The London Insurance and Reinsurance Market

Lloyd’s – The McDonald’s of the Insurance Industry

Robert Woodthorpe Browne

03/02/2010

This lecture is based on nearly 50 years as a reinsurance market practitioner, both as an underwriter for foreign companies, as a broker for some of the top Lloyd’s houses, and latterly as a broker and reinsurance consultant with my own small firms.

When I started, no-one knew what reinsurance was. It is in fact the laying off of large risks or catastrophe exposure by insurance companies to professional reinsurance companies, other insurers, or Lloyd’s syndicates. A bit like a bookie does, really.

Despite my title, I will not just cover the developments at Lloyd’s itself during the last two decades, but will examine the role of London as an insurance centre, and try to look some way into the future.

Lloyd’s describes itself as a specialist insurance market.

This means that underwriters are able, with the exclusion of some types of risk judged to be “commercial” and therefore more properly in the realms of the banking sector, to write exotic covers. You will get an idea from this slide:

SLIDE – list of exotic covers

There has always been pride in the London market, and primarily at Lloyd’s, that it is the place to go for innovation in insurance. 

However, the brilliant underwriter, Ian Posgate, known to many as Goldfinger because of the profits he made for his names, stated that it is not the underwriters who are the innovators, but the brokers. The so-called innovative underwriter is the one who can appreciate the broker’s proposition and fix a price - or is daft enough to think he can, in some cases.

SLIDE 2 LLOYD’S LOGO

Lloyd’s realises the value of its brand. The home page of Superbrands includes the Lloyd’s logo among those of other household and widely-recognised brand names, and my somewhat whimsical comparison with McDonald’s in the title of this lecture refers to the creation in 2003 of a Franchise Board to protect and market the Lloyd’s brand.

Lloyd’s response to my title is that they are more like Harvey Nicholls – they did not mention Mr Al Fayed’s emporium – which houses a large number of quality brands under its roof.

Moreover, whereas McDonald’s franchises its brand to those who will have to pay over a share of their profits, the Corporation of Lloyd’s acts more as a monitoring body and a provider of services to the Syndicates it governs.

Lloyd’s is not itself a profit-making company but a subscription insurance and reinsurance market. By this I mean that the Lloyd’s syndicates operating in the market accept shares of risks offered to them, and rarely take 100%.  

Its current success is demonstrated by the fact that well over half of the London Market premiums of £25 billion are underwritten at Lloyd’s.  For 2008 its members made a profit of nearly 2 billion pounds – just think what that does for UK plc.

The Lloyd’s brand has been intensively marketed abroad. The Corporation has offices in some 30 jurisdictions and is licensed to underwrite direct insurance in about 66 – which means that they would have all had to introduce special legislation to allow this. In 11 countries they have a reinsurance licence, and they have life assurance licenses in 55 jurisdictions.

These licences apply to all Syndicates, and this has to be a major attraction for companies coming into Lloyd’s in that they do not have to go through the rigmarole of becoming licensed in those countries in which they wish to operate.  Lloyd’s has rolled out a computerized service called “Crystal” to provide information to its community of brokers, managing agents and underwriters concerning the international legislative and taxation requirements throughout the world, and this is constantly updated.

In 2008, the so-called invisible exports of the UK came to £ 54 billion, up from £ 35 billion in 2006. Insurance is the largest single component, so it should come as no surprise that Lord Levene of Portsoken – his title comes a district of the City, EC3 – is both Chairman of Lloyd’s and of International Financial Services, previously known as British Invisibles.   

The origin of London as an insurance market stems from the importance of the Port of London which by the 17th Century had superseded Antwerp, where Thomas Gresham had been the King’s Agent, as a result of British naval dominance and the colonial trade, and London’s Hanseatic Kontor, the Stahlhof, or Steelyard, for Baltic goods.

SLIDE 3 – SUBSCRIPTION ROOM

Coffee arrived in London in 1650 and became the fashionable drink in Puritan England – this was the subject of Professor Steven Inwood’s Gresham lecture in 2004. Edward Lloyd’s Coffee House is first mentioned in 1688, and his establishment was a meeting place for merchants and insurers, many of them fellow merchants who signed their names under each other beneath a description of the voyage, the first Underwriters. Such a document would today be known as a “slip”.

Edward Lloyd set up an information system in the ports of Britain and the Continent to provide details of shipping movements and made this available to merchants and insurers trading in his establishment. The so-called Lloyd’s Agents, which exist today, were considered to be a highly effective spy network.

He moved his coffee house from Tower Street to Lombard Street in 1691 and started a regular bulletin, Lloyd’s News in 1696, the precursor of Lloyd’s List, which was founded in 1734 by Richard Baker and is now the oldest daily newspaper in the World.

Edward Lloyd died in 1713 and is buried in St Mary Woolnoth Churchyard.

In 1720, after the South Sea Bubble had burst, an Insurance Act gave a monopoly of insurance business to the Royal Exchange Assurance Corporation and the London Assurance Corporation. However, individual traders were exempt and, given the experience of the Underwriters at the Lloyd’s Coffee House, the monopolists handled fire and life assurance while the insurance of trade stayed put.

Because the coffee house, now run by Richard Baker, had become a haunt of gamblers and speculators as well as underwriters – nothing much had changed by the late 20th Century, some would say - a “New Lloyd’s” was set up by Thomas Fielding in 1769. On 13th December 1771 seventy-nine Lloyd’s Underwriters subscribed £100 each and formed a committee. One of the subscribers, John Julius Angerstein, rented two large rooms in the Royal Exchange, so here we have a posthumous connection with Gresham.

The next century saw several developments at Lloyd’s and in the wider insurance industry, the duopoly being broken in 1824 with the legalisation of the formation, of the Alliance British and Foreign Fire and Life Assurance Company, who could also underwrite marine insurance.

The next significant date was the advent at Lloyd’s of Cuthbert Heath who began to underwrite non-marine policies in the 1880’s, and syndicates of underwriters were formed with agents introducing “Names” to active underwriters to participate in the much larger risks. The first motor policy was written in 1904 and the first aviation policy in 1911. The market became divided into syndicates specialising in marine, non-marine, bloodstock, motor and aviation, and individual underwriters were known for their expertise in certain aspects of the business and would be respected as “leaders”, to be followed by others.

Lloyd’s outgrew the Royal Exchange and moved to Leadenhall Street in 1928.

SLIDE 4 - BATEMAN

The Bateman cartoon, part of the “Man Who” series, shows the famous Lutine Bell, which was salvaged in 1858 from the wreck of the Lutine and which originally hung in the Royal Exchange Underwriting Room. The Bell was rung once to confirm bad news, such as the loss of a vessel, and twice to announce good news, customs which have long since died out, although the bell is rung for market announcements.  

It followed the market into the “New Building” in 1958. (Lloyd’s could be quite trendy in those days. When an extra underwriting room had to be opened in the basement to accommodate the rapid expansion in syndicate numbers, it had a yellow décor and was known as the Yellow Submarine.)

Space problems meant a further move to the current Richard Rogers building – to some a thing of beauty and stunning design, to others an oil-refinery copy stuck next to the charm of Leadenhall Market.  

SLIDE 5 – LLOYD’S BUILDING

Lloyd’s has been regulated by special acts of Parliament, the most recent being 1982, updated in 2008. Its special nature, whereby, until 1994, all business was accepted by syndicates of individuals with unlimited personal liability, meant that it was not subject to normal Companies Act rules. Today, however, Lloyd’s is subject to the Financial Services Authority, which directly supervises managing agents and monitors capital solvency.

I recall a visit to Cameroun, in the 70’s where I gave a lecture on Lloyd’s to the local insurance institute. At the end of my description of the way that Lloyd’s was then constituted and operated, one student, living in an environment designed by French codes, thanked me for my tale but said “this is interesting but obviously cannot be true”.

As early as 1939, Lloyd’s had established a US Trust Fund for dollar business, and its reputation in the United States was established by its efficient response to the San Francisco earthquake of 1906, when many American companies failed. US business represented over half of Lloyd’s income at one time, and still accounts for 44%

This was to become the market’s Achilles heel.

I think that before turning to what Lloyd’s is now, it is worth looking at the Lloyd’s culture. To be an underwriter, one would start as a teenage “entry boy”, sitting near the junior and later senior underwriters, listening to presentations made to them by brokers, the only people then allowed to bring business into Lloyd’s, and noting statistics and decisions made on filing cards. These entry boys tended to have left school at 16 or earlier, and an A level was considered an unnecessary qualification. A degree meant you had missed out on 6 or 7 years of valuable apprenticeship.

Gradually, as their seniors retired, they would move up the chain until the brighter ones, for the most part, ended up as the main underwriters.

In those days everyone called everyone else “Sir” – there were no lady underwriters or brokers then, although, happily, some of the greatest talent in today’s market is female.

Whereas staff in the UK’s insurance companies were expected to take the professional courses of the Chartered Insurance Institute and become Associates or Fellows as a condition of promotion, this was rarely the case among brokers or Lloyd’s underwriting staff, where experience counted for everything.  

As a young man, I attended a CII reinsurance course. When I asked some quite basic questions concerning issues that had come up in my line of work, I found that the instructor knew less than I. Like many of my friends, I became a drop-out.

SLIDE 6 - INTERIOR OF LLOYD’S

Salaries for junior staff were poor, although senior underwriters, who would invariably become members of their syndicates, lived well. The brokers would often poach the brightest underwriting staff,  whom they would have come to know from their visits to the underwriting “boxes”, as the booths, modelled on the old coffee houses, are called. This was severely detrimental to the talent remaining to underwrite, in my view.

Senior brokers were almost always invited to become “Names” at Lloyd’s, the “working names”. These had the same unlimited liability as outside names. It was thought that they were given better treatment than others, and indeed there were, scandalously, “baby syndicates” set up for some of them and for some underwriters into which the cream of the business was put, a practice later stamped out after public outcry. In fact, when the disaster years struck, working names fared only marginally better than outside names.

There was also a significant movement of underwriters in both directions between Lloyd’s and what became known as the Fringe Market, that is offices set up by British and foreign insurers and reinsurers around Lloyd’s, to write business in the same subscription way as Lloyd’s, this being known as a London Market account.

The difference between this and the operations of the so-called “tariff company underwriters”, who had printed rating scales – the “tariff-bloody-worms” as some brokers called them - was that underwriters relied on their long experience to fix an adequate price.

I recall an engineering underwriter from the Munich Re, the largest reinsurer in the world, where a doctorate is necessary to make any serious progress, telling his audience at a War Insurance in Iraq, of all places: “We Germans use technical rates. In London they use ceiling rates. The underwriter reads the slip, looks at the ceiling, and puts down the first number which comes into his head”. 

This same engineer’s department embraced the modern world by handing out to its clients a handheld organiser to allow them to calculate Munich’s tariff rates. Their clients would contact their London brokers to tell them what they had to beat.

Lloyd’s relied at the time on the capital base provided by wealthy individuals. Their liability was unlimited, and they relied on their syndicates – they were usually members of several to spread the risk to themselves – buying adequate reinsurance protection. Many individuals also purchased “stop loss” protections to minimise possible disasters.

The system began to unravel after Hurricane Betsy in 1965, the first billion dollar loss, when underwriters and reinsurers discovered that they had created “spirals”. Company or syndicate A reinsured with B who reinsured with C who reinsured with A, who found they had to pay their own claims before they could be reimbursed by reinsurers who did not have the cash to fund the amounts due. Coupled with this, Communist countries’ state insurance monopolies had got into the game seeing a healthy flow of dollars. Planned economies do not anticipate excessive claims, and so they negotiated settlements. Many syndicates and companies were unable to recover millions of dollars from reinsurers. Syndicates made calls on their “Names”. Some reinsurers failed, compounding the market’s problem.

SLIDE 7 – THE UNDERWRITER WHO NEVER MISSED THE TOTAL LOSS

Many individuals resigned from Lloyd’s, who set up a committee under Lord Cromer to look for changes – which included the introduction of foreign and Commonwealth members - and later, in 1978, Sir Henry Fisher led a Working Party on the reform of Lloyd’s.

In my view, one of the recommendations embodied in the subsequent 1982 Lloyd’s Act led directly to the greed which caused so much difficulty to Lloyd’s a decade later. The Managing Agents, who ran the syndicates, and the Members’ Agents, who introduced “Names” to Lloyd’s and looked after their interests, were often owned by the broking houses. The perception was that a broker would thus be able to influence an underwriter who was, in effect, indirectly his employee.

This misconception took no account of the prima donna culture among top underwriters, to whom the ability to tell a top broking executive to go forth and multiply seemed to be one of the perks of the job.  

The 1982 Lloyd’s Act forced brokers to divest their shareholding in Managing Agents They were often bought for relatively little money by the Underwriters who, in many cases, either sold them on for huge profits, or became enriched by what were fantastic cash cows.

SLIDE EIGHT - LEADENHALL MARKET PUB

If there was anything scandalous about Lloyd’s in the 70’s and 80’s which influenced the results for Members, it was the drink culture. Part of a broker’s skill was to know which underwriters should be seen before and which after their long, boozy lunch in a broker’s boardroom. I am referring here only to a minority, but a significant one.

Another issue was that many people in the market came either from moneyed public school backgrounds or from extremely humble ones. I used to describe Lloyd’s as an unholy alliance between hooray Henry’s and barrow boys, and there were times when not very bright wealthy market practitioners, who had got their jobs on the old boy network, went along with some totally dishonest schemes. Ethics in some broking houses was spelled ESSEX.

Brokers often became very wealthy, especially those who handled the reinsurance of syndicates and London Market companies, known as LMX, London Market Excess of Loss.

A favourite anecdote concerning one of these is a lunch at the Ritz following which Bill Brown of brokers Walsham Brothers and his brother went to Jack Barclay’s where they bought a brace of Rolls Royces, as one does. “I’ll get these”, said Bill to his brother. “You got lunch”

Still another problem was the remuneration system which encouraged Members’ Agents to recruit from among their wealthy friends new “Names” for Lloyd’s. Although Lloyd’s operated a strict interview system to ensure that everyone was aware of the potential downside of unlimited liability, when things later went wrong, people who had pledged their farms or their share portfolios as collateral alleged that they had been told that they could only make money, and not lose it, at least over a 10 year cycle.

The rapid expansion in numbers of Lloyd’s Syndicates meant that a lot of underwriters had to be recruited from other syndicates and from outside Lloyd’s, which broke the long apprenticeship practice. So after the Piper Alfa oil platform disaster of 1988, spiral reinsurance created havoc once more - a sorry lesson had to be re-learned.

In the late 80’s the real disasters struck at Lloyd’s, largely caused by asbestosis and pollution claims originating in the United States. Their legal system, using juries to determine damages, operated on the basis that those with deep pockets should pay. Ancient insurance policies were examined for their relevance to liabilities 20 or more years later. If limits were small, they were “re-interpreted” A famous pollution case, involving a leaking oil tank at a garage, had the judge ruling that each drop which spilled into the underground water system was a separate incident and a policy with a limit of $100,000 had to pay out millions.

Some at Lloyd’s said that the Corporation should hand over the US Dollar Trust Fund to the US Government and walk away as Congress could not agree sensible liability laws. 

Lloyd’s operates a 3 open year accounting system, whereby the Underwriter, after all claims advices have been noted for policies written 3 years earlier, closes off the account, calculates an amount to be passed on the following year’s account, and then either distributes a dividend (net of his and the agents’ juicy profit commissions) or requests cheques to cover the deficit.

Lloyd’s Underwriters now had to tell their Names that there were huge claims to be paid, often from policies written before some were even Members of Lloyd’s, because of these internal reinsurances from one Underwriting Year to the next. Many of even the richer Names could not pay - remember unlimited personal liability - and a Hardship Fund was set up. This negotiated with distressed Names so that they could retain a modest dwelling and something to live on, but the bulk of their stately homes, fine art and estates would invariably be lost. This caused real problems and litigation both in the UK and abroad.

We should never forget the human factor. Many people felt, sometimes rightly, that they had been duped. Marriages broke up and there were several suicides.

There are plenty of 70 year olds still active in the market as brokers and consultants as a result of their pensions disappearing down an underwriting plug hole.

The fact that Lloyd’s could still say that all valid claims were paid retained its brand image among customers, but the forced exit of so many individual Names meant that there was a real reduction in underwriting capacity and thus Lloyd’s potential market share.

By 1991, it was clear that Lloyd’s had lost too many Names and David Rowland, who later became the first full-time remunerated Chairman of Lloyd’s, was appointed to head a Task Force which resulted for the first time in the admission of Corporate Members.

In 1997, 95% of the Membership of some 34,000 Names voted for the so-called Reconstruction and Renewal, whereby a special company, Equitas, was formed to reinsure all liabilities on policies underwritten before 1993. This did not provide “finality”. If Equitas had insufficient money to pay valid claims, especially from asbestosis, “Names” would still have been liable. This chapter was only finally closed last year when the UK Courts approved a deal between Equitas and Berkshire Hathaway removing all liabilities.

SLIDE NINE – TWIN TOWERS

The market at this point started with a clean slate, but insufficient lessons had been learned by the time the claims arising from the 9/11 terrorist attack hit the market, and quicker claim settlements soon demonstrated that catastrophe modelling was inadequate for many and spirals were still around.

The modern Lloyd’s can be said to have started in 2002, when the Chairman’s Strategy Group’s proposals were approved by Members. This was also the year when former Lord Mayor of London, Lord Levene became Lloyd’s Chairman – he will not step down until 2012.

Today, from being an organisation accepting business on behalf of thousands of individual names with unlimited liability, their number is down to 773, whereas there are over 1200 Corporate Members.

Only a sixth of capital now comes from individual members, nearly half from UK listed and other corporate vehicles, and the rest from the international insurance industry.

Although each syndicate is responsible for its own liabilities – they have own assets totalling nearly 40 billion pounds and deposit an additional 10 billion pounds with Lloyd’s - there are Mutual Assets totalling some two and a half billion pounds in various forms to ensure that all claims are paid should a Syndicate, despite all of the monitoring, be unable to meet its liabilities.

Whereas historically Lloyd’s was self-regulating through the various Lloyd’s Acts, they are now subject to regulation by the Financial Service Authority. The Franchise Board was created in 2003 to monitor market performance, which is reasonable in a market where in extremis all could suffer from the reckless underwriting of the few.

The introduction by the of strict underwriting guidelines has meant that there is a general, high rating by the main agencies which applies to any and every syndicate at Lloyd’s.

In times of high interest rates, it was common for insurers and reinsurers to be able to make a profit even if their combined operating ratio, that is claims plus acquisition and administration costs, exceeded 100%. Nowadays, Underwriters have to prove to that they have a reasonable expectation of a real profit. Gone are the days when people could increase their market share by “dumping” – undercutting competitors’ premium rates.

SLIDE 10 - LLOYD’S STRATEGIC PLAN

For those of you who wish to go deeper into this, I commend the Lloyd’s Strategic Plan document, available in PDF format on-line, and with a foreword by Chief Executive Richard Ward, which sets out 5 principal benefits for Managing Agents of being at Lloyd’s.

How easy is it for a new entrant to set up a Lloyd’s syndicate? Are there hard and fast rules, apart from those set out above?

There is a New Entrants Manual, which does reflect its criteria. Although Lloyd’s has to be careful not to fall foul of competition regulators, the Franchise Board will seek to ensure that any entrants  will bring something new to the market – expertise in novel or different lines, and not just be yet another syndicate offering the same products as established practitioners.

Some syndicates have their own offices in major European centres. There is a hub in Singapore for Asia Pacific business and more than 14 syndicates operate from there. In China, Lloyd’s has formed Lloyd’s Reinsurance Company (China) Limited, and 5 syndicates have underwriters based there.

A recent change, recognising this, is that Lloyd’s syndicates no longer get their business exclusively from brokers, but also through coverholders, through these international platforms, and directly with some clients.

Finally, Lloyd’s has invested heavily in claims handling and settlement – prompt, fair claims settlement means satisfied customers. Nowadays, the leading syndicate on a contract, sometimes backed by a couple of following underwriters, can agree a claim on behalf of the whole Lloyd’s market.

But why is Lloyd’s able to compete so successfully, and why is it still so important when the premium incomes of many major international companies are greater than theirs?

One of the answers may be found in the fact that some of Lloyd’s competitors have joined its market – companies like Munich Re, the largest reinsurer in the world, felt that they would have missed out had they not also been part of Lloyd’s. They have a Lloyd’s premium capacity of £ 260 million.

Individuals too are showing increasing interest in investing at Lloyd’s, now that the unlimited liablity concept is not obligatory. At a time where returns on fixed deposits and bonds are so low, Lloyd’s has, over the last decade shown excellent returns.  

There is an auction process where people can buy into and sell out from syndicate capacity. Profitable syndicates obviously command a higher price.

So far I have concentrated on Lloyd’s.

The Marine and Aviation markets outside Lloyd’s formed the Institute of London Underwriters, the ILU, way back in 1884.  Senior members of marine insurance companies had, since the 1850s, been meeting informally in the Jerusalem Coffee House and the Jamaica Wine Rooms near the Royal Exchange to discuss policy wordings and other matters of mutual interest. A proposal was made to establish a formal representative underwriting association in July 1882 and two years later the new ILU took up offices in the Royal Exchange Buildings.

Its successor organisation is the International Underwriting Association of London, the IUA, which was formed at the end of 1998 by a merger with the London International Insurance and Reinsurance Market Association (LIRMA), created in 1991 and itself a merged entity of market insurance and reinsurance associations founded in the 1960’s and 70’s. The objective was to allow companies in London to speak with a single unified voice when dealing with other market participants, regulators and Government.

Today the IUA has 40 Ordinary Members, out of the 50 companies operating in London, 17 Associates and 5 Affiliates. Most of these are foreign owned, and in fact all of the top 20 reinsurers of the World have London operations.

15 member companies choose to have a foot in both camps and also have Lloyd’s syndicates.

SLIDE ELEVEN – LONDON UNDERWRITING CENTRE

The IUA operates from LIRMA’s spectacular London Underwriting Centre in Mincing Lane, and some companies have offices in that building, designed to match the convenience of Lloyd’s or the old ILU building in Billiter Street. Today there is a tendency for members, which are often huge companies with world-wide premiums dwarfing Lloyd’s, to have their own buildings with trading floors, or to have these in modern buildings such as Plantation Court.

This is a departure from the Lloyd’s model, whereby brokers go to see underwriters at their “boxes”. The trading floors have seating areas, conference rooms and small offices, where the underwriter, alone or with colleagues, can discuss proposals comfortably with brokers over coffee or tea. The brokers are no longer “sir” but Tom, Dick or Rupert.

In 2001, the IUA and Lloyd’s agreed to merge their separate processing and claims settlement operations. They each took 25% of Ins-sure Services Limited in co-operation with Xchanging, to provide back office services to the market. This has meant fuller use of internet technology, although there is some way to go, according to a recent speech by IUA’s chairman, Stephen Riley, who looks forward to a time when all processing no longer needs someone to re-key submissions from brokers and is seamless.

To improve documentation, the London Market Principles Slip was introduced, which evolved into the Market Reform Contract, enabling slip, cover note and contract wording to be a single document, available to a client before the inception of the risk. In the past, contract wordings often hadn’t been agreed by the time renewal came around. The new system is known as “Contract Certainty”, and this concept has been exported to other markets, the most recent being Bermuda.

Lawyers used to love reinsurance contracts, especially the non-marine ones, which they found shot full of inconsistencies. UK marine insurance law has however evolved through decisions at the special Chancery courts, whose arcane wordings are now in use world-wide.

Standard clauses are “made available”. They cannot be imposed as this could breach competition law in some countries, especially the United States.

Another innovation is the Insurers’ Market Repository, which has been developed to speed up accounting and claims processes. It allows insurers to view all risk information and documentation submitted by brokers on a central secure database.

This is an electronic filing cabinet that allows brokers to give full claims information to the whole participating market without having to trudge round with huge files to be shown to each underwriter, destroying several forests in the process.

IUA members do not however accept the Lloyd’s system of allowing one or two leading underwriters to agree claims settlements, and in the company market claims processing is necessary slower, especially as major cases may have to be referred back to overseas head offices.

SLIDE TWELVE – LONDON VIEW INCLUDING GHERKIN

The Company market had expanded enormously after the entry of the UK into the then European Economic Community in 1973, and even more so after the 2005 EU Reinsurance Directive, for which the IUA had actively worked. This allowed all authorised reinsurers in the EU, except for branches of non-EU parents, to operate anywhere in the EU while reporting only to their home supervisor. Thus it became much easier for continental European companies to set up here, and for UK companies to establish branches abroad.

The IUA has a Compliance Committee, publishing practical guidelines and research tools, dealing with international trade sanctions, insurance premium taxes and anti-money laundering policies. The FSA regards the IUA as a representative voice for companies and will negotiate with it when new rules are proposed.

More than 500 people meet regularly through the IUA’s various committees and working groups which have grown to cover all classes of business and major market issues.

It does not however police underwriting, as so many of its members have London operations which are only a small part of their worldwide activities. It admits that it is incapable of obtaining reliable statistics for its members’ operations. A broker may see an underwriter in London and the decision-making may be relayed to head office elsewhere. The transaction can be booked here or abroad.

 I wonder if we shall ever see again the case of an underwriter writing for a Scandinavian reinsurer who was given a list of limits he could accept per class. He applied these to everything he was offered. We had a sweepstake in my office as to who would get the first declinature. No-one won. The major brokers went to his Head Office to warn them after a time – too late, the company did not survive.

SLIDE THIRTEEN – BERMUDA FLAG

Major international reinsurers offer “alternative risk solutions” both as insurance for large corporate clients and as reinsurance of other insurers. But these are almost always financial products, dependent on their ability to shelter reserves from the tax man. London is unable to compete with hubs such as Bermuda in this area, and this can be an increasing challenge as large corporations look for long term financial arrangements which are more “financial engineering” than pure insurance, allowing people to even out their results over time.

Historically, London was the home of a large “contingency” market, where people could cover themselves against events in which they were not directly concerned but which could impact on their bottom line. There were abuses, and Lloyd’s will neither allow contingency covers nor transactions which they regard as “financial” covers or “commercial risk”, that is the insurance of pure market risks which form part of a company’s standard activity.

But only in London will you find a genuine marketplace, where brokers can go and take advantage of the competition which exists, and use the advantage of a subscription system, whereby syndicates and companies write percentages of risks following recognised leaders. Chicago tried, and so did Florida, but those experiments fizzled out. Talk of a New York Exchange is widely seen as irrelevant to London’s continued dominance’.

To add to the convenience of operating in London are the common accounting systems of both Lloyd’s and the IUA, and the high solvency levels imposed on their members.

However, some international reinsurers are competing hard, offering to accept 100% of large risk by email, allowing brokers to give prompt responses to customers and reducing transactional costs. Brokers hate to have all their eggs in one basket, but the subscription system can be threatened.

The London market is not standing still. On the regulatory front, the Lloyd’s Act was updated in 2008. and undermined the brokers’ monopoly of access to Lloyd’s.

London is also much more professional, and the insurance quarter is populated with specialist legal and accounting firms; claims adjusters; climate and catastrophe modellers; companies offering specialist survey services for agricultural risks, financial institutions, engineering, construction, energy, so that the London Underwriter no longer looks at the ceiling but reads reports for which he or she is prepared to pay.

The staff of Underwriters and brokers today are expected to undergo formal training and the hours worked in the City institutions are a tribute to the dedication of thousands of expert employees.

The chief executive of the IUA, Dave Matcham, has said that two of the London Market’s most prominent challenges– modernisation and the European Union’s so-called Solvency II rules– will be closely linked and interdependent in 2010. Just the regulatory part will cost 40% of the new investment needed.

An example of modernisation is the wider implementation of so-called ACORD data standards, which will be seen in greater use of the Lloyd’s Exchange for endorsements and other peer to peer transactions between brokers and carriers.

This project enables validated data to be submitted and reused without rekeying. All insurers will have to be ACORD standard compatible, and this will give greater certainty that data received and processed by insurers will be of high quality and give regulators greater comfort that their capital modelling is adequate.

The Market Reform Group last September became the London Market Group. After the reforms and technological advances of the last 10 years, London’s backwardness in processing terms seems to have been largely overcome.

As World financial markets recover, capital will seek to create new products to compete with insurance. As I have said, Lloyd’s and London need to be able to react to this. I criticise greatly the taxation authorities which would not allow insurance and reinsurance companies and syndicates to build up long term reserves beyond those required for anticipated claims payments. Yes, equalisation reserves are designed to correct this to a degree, but not enough. This encourages companies to buy “financial” reinsurance abroad, taking reserves off balance sheet and making proper analysis of a company’s worth impossible for rating agencies, regulators and stock market analysts.

If insurers and reinsurers and even their clients were allowed to transfer into their capital reserves a large amount of their pre-tax profit, many of these financial products would wither away. London, and ultimately the Treasury, would benefit in the longer term. Unfortunately, long finance is not a concept high on politicians’ and bureaucrats agendas.

SLIDE FOURTEEN - WILLIS BUILDING  

But I do not believe that London will completely change its character. The major brokers, led by Marsh, Aon and Willis, all have huge offices here – Willis’s new building occupies the site of the Lloyd’s 1958 building. They are American-owned or have an American CEO.

The market works by brokers being able to talk to underwriters face to face, and establish relationships of trust with them. There will be an increase in electronic placing, but not for the more complicated deals. Lloyd’s and the IUA both recognise, however, that greater electronic dealing is inevitable and welcome.

Where something is innovative, or frankly weird, it is London, and notably at Lloyd’s, that a solution may be found, with the exceptions mentioned earlier.

SLIDE FIFTEEN – SUBSCRIPTION ROOM - REPRISE

The subscription market system, started in Edward Lloyd’s café centuries ago, is the sort of thing that only the English would have invented – along with our tax system and our politics.

There have been hiccups on the way, but if the London market continues to adapt and improve its service to its customers, it will still be contributing hugely to UK plc throughout this newish century.                      Final slide       

                                                                                                                                ©Robert Woodthorpe Browne,  Gresham College 2010