The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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There have only been 10 holders of Lloyd's silver medals in the Society's long history, but Tolle was awarded the 11th by Lloyd's chairman Lord Levene in December last year in recognition of his services to the market.

Tolle is widely credited for imposing a new discipline in underwriting standards and risk management that enabled Lloyd's to comfortably weather its greatest test when, in 2005, Hurricane Katrina became the most costly natural disaster to hit the (re)insurance industry.

As gatekeeper to Lloyd's for seven years, Tolle saw his fair share of ups and downs and admits that it was "blood sweat and tears" at times. He officially handed the reins to Tom Bolt, former chief executive of Lloyd's insurer Marlborough Underwriting, at the start of the Year, and took this opportunity to reflect on his tenure.

IQ: Is there anything you would have done differently as franchise performance director?

I was aware of the difficulty of the task ahead when I was given the job - everybody said to me "it's Lloyd's, it's impossible, it can't be done". I said to myself, "OK, fine, if I fail then all these people are right".

But there are a lot of fantastic and very intelligent business people at Lloyd's, and at the end of the day logic had to prevail.

It was a big job and it was blood sweat and tears, and I was aware that there wasn't always the friendliest of atmospheres. But you have to go through that in order to get out at the other end with something better.

And if you look at the numbers, those seven years were the most successful period that Lloyd's has ever seen. I do not take the credit for that - the market came through the shock of 9/11 and worked together with us.

But the framework that the Lloyd's franchise board created for discipline I think definitely contributed.
To be quite frank, I consider the most successful time was not when we posted £3bn+ profit, rather it was 2005 - when we had the biggest loss ever as a market, but Lloyd's itself only made a loss of £100mn, and nothing found its way to the Central Fund.

I think the only thing which I definitely should have done differently was asking for better, more detailed management information data earlier.

But I wonder if we could have achieved that - it was a long process to gain an understanding for the necessity and importance of such information in the first place.

Nevertheless, the quality of data collection should have been better earlier, and we should have pushed harder to get that done earlier.

When we started out, Lloyd's reputation in the world was shot to pieces. We had Reconstruction and Renewal to come back from and then the September 11th disaster - we were really in trouble.

A lot of people were preoccupied with the old days, the assumption was Lloyd's is Lloyd's and it will never change. I think that is the most important thing - we've put Lloyd's back on the map, where it belongs. It is considered to be a feather in the cap to be in Lloyd's now.

IQ: Your departure coincided with a queue of people waiting for approval to get in. IQ has noticed that a lot of "sleeper" players have set up at Lloyd's - parented by Chubb, WR Berkley, RenRe and others - overtaking the trend for geniune start-ups. Was that part of your strategy?

Well it wasn't part of the strategy. Because Lloyd's suddenly became the place to be, those people in the industry with the big backing as well as start-ups produced business proposals.

But I am personally not sure that the influx of corporate players is the most desirable thing for Lloyd's because it is a marketplace and Lloyd's strength is its subscription market.

Click to enlarge In many cases, the philosophy of these companies is not to be part of subscription but to write the business for themselves. For some of the big companies it is just a shopping window, while for the "Lloyd's Lloyd's" people it represents more than that - it's not only an opportunity, they depend on it.

Lloyd's has always been a place where you could start, you could build a business and reach that size which makes you quite interesting in the world of (re)insurance and we should never allow that to stop.

So, corporate capital may sometimes culturally, not really be aligned with what some of Lloyd's strengths are.

But it's not for me to say, I'm outside - it's for the people in Lloyd's to make sure that they preserve the culture and the basis of what Lloyd's is trading on.

IQ: We're currently in a very soft market - did you see conditions like this during your tenure?

No, not while I was franchise performance director. I saw it pre-2001, at least as bad as this, and we didn't have as disciplined a reinsurance market. But during my time as FBPD we prepared for conditions like these because it was quite clear that success and build up of capital will breed competition and a soft market.

In the current situation, some firms are showing more discipline than others. I think some of the big reinsurers, while they also have to get more competitive, are still holding the line to a large extent, particularly compared to some of the insurance market.

But I can see this soft environment being prolonged for quite some time.

Even if a (re)insurer stays flat on premium income, it means in effect that they have written more exposure because if rates are going down then that's a logical consequence.

"We've put Lloyd's back on the map, where it belongs"

I think for the time being most lines of business are under similar pressure, with the exception of those which have had losses, particularly energy. We are seeing people look towards the energy market now, but it's worth bearing in mind that if capacity suddenly grows dramatically then it will in turn put pressure on pricing and the high rating environment won't last for long. Some people really can work anti-cyclically, as long as they have the discipline to step out when things change.

I can't really say that there are any lines which I would jump into today with both feet.

Wider economic issues are also worth keeping in mind. I think we have stabilised from what was a very bad situation, but the moment that inflation comes will not be a good time for the (re)insurance industry.

In a strong market, you can build a certain expectation of claims inflation into your pricing, and last year some people said they were doing this. The question is though, with falling rates in a soft market, can you really get that particular part of pricing right? I don't' believe so.

IQ: What are the biggest issues currently facing the market? What is looming on the horizon?

Getting the necessary profitability to serve capital will be the biggest challenge in the mid-term. In the longer term, Solvency II is a big issue - it is a dramatic burden on everyone.

Large companies will find it easier to cope with the expense of compliance with Solvency II. It could inhibit start-ups in future if costs are too high to live with. On the cultural side, it's a challenge to every syndicate to have the ingrained risk culture that the new legislation requires. They have to provide the data and change the way they are working - it will increase costs.

Solvency II also creates a challenge at the centre of Lloyd's - the extent to which the Society will be able or capable of supporting the membership in achieving the requirements fully is not quite clear.

But looking further ahead, I think climate change has huge implications not only in the property catastrophe field, but in the liability arena and in all areas. Climate change creates unforeseen loss situations and no-one can base their knowledge on historical data alone any more. The whole scenario is changing. It's a question for society at large as well.

IQ: Why did you decide to join Beazley's board? Any more non-exec roles in the pipeline you can tell us about?

To me, Beazley is a great organisation, and I've known Nick [Furlonge] and Andrew [Beazley] for a long time and when I was asked I was pleased to say that I would join them. Potentially, I will take on a couple more, but I will take my time. I want to take on the right portfolio - not more than three or four, and the right companies. There have been quite a lot that I have turned down because they haven't fitted with what I think an excellent portfolio will look like.

But I want to give something back to the industry, which really has been very good to me over 30 years. I've seen a lot of things go well and I've seen a lot of things go badly, and I think giving back some of that experience on a board level can be very helpful.

IQ: Finally, do you have any advice for Tom Bolt?

I think Tom Bolt is a great guy and he has a lot of work to do. At the end of the day, it is about analysing the numbers and looking at the trends - staying disciplined. He comes from a background where all these things are important, so I don't think he needs my advice.

In my time we shut a couple of syndicates down because we couldn't believe that they would really achieve in any way what they had planned to do. That is the last consequence of being undisciplined, but it shouldn't have to come to that point and it certainly doesn't happen overnight.

There are certain lines where it is not a question of capital; it is a question of exposure control. People make plans with expected loss ratios, which can only be achieved at a certain rating level.

And it's quite easy when you look through the business plans to say, "excuse me, it doesn't hold together logically - on the one side we agree that the market is softening, but at the same time your loss ratio is projected to improve, according to this chart". So there are ways to challenge business plans and ask for revisions if you are not satisfied, and you have ways to justify saying "you have to reduce your exposure".