 178 approved broking houses, acting alongside coverholders as the market's distribution network.

They are an indispensable part of the market and, for David Foreman, one of the compelling reasons to underwrite from Lloyd's.

"Lloyd's has the world's best production force. We don't need an office everywhere round the world to write that business - the brokers bring it to us," he says.

And Foreman believes that the additional costs of business at Lloyd's are a sort of "quid pro quo" that the insurers accept because the "broker fraternity" trims their own production costs.

There is little anxiety around the broker distribution model. The same cannot be said about the position - and power - of the big three brokers.

Crawley tells IQ that: "There is a lot of concern about the amount of business traded in Lloyd's [by the big three]."

Redmond makes the same point, calling it "a major sensitivity".

Bolt implicitly accepts that Lloyd's potentially has a problem in this area. "To be a healthy, competitive marketplace you need diversity in your capital, the business you do, and your business suppliers. This is why we are actively working with smaller parts of the broking community and trying to make it easier for them to bring business into Lloyd's," he says.

The last six months has amply demonstrated the vulnerability that over-dependence on a narrow range of producers creates for Lloyd's, with the market enmeshed in a damaging remuneration wrangle with Aon.

It's not paradise...
Lloyd's is an odd brew, a curious machine or a strange beast depending on your metaphor of choice. It's a long way from your average FTSE-100 company. Most people that one talks to outside of the industry have little more than a vague understanding of what it is and how it works. And these attributes are a function of its long history. The market was not made from a blueprint. It evolved in response to a need and then changed in response to new needs.

And that is part of its fascination and appeal. People have a sort of perverse affection for the fact that not everything makes sense; the way in which it doesn't feel as if it has been designed with the corporate set-square and protractor.

David Gittings comments simply, but affectionately: "You would never create it like this."

While Hugo Crawley asks: "Would we start with this now? Of course not. You never would. But it's there."

And that's the important thing, it's there and it's stayed there despite various efforts by Fate to wipe it out.

More than that, though, for all its idiosyncracies people want in. Lloyd's is still attractive to outsiders. And that demand to join the club is the most compelling evidence that, 237 years on, there is life in the old dog yet.

"Go back to the mid-90s and there were serious questions about whether Lloyd's would survive," says Hugo Crawley.

For a number of years mushrooming losses from asbestos liabilities and disputes with individual Names - then the sole capital providers - threatened to overwhelm the market.

But it showed its resilience by mutualising the pre-1993 liabilities in the Equitas vehicle, which was ultimately passed on to Berkshire Hathaway. This was hard on the heels of the advent of corporate capital and wide-reaching changes to governance and regulation.

Soon after the future of Lloyd's was again placed in question by a catastrophic multi-line loss from 9/11, but again Lime Street paid its claims and carried on.

"It was remarkable that it kept going, that people kept writing business, kept paying claims," Crawley continued.

Earlier this year in the Lloyd's library, XL CEO Michael McGavick paid fulsome tribute to the market's ability to adapt and endure.

"The recovery of the Lloyd's market is one of the great business stories in history," McGavick said.