That an institution can survive for 332 years and boast that no valid claim has ever been refused is a testament to the enduring appeal and intellectual capital that sits in the Lloyd’s of London building. Underwriting risks from all over the world, Lloyd’s has a brand that is the envy of its peers. Is this justified, will Lloyd’s prevail and do Lloyd’s brokers have a future as the market modernises to embrace technology?
In 2017 Lloyd’s wrote £34Bn Gross Written Premium (US$44Bn) and behind this sits very solid security. There are £50Bn (US$65Bn) plus of syndicate assets, just under £25Bn (US$32Bn) of syndicate members’ funds and also the central fund of £2Bn (US$2.6Bn). The financial ratings that Lloyd’s enjoys are: AM Best A (Excellent), S&P A+ (Strong) and Fitch AA- (Very Strong). These ratings demonstrate the robust strength of the market.
Using the term “market” is appropriate as opposed to calling Lloyd’s an insurance company because each of the syndicates within the market are separate entities enjoying ownership from different investors, many of which are large global insurance companies themselves. It may seem strange for well-resourced global insurers to buy a Lloyd’s syndicate and become a part of the Lloyd’s marketplace so what drives this unique market and why are there so many investors queuing up to invest?
Lloyd’s syndicates got together to insure the first satellite in 1965 as a pre-launch cover and then insured the first launch in 1968. This required expertise and collaboration on a level that was not available anywhere else in the world with brokers and underwriters working together to create a product that was fit for purpose. Brokers were able to discuss coverage issues and agree new policy language with underwriters all under one roof and in doing so an efficient and workable solution was found.
Less of a technical challenge in terms of the policy language but innovative nevertheless is the fact that when Betty Grable wanted to protect her famous legs, Lloyd's of London delivered a policy covering a limit of US$1M. The first kidnap & ransom policy was issued by Lloyd’s in 1932.
Lloyd’s has been a pioneer in many other ways over its long history but even as the original market began to develop in Edward Lloyd’s coffee house to cater for shipowners, merchants and bankers, marine insurance had in fact already been in existence for hundreds of years with wealthy Romans and Greeks speculating on the safe transit of goods and ships. Lloyd’s was able to take the idea and create formal contracts of insurance that were to become known as syndicated ventures. The principal of the premium of the many paying for the losses of the few developed with laws and contracts to match. It is a simple process now for a cargo broker to enter a few details into a computer system and generate a Lloyd’s policy for a specific transit of a shipment, but the wordings, coverage and rates have been developed over many hundreds of years. As the market developed and disputes became more common place, the rules surrounding the placement of insurance were codified under the Marine Insurance Act of 1906.
With all of this expertise and entrepreneurial spirit housed in one small building in London, Lloyd’s was able to be a market for complex and difficult-to-insure risks. It is however now only one part of a global industry. As markets have matured and technology improved, the advantages of having a single market place of business in one city has somewhat changed. Now a broker can send an email proposal to literally dozens of insurers if required and those in different time zones are not at a disadvantage in the same way as they would have been decades ago.
Since 1995 Lloyd’s has enjoyed mainly corporate ownership, particularly from insurance companies owning syndicates. The business is under different stresses and underwriters are now more constrained in their underwriting. An owner that has strong representation in a particular territory or class of business will not want to see a Lloyd’s subsidiary competing for business in the same environment. Lloyd’s operates a corporate structure with shared services and the syndicates have to pay fees for the privilege. The cost of operating a Lloyd’s syndicate has risen sharply over recent years and like all insurers, Lloyd's has to stay compliant with the many different regulators in the numerous jurisdictions in which it trades around the world. In the past it would have been possible for a small syndicate to operate underwriting just one class of business and be an expert in that class but now this is almost impossible. This has led to the huge explosion of Lloyd’s backed Managing General Agents (MGA’s) that are able to operate within a particular field, underwriting on behalf of syndicates with pre-determined rates and guidelines.
Pressure to retain the all-important Lloyd’s rating means that there is a burden to generate underwriting returns which demonstrate that the brand is sustainable. In recent years, in a very soft insurance market, this has proven to be difficult and Lloyd’s has increased its oversight to ensure that syndicates are running profitably. The increased level of scrutiny has seen syndicates withdrawing from lines of business, reducing capacity and cutting expense ratios to improve results.
The pressure on syndicates to hit their performance targets is high. In the past the situation would have been managed by syndicates purchasing Quota Share reinsurance where re-insurers (non Lloyd’s) take a pre-defined percentage of all risks within the portfolio and pay a commission to the syndicate in return for their underwriting expertise. These facilities had the advantage of reducing the net expense ratios as the commission received would be higher than the costs of underwriting the business.
For the underwriting community this is a difficult time and we are unlikely to see significant new capital until Lloyd’s sees improved returns. During this time it is important for brokers to manage the expectations of their clients. In order to retain business we have to find other syndicates that can take up the slack or seek alternatives possibly outside of the Lloyd’s market altogether.
The simple answer for syndicates under the ownership of large insurance companies is to migrate business to other divisions within the group. For example, it is relatively simple to move an SME portfolio currently underwritten on Lloyd’s paper to UK licensed company paper.
In parts of the world where the major advantage of operating at Lloyd’s is to access local business utilising Lloyd’s licenses, it is more difficult to move business due to regulatory issues. In the USA and Canada for example Lloyd’s is a major market force and has always been successful in attracting business into London. The brand is powerful and any dilution will be harmful in both the short and long term. In a global insurance market that is awash with capital, a syndicate declining to renew a profitable account due to “management restrictions” will struggle to survive.
Lloyd's has in the past had to reinvent and recapitalise itself. The expertise that exists within the institution and its component parts means that it is well placed to emerge as a stronger enterprise going forward. There will undoubtedly be some challenges over the next 12 months but the collective will is there and the London market is more robust than any other insurance institution in the world.
The use of the new PPL platform (Placing Platform Limited) where risks can be placed electronically is just one of the many initiatives designed to keep Lloyd’s at the forefront of a rapidly changing insurance industry and as Lloyd’s utilises more and more insurtech solutions, the market as we know it will inevitably change.
Lloyd’s has the opportunity and certainly the ability to grow and prosper in the international market. It is incomprehensible to think that insurance as a product will fade and die. Cyber crime, driver-less cars and trucks and many forms of technical innovation should in fact increase the global P&C premium. There are also the opportunities arising from emerging markets in addition to the usual mix of hurricanes, earthquakes and tornadoes - all of which mankind is doing its best to propagate.
The current issues faced by the insurance industry require attention but the extraordinary amount of talent, experience and spirit that resides within the Lloyd’s community puts it in a strong position to adapt to the changes being faced and maintain its position as the world’s leading insurance market.