Photography by Amanda Jane Richards
Visiting London is a key rite of passage for any young person working in the international commercial insurance business. A foray into the distinctly strange, inside-out Lloyd’s building, with its elevators and heating ducts on the outside and its concentration of underwriting talent on the trading floor inside, is de rigueur.
The London Market has held onto its global insurance leadership for 300 years.
The ethos behind the market’s old motto, uberrima fides—utmost good faith—still permeates much of its behavior.
Lloyd’s is an admitted insurer in Kentucky, where its largest line is bloodstock—the insurance of thoroughbred horses—another of London’s old, quirky specialties.
First-time visitors tend to marvel at the juxtaposition of sky-scraping office towers rising aloft beside medieval churches, Georgian halls and Victorian markets.
This is the epicenter of the insurance business, the true laboratory of coverage innovation, a gargantuan silo of premium capacity for the world, and the international encyclopedia of risk knowledge. The London Market has held onto its global insurance leadership for 300 years, which is no mean feat in any sector, let alone in one as dynamic and competitive as international wholesale insurance and reinsurance. London appears to defy gravity and may appear inscrutable to visitors.
Insurance policies have been underwritten in London by subscription, with multiple individuals and companies each taking a small slice of a big risk (their “line”) since at least the 1430s. Brokers have had held a central role in this process since Elizabeth I defeated the Spanish Armada.
The London insurance market has had plenty of ups and downs over the centuries, including a near-death experience in the 1990s, but has clung to the pole position. Its success has been garnered through experience: centuries of assessments, agreements and adjustments, of profits and losses and of reliably paying the panoply of claims that inevitably arrive from around the world.
Payment is ingrained: The London Market is a culture as well as a sector, and the ethos behind its old motto, uberrima fides—utmost good faith—still permeates much of its behavior. It is in the DNA of market players such as Robin Hargreaves, chairman of the underwriting board of the Lloyd’s agency Kiln, whose great-great-grandfather, Benjamin Chappell Hargreaves, became an underwriting member of Lloyd’s in 1871, beginning six generations of continuity. Robin’s son Tom is a broker at BMS. Newcomers constantly refresh the market, of course, but they are encouraged to embrace London’s culture.
This embedded culture is at the roots of London’s success, but the passage of years has also piled on laborious complexities and arcane practices, along with attendant expense. Updating the way the market works often demands difficult cultural upheavals, many of which are underway. Now, as always, London is facing down challenges in its constant effort to stay ahead and adapting—often against its culture—to do so. Even our first-time visitor may detect the winds of change.
Anatomy of the Market
At the core of the London Market are 91 Lloyd’s underwriting syndicates, more than 60 risk-bearing companies operating outside the old institution, roughly 150 broking houses, and a massive back-office bureau that processes policies, premiums and claims for most of the players. This agglomeration of insurance expertise writes total annual premium income in excess of £50 billion ($85 billion, compared to more than $30 million in property-casualty premiums for Berkshire Hathaway and its subsidiaries and roughly $67 million for Munich Re).
Lloyd’s is the world leader in specialty insurance, and therefore it is the market of choice for hard-to-place specialist industrial and commercial business.Tweet
Of course, the underwriters, brokers and processers have help with their task. Expertise in London is spread on thickly, extending to swaths of specialist law firms, consultants, rep offices, adjusters, non-life actuaries, surveyors, accountants, claims managers, modelers, registers and standard-setters, ratings agents, specialist IT suppliers, investment advisors, trade associations and publishers. Some are small and home-grown, others part of much larger international organizations. Their culture is one of cooperation but also of fierce intra-market competition. It is the key ingredient that keeps London’s spirit of innovation alive.
“The London Market is highly competitive,” says Andrew Duguid, a senior executive at Lloyd’s in the 1990s and author of the new book On the Brink: How a Crisis Transformed Lloyd’s of London (Palgrave Macmillan). “There are many capable providers in every field. The brokers know them all and how to get the best deal for their clients. This keeps everybody sharp, and the whole market is constantly searching for new ways of doing things.”
Lloyd’s: The Old Market
Lloyd’s, the world’s most venerable insurance brand, has traded for 326 years. It is the lodestone that attracted all the rest. Lloyd’s is a market, not a company. Underwriting is under the direction of 56 managing agencies, which operate the syndicates on behalf of an array of capital providers. It has several distinct characteristics and a few distinctly odd traditions. Coverage comes under a single Lloyd’s policy, regardless of which syndicates have a share of the risk. A pool of cash—the Central Fund—guarantees that all claims will be paid, even if some capital providers, at risk, go bust. It boasts joint and several net assets of more than £21 billion, or roughly $35 billion, which ratings agencies assess jointly. All Lloyd’s underwriters carry the Lloyd’s financial strength rating (recently upgraded by Fitch and on positive outlook at S&P and A. M. Best), regardless of the wherewithal of their ultimate parent company.
What sorts of risks find their way to Lloyd’s? In one sense, all sorts, from dry cleaners in Nantucket to German soccer players in South America. In another way, though, the risks underwritten at Lloyd’s are almost all the same: large, sometimes very large, and complex. Roughly 37% of Lloyd’s business is treaty or per-risk, facultative reinsurance, 23% direct property and 19% casualty. Marine, energy, motor and aviation make up the rest. Somewhere within these categories will be found cover for 100% of the Dow Jones Industrial Average companies, the vast majority of the world’s ocean-going vessels and airlines, and yes, at least a few starlets’ derrieres.
All business reaching Lloyd’s is brought there by brokers. Most are members of the London International Insurance Brokers Association, whose members channeled in excess of £46 billion, about $77 billion, of premiums through the London Market last year. Many of them are long established with niche specialties. Miller Insurance, for example, is the market’s principal hull war broker and has a large general book besides. “Lloyd’s is the world leader in specialty insurance, and therefore it is the market of choice for hard-to-place specialist industrial and commercial business,” says Graham Clarke, Miller’s chief executive. “It brings together the London brokers’ distribution channels, specialist knowledge and expertise with the more innovative underwriting approach of the Lloyd’s and London Market underwriters.”
Although specialists abound, most of the billions flowing into London’s postal-district EC3 comes from the big three. Between them, Aon, Marsh and Willis deliver (with their reinsurance subsidiaries) a massive 40% of Lloyd’s premium income and 55% of its reinsurance-related business. Built in London through a long series of acquisitions beginning in the 1990s, the three London Market broking giants are essential to Lloyd’s. Their vertical integration means that now, on some occasions, the producing broker (with the client relationship), the placing broker (who shows the risks and recruits the underwriters) and sometimes a wholesale broker (who brings the business to London) are all subsidiaries of the same tentacled organization.
This business model for international distribution, integrated or otherwise, has been used in London for almost 300 years, when agents in continental European ports wrote business for London underwriters. In much more recent history, the integration typically went a significant step further. Lloyd’s underwriting syndicates were often managed by broking firms, until statutory “divestment” at Lloyd’s in 1982 brought this level of connection to a halt. Many saw it as a mistake and even as a cause of the troubles which followed at Lloyd’s. Robert Hiscox, honorary president of Hiscox Group, which he built from his father’s small Lloyd’s syndicate into an international reinsurer, wrote premium of £1.7 billion, about $2.8 billion, in 2013. Hiscox says divestment “took away the professional management of brokers. The syndicates were handed back to the underwriters, who were wholly untrained in management.”
Divestment rules were eased in 2009, such that brokers can now return to the ownership and management of Lloyd’s syndicates. Most recently, Willis revealed its involvement in Acappella, a start-up managing agency that underwrites through new Syndicate 2014, which has a “stamp capacity” of £75 million, or $126 million. Jason Howard, previously chief executive of Faber Global, the wholesale reinsurance subsidiary of Willis, has moved over as Acappella’s CEO. But John Cavanagh, Global CEO of Willis Re and a longtime London Market broker, is widely seen as the architect.
The attractions for trade investors to operate here include Lloyd’s international licenses, its ratings and its access to business, which can give them instant diversification.Tweet
“We hope to translate and transition Acappella into our own agency over time, in which Willis will have a majority share,” Cavanagh says. He hopes the process will prove a model for new underwriting businesses at Lloyd’s, created like Hiscox by underwriters from the ground up—something that has become more difficult as Lloyd’s expands and evolves.
“We are looking to try to provide a regulatory and compliance umbrella to start green shoots of new entrepreneurial syndicates and to encourage external investors into Lloyd’s,” he says. “Our friends and our clients have heretofore found it very difficult to navigate.”
About a third of Lloyd’s international risk is accessed through a network of more than 3,000 intermediaries known as “coverholders,” managing general agents who possess the coveted permission to accept business on behalf of the syndicate they represent under a binding authority agreement. Relationships between underwriters in London and their coverholders around the world are necessarily close and built upon trust. These distant agents are London’s local eyes and ears, so when syndicates hand over underwriting authority under a binder, they must have ample confidence in those agents, who underwrite directly against London capital in exchange for a commission.
So when Lloyd’s coverholder Axis Underwriting (no relation to the Bermudian giant) saw competition heating up in the Australian market for commercial strata property risk earlier this year, the Melbourne-based agency worked with Lloyd’s syndicates to upgrade its policy for such risks, which it distributes through local commercial brokers. Limits were raised, thereby shoveling more risk (and commensurately more premium) into London.
“Binder business is very important to Lloyd’s,” says James Kininmonth, an independent consultant who specializes in designing and developing new product programs in both the London and international markets. “Many managing agents are encouraging underwriters to grow the binders book, to replace income lost from their catastrophe reinsurance books, as prices soften.”
Such business has sometimes gone “horribly wrong,” says Kininmonth, but underwriters’ “due diligence over coverholders makes the difference.” Stringent oversight is now demanded by Lloyd’s, and relationships are reviewed centrally, but external supervision is also bearing down.
“We are seeing increased regulatory scrutiny around the coverholder model, from the Financial Conduct Authority in particular,” says Mike Van Slooten, international head of market analysis at reinsurance brokerage Aon Benfield. “Lloyd’s will find a way of dealing with that.”
Lloyd’s gets international premiums in other ways, too. Many managing agents have set up offices around the world to get closer to local intermediaries, and Lloyd’s has obtained licensed or admitted status in 75 jurisdictions, which eases potential regulatory hiccups. To extend its reach even further, the market has established a handful of trading entities in international insurance hubs, including Singapore, Japan and, most recently, Brazil. There, subsets of syndicates underwrite locally against their London stamp, improving access for local brokers.
The time has come to remove the Londonisms and Lloyd’s quirks from our systems. No more delays, procrastination or prevarication.Tweet
Earlier this year, Britain’s chancellor of the Exchequer, George Osborne, who oversees the nation’s budget, visited Lloyd’s Rio de Janeiro office as an 11th syndicate joined the platform. “It is another example of a British firm taking the lead in the global race,” Osborne said. But such moves have been controversial, particularly among some wholesale brokers, who are cut out of the transaction. Few wish to speak about the controversy—London Market players rarely expose their internal concerns—but one broker said such forward advances by Lloyd’s “connote a somewhat more direct approach. Some in the broking community are not very pleased about that development, and it is the subject of some debate.”
Typically, London puts other people’s money at risk, mostly in the form of shareholders’ assets. The days when Lloyd’s was backed exclusively by private individuals with unlimited liability (which extends “to their last gold collar-stud,” according to the lore), ended in the 1990s, when corporate members were first admitted and limited liability was embraced. However, the “names” have not been extinguished. Today roughly 2,000 provide about £2.8 billion, or about $4.7 billion, of Lloyd’s underwriting capacity. Corporations provide the rest, bringing the total north of £26.5 billion, or $44.5 billion.
They are a geographically diverse bunch. Many Lloyd’s managing agencies are subsidiaries of international insurance organizations, ranging from CNA and Chubb to Tokio Marine and Qatar Insurance. Or, like Hiscox and Amlin, they have built organizations on the backs of their Lloyd’s operations. Some practice “mixed bathing,” deploying a dollop of their own shareholders’ capital alongside cash placed at risk by third parties. Existing insurers are naturally the most eager participants. In 2013, 56% of Lloyd’s capital was provided by insurance companies, which, whether within Lloyd’s or in the company market, often bring innovation and scope that Lloyd’s insiders may not possess.
Attracting new capital from diverse sources is a central goal of Lloyd’s, especially from large, emerging economies like China, since such investment should also attract new business. No shortage of inquiries reaches the Lloyd’s building on Lime Street, and the market is extremely selective. “Companies in emerging markets would love to get in,” Van Slooten says. “The attractions for trade investors to operate here include Lloyd’s international licenses, its ratings, and its access to business, which can give them instant diversification. Over time, these strengths will only become more apparent.”
The Company Market
Much less celebrated, but in no way less important to London’s health and vibrancy (and its capacity, income and flair for insuring) is the so-called “company market.” It writes about the same amount of business as Lloyd’s—about £25 billion, or $42 billion, in 2013—and operates in very much the same way. Large risks that find their way to London are often placed partly at Lloyd’s and partly with the companies, from Ace to Zurich. Many of them operate in London through branch offices, writing business against their parent company’s balance sheet. Some London operations control and manage underwriting in distant offices and against parent-company capital, a practice the International Underwriting Association (IUA) has described as “intellectual” London premium.
Whether the actual capital is lodged in a Bermuda fund or a Zurich giant, most company-market signings are issued under a joint London policy. Although the central guarantee and communal financial strength ratings enjoyed by Lloyd’s are absent, common market wordings and joint processing allow very large risks placed in London to be covered under only two policies, one from Lloyd’s and one from the companies.
About a quarter of the companies’ business is property, of which a quarter is treaty reinsurance and the rest direct insurance or individual risk reinsurance, according to the IUA. The balance is divided between liability, professional lines, marine, aviation, motor, and other classes.
London Market business is remarkably international, seeping into the “Square Mile” from more than 200 countries. The balance of the geographical origins of risks assumed is another difference between the companies and Lloyd’s: Only 18% of the latter’s business comes from the United Kingdom, compared to 57% for the companies. The old market takes 43% of its premiums from the United States and Canada, the companies just 14%. Lloyd’s is also bigger in Asia and Latin America. Lloyd’s position is particularly strong in the United States, where it maintains about 900 agents with binding authority.
According to Sean McGovern, Lloyd’s general counsel, it is the largest underwriter of United States excess and surplus (E&S) lines business. Such premium increased by 13% in 2013, to more than £7 billion, or $11.7 billion. That total may continue to grow. In July, Lloyd’s began to underwrite E&S in Kentucky, and it can now do so in all 50 states. It is also an admitted insurer in the Bluegrass State, where its largest line is bloodstock—the insurance of thoroughbred horses—another of London’s old, quirky specialties.
Perhaps Lloyd’s greatest advantage across the pond, which rubs off on the wider London Market, is its justly deserved reputation for paying claims. The market’s fame there was established in 1906, after the great San Francisco earthquake. The legendary underwriter Cuthbert Heath (who also ran a business in the company market) cabled his agent in San Francisco with instructions to pay all claims, regardless of coverage. Many local insurers refused to cough up a share of the $400 million in damage or simply fell into insolvency. Heath and Lloyd’s took the hit. In London’s culture, underwriters follow their leaders’ judgment when it comes to claims, as well as premiums. Heath’s decision is still paying dividends. America loves Lloyd’s.
The international companies in the London Market also use managing general agents with binding authority from one or more underwriters to source some of their business, particularly from British MGUs, but tend to write a large share of their foreign risks through local admitted carriers. But the companies are increasingly looking farther afield.
“Our members have recognized that future business growth is likely to be sourced from Eastern Europe, Asia, South America and other rapidly developing regions,” says Scott Farley, a spokesman for the IUA. “Our research indicates that accepting risks via international branches but controlling the operation from a London office is proving a popular business model. Such controlled premium now makes up more than a quarter of the company market’s total income.”
Risk is attracted to London from so many distant quarters in part by London underwriters’ willingness to deploy their enormous risk capital against large and complex insurance challenges. London is a market of well financed experts. Somewhere in the office towers of EC3 is a specialist in almost every type of complex risk, from satellites to multistate hotel chains. They take lead positions on policies, working with brokers to set the price and terms of cover and assuming a percentage of the risk.
London placing brokers then shop the policy around the market, often toting reams of paper describing the risk, sometimes queuing patiently at “boxes” in “the Room” at Lloyd’s awaiting a moment of a select underwriter’s time. The job is done when they have completed their “slip” with sufficient commitments from “followers” to achieve the desired level of cover.
In so doing, they have pretty much mimicked the old practice of Edward Lloyd’s Coffee House, although today meetings are much more likely to take place in private offices rather than the more public Underwriting Room. Still, the ability of underwriters to offer a quick and simple yes or no to a proffered risk is valued; London makes decisions quickly, and a Lloyd’s underwriter’s yes can put them immediately on-risk.
On the back of these yeses, London as a whole has enjoyed a decade of enviable profits, but not every company and syndicate is profitable every year. Between 2011 and 2013, Lloyd’s declared annual profits of £4.4 billion, or about $7.4 billion, but only after 29 syndicates together realized combined losses of £1.2 billion, about $2 billion. Such losses are inevitable in a market with an enormous risk appetite and a penchant for taking on insurance causes that look lost to others. However, the gap between the best- and worst-performing syndicates is closing as the impact of Lloyd’s oversight of underwriting (see box) is beginning to have a serious effect.
The companies are more difficult to track, since the performance of London Market ventures is often not directly and separately reported from parent-company results. Still, the general feeling is that results have been extremely satisfying, at least until the soft market begins to bite.
While London’s central processing of policies, premiums—and for Lloyd’s, claims—is an advantage that makes the concentration of smaller risk carriers in the market sufficiently coherent to compete as an entity with the big boys, the market long ago realized that back-office processes can and must be improved. Despite the cultural challenges, process reform is seen as a way of combating falling prices by reducing expenses. Over the decades, a series of initiatives, from the marketwide Electronic Placing Support in the 1990s to Lloyd’s Project Blue Mountain (later Kinnect) in the 2000s, has attempted to take the market steps away from face-to-face trading and bring it to computer screens.
Enthusiasm among brokers and underwriters was, to say the least, muted, but the need to make progress is becoming perhaps even more critical, as competition heats up.
“Much has been achieved in updating the London Market’s business processes,” says the IUA’s Farley. “Attention is now turning to a new series of improvements, but to ensure they are successful, they need to converge as part of an agreed cross-market future processes strategy.”
A corner appears to have been turned. New strategies to streamline back-office practices are now in place. The marketwide initiative CSRP, the Central Services Refresh Program, aims, according to Lloyd’s, “to improve and extend the central services available to the London Market for back-office processing.” The project is coordinated by the London Market Group, which reports a high priority has been attached to eliminating or outsourcing from brokers some London-specific processes identified as hindering efficiency. It calls these “negative Londonisms.”
Its first target is the delivery of information to underwriters by brokers and policyholders. It will be addressed with a new information-exchange platform called “Market Submission.”
A parallel initiative, The Exchange, provides a marketwide messaging hub for brokers, underwriters and processors that employs the common ACORD data standard.
Another, Project Genesis, will receive data input by insurers in any format and convert it to ACORD for use by all subscribing insurers and the central bureau. This will eliminate most duplicative entries. However, creating the systems is the easy part. Getting the market to use them is less so—especially when systems replace people and their personal interactions. Inga Beale, Lloyd’s new CEO—its first female chief executive—has made it very clear that, centrally at least, modernization of such processes is going to happen.
“The time has come to remove the Londonisms and Lloyd’s quirks from our systems,” Beale says. “No more delays, procrastination or prevarication. Lloyd’s will make headway on this issue.”
Company market players handle their own claims, but Lloyd’s processes them centrally. In 2013 it activated its Claims Transformation Program, which has been a success. Lloyd’s says it has improved the speed of agreeing claims by 53%, reducing the average time from 25 days to less than 12. Transferring claims data from the Underwriting Room to screens means it is no longer always necessary for a broker to visit every underwriter in person. Of course, electronic processes cannot replace the deliberation of brokers and underwriters, a London advantage arising from the competitive market’s cooperative claims-paying culture. This approach was evident after Malaysia Airlines flight MH370 disappeared inexplicably in March. Underwriters heading the distinctly different aviation hull and hull war constituencies agreed to meet the initial claim jointly, on a 50:50 basis, until the cause of the loss could be established.
London in a Changing World
More than just the back office is changing. Concern is widespread over so-called alternative capital, particularly in catastrophe reinsurance. Yet while some in London grumble, others are embracing alternatives, either as a source of reinsurance or retrocession for their own underwriting exposures or as a new product line.
“It cuts both ways,” says Aon Benfield’s Van Slooten. “A lot of catastrophe reinsurance companies are facing an increasing competitive threat. Pension funds and others deploy their capital at a lower cost for lower returns. But a lot also take advantage of alternative capacity when buying retrocession or by putting a catastrophe bond into place.”
The broker says solutions are internal. “It is focusing peoples’ attention on management teams and their market position,” Van Slooten says. “We are seeing a lot of consolidation of reinsurance buying, and big buyers are looking for strategic partners to provide significant capacity and potentially multiline, multiyear coverage. Some can offer it, and some can’t.”
For a relatively small player writing following business, he says, new capital will make their position in the food chain very difficult.
One option, if you cannot beat them, is obvious. Lloyd’s joined the alternative capital providers during the summer of 2013 when it approved the new Syndicate 2357. It is owned and funded by Nephila Capital, a specialist in industry loss warranties—catastrophe excess of loss reinsurance products that pay when the industry as a whole bears a loss of a magnitude specified in the contract. The capital behind its underwriting is provided by an array of institutional investors.
“The syndicate adds a new dimension to a market that is better known for providing more traditional excess of loss coverage for catastrophe risks,” said Tom Bolt, Lloyd’s director of performance management, when the syndicate was formed. “Nephila is well experienced in bringing in big institutional investors, so this allows Lloyd’s to access that capital and diversify its capital base.”
While Nephila, an initiative of Willis, represents a concrete move by a leading broker into alternative reinsurance, Kiskadee Investment Managers comes from the Lloyd’s business Hiscox (now, like Nephila, headquartered in Bermuda). It raises third-party capital for deployment in reinsurance products.
“Through Kiskadee, we launched a number of collateralized reinsurance funds during the year,” Hiscox revealed in its 2013 annual report, while taking a subtle potshot at the causes of the softening reinsurance market. “We have deployed $110 million of capital—less than we had expected, as we are seeing signs that capital markets investors are being more disciplined than some traditional reinsurers.”
Meanwhile, outside Lloyd’s, some insurers in the company market, and all of the large brokerages, have already been active in alternative reinsurance financing and products for years. The London Market will, it seems, adopt and adapt.
While the softening reinsurance market bears down and new capital providers nibble away at bits of the market with structured and collateralized products, so-called broker facilities are a concern for others.
The greatest reaction was provoked by a 2013 arrangement between Aon and Berkshire Hathaway, called simply “Sidecar,” through which the insurer accepts (at the client’s discretion, Aon points out) a 7.5% line on any risk the broker places at Lloyd’s. This is cheap risk for Berkshire Hathaway, which need not go to the trouble of actually underwriting, and is a clear vote of confidence in Lloyd’s skills. Some saw the arrangement as likely to bump smaller Lloyd’s syndicates off the bottom of policies, but Aon has insisted that the Berkshire Hathaway deal will be additive.
“Where it is consistent with the best interests of our clients, our focus is on increasing the order and not signing down the Lloyd’s and London Market,” Stephen McGill, Aon’s group president, wrote to Lloyd’s former chief executive. “We remain convinced that the Sidecar transaction and the way it has been structured will be very positive for clients, the London market, and Lloyd’s,” McGill wrote. He noted the arrangement was “driving positive growth.”
Later in the year Willis launched a facility it calls “360,” which would behave in a similar way, offering, it declares, a “stable and consistent source of new, or additional, follow-market capacity.”
Willis signed up Hiscox, the People’s Insurance Company of China and Berkshire Hathaway to back the deal. However, it has a key difference. Unlike the Aon/Berkshire Hathaway Sidecar, 360 offers only the right to be shown business rather than a guarantee to the client that the capacity is available. Still, it builds efficiency for the brokers and provides the participating underwriters with a breadth of business to consider.
Lloyd’s itself has been encouraging syndicates to band together into specialist consortia serving various classes of business. One of the most recent is a new consortium to underwrite D&O coverage. Lloyd’s agencies provide joint limits of up to $50 million. Such arrangements are intended to make larger limits more easily available and to increase the flexibility of policy structures. That makes Lloyd’s arrangement simpler and more attractive.
Creating more such internal facilities is now a central goal of Lloyd’s. Its official company strategy for 2014 to 2016 calls for Lloyd’s to work with interested managing agents to develop consortia arrangements.
“When it comes to challenging risks like cyber risk,” says Van Slooten, “most syndicates are too small to compete in the wider market. With consortia, technical syndicates can lead, and others can commit capacity. The approach can build on Lloyd’s reputation for innovation while putting enough capacity into the market to be relevant.”
Although broker facilities have caused consternation in some quarters of the market, others—including some senior Lloyd’s underwriters—see them, alongside internal consortia arrangements, as a potentially important competitive advance. The practice of multiple followers repeating the same underwriting decisions (skewed of course by their individual carriers’ risk appetites) must be inefficient.
Some syndicates and companies follow without any particular underwriting flair and instead accept risk based on the algorithmic assessment of a model that shows how a given risk at a predetermined price will fill silos within their own portfolio, which, of course, helps the London Market to muster huge policy limits. But non-specialized followers may indeed struggle going forward.
“There is a real need for people to demonstrate their relevance,” Van Slooten says. “Buying behavior is changing. Buyers are looking for strategic partners more than capacity. Their demands for technical expertise and a cross-class approach make it more difficult for companies that might be followers rather than leaders. They will always have a place, but the number has to reduce over time.”
Meanwhile, leaders invest a tremendous amount of effort in assessment and pricing and structuring policies and programs with brokers, receiving no compensation for their efforts. Some voices are muttering about leaders’ fees to reward these efforts. Some are even predicting the shuttering of the Room at Lloyd’s.
Lloyd’s view of the future is captured in its chairman’s Vision 2025. When John Nelson arrived at the pinnacle of the market with no insurance experience, he was able to observe and analyze with executive eyes unencumbered by the market’s underlying culture. He saw room for expansion and improvement. His vision was launched in the Room by the British Prime Minister in 2012 and updated since through a series of business plans and strategy documents. It marks the biggest intervention in the market from the upper floors of Lloyd’s odd building since Reconstruction & Renewal—the rescue plan of the 1990s. It calls for cautious international expansion, including into emerging economies as well as into established territories, by expanding the coverholder network. The vision also calls for an increasingly diversified capital base and optimized use of technology. Moreover, Nelson wants the market to grow.
“Lloyd’s will be larger than today, predicated on sustainable, profitable growth,” according to Vision 2025. But growth is not to come at any cost. Lloyd’s “performance will outstrip that of its peers. ... Lloyd’s will be a ‘risk selector’ rather than a capital provider to a commoditized market.”
As an add-on, “Lloyd’s will provide innovative indemnity insurance-linked products.”
For brokers, “Lloyd’s will build on its relationships with the larger brokers, as well as encouraging other specialist brokers. Coverholders and service companies will provide efficient access to local markets, and brokers will find it as easy to access Lloyd’s as they would local carriers.”
Some are skeptical. Growth in new markets, for example, is often a costly proposition—at least initially—but signs are emerging that the Lloyd’s vision is working. The true test will come as the softening market beds down and Lloyd’s continues to pursue the delicate balancing act of achieving growth, prudence and profitability at once.
With all its expertise and traditions and very large file folders alongside its new outward-looking demeanor, modernization of systems, and the distinct increase in professionalism that has been building over the past 20 years or so, the London Market is doing rather well.
Perhaps arcane and certainly the elder of the business, it remains the ultimate destination for large and complex risks. That, it seems, is why Aon moved its headquarters to London from Chicago in April 2012. In the words of Vice President David Prosper, “London remains a gateway to the world and to our clients, and the modern insurance industry that started in Lloyd’s Coffee House is more important today than ever.”