Lloyd’s of London Finds its 21st Century Form

Lloyd’s is 317 years old and doing just fine thank you. London’s venerable insurance market traces its roots to the establishment of Edward Lloyd’s coffeehouse in 1688. It’s an icon of both tradition and innovation. Tradition–as expressed not only in its longevity, but also in things like the Lutine Bell and the mêlée of brokers with their slipcases. “Lloyd’s’ is synonymous with “insurance.”

Innovation–in the sense that for any organization to survive for 50 years, let alone 300, it has to change and adapt to new conditions. Lloyd’s has–changing its structure and pioneering new policies and coverages, including the first use of reinsurance.

Lloyd’s remains unique. It’s an insurance market, not an insurance company. It began and remains broker driven. According to the Lloyd’s Web site: “A merchant with a ship to insure would request a ‘broker’ to take the policy from one wealthy merchant to another until the risk was fully covered. The broker’s skill lay chiefly in ensuring that policies were underwritten only by people of sufficient financial integrity.” Three hundred years later underwriters have replaced wealthy merchants, but the brokers are still there, doing the same job.

Although Lloyd’s continues to insure merchant ships, its business has expanded somewhat. “Lloyd’s underwrites risk for a wide range of businesses and projects internationally,” says a document titled How Lloyd’s Works.

Lloyd’s insures oil rigs, underground transport networks, airlines, and pharmaceutical companies, to name just a few. Some of its more unusual policies over the years have included insuring the body parts of various movie stars, and a Frenchman’s trip across the channel in a bathtub. But, as the document points out, “insurance is at the heart of the global economy, allowing entrepreneurs to take risks, helping businesses to grow, and enabling people to experiment, innovate and create, while also rebuilding when disaster strikes.”

That last phrase also describes Lloyd’s own more recent history, which brought about the most fundamental changes in its 317 years. The “disaster” was named asbestos. It struck at the end of the 1980s. By 1992, Lloyd’s was in deep trouble as claims on policies written over a 40+ year period began to mount. The initial reaction was traditional. Lloyd’s recruited a number of new “Names”–the individual syndicate backers, who pledge their wealth to pay claims.

That solution only created another disaster, as many individuals lost huge amounts, sometimes all they had. A number sued Lloyd’s for fraud–the Jaffray case being perhaps the best known. Under pressure from the government and in desperate need of funds, Lloyd’s did the unthinkable–in 1994 it admitted corporate capital to back its syndicates. That decision changed the basic structure of the London market forever, and in retrospect ushered in the modern era. To recover and to attract the major players it needed, Lloyd’s implemented a “Reconstruction and Renewal” program to handle past liabilities and produce initiatives for structural change.

In 1996 it established and funded Equitas, as a run-off vehicle to handle the mountain of asbestos and related claims. These changes enabled Lloyd’s to weather the firestorm of criticism and lawsuits from disgruntled Names, which was considerable. Time Magazine devoted 23 pages of its Feb. 21, 2000, European edition to a “Special Report” titled “The Decline and Fall of Lloyd’s of London.” As Mark Twain remarked, the report was premature. Lloyd’s eventually settled with more than 95 percent of the Names, and has prevailed in all of the lawsuits, including the Jaffray case.

The changes, however, were permanent. At the end of 2001, Lloyd’s ceased to be a self-regulating body under the Lloyd’s Act and became subject to the supervision of the Financial Services Authority. (Since January 2005 the FSA has also assumed regulatory authority over the entire British insurance industry). Lloyd’s had already decided to appoint a full time chairman. In 1996 it also appointed a full time administrator, naming Nick Prettejohn as its CEO with a mandate to continue modernizing its structure and procedures. In 2001, London brokers lost their exclusive rights to deal with Lloyd’s underwriters, when Lloyd’s opened the gates to applications from qualified brokers worldwide. In 2003, it scrapped its old structure and replaced it with a Franchise Board.

Lloyd’s participated in setting up Xchanging, an independent venture (in which AIG has a large stake) that handles back office procedures. It has been in ongoing discussions with the London’s International Underwriting Association since 1999 about harmonizing and eventually combining Lloyd’s and the IUA’s back office operations. The two have also established standardized policy wordings and procedures. In 2002, Lloyd’s began changing the time honored three-year accounting system (which went back to the days of sail) and is adopting annual accounting. More changes are in the works, and so far Lloyd’s–and its corporate backers–have greatly benefited.

How healthy Lloyd’s has become in so short a time is exemplified by its reaction to the Sept. 11 attacks, which, had it not been restructured, could well have been fatal. Claims were around 2 billion pounds ($3.64 billion in today’s dollars). In six months Lloyd’s had to come up with more than $2 billion in cash or equivalent to bring its U.S. reinsurance trust fund up to 100 percent of those estimations. The overall loss for the year was a whopping 3.11 billion pounds ($4.257 billion). Lloyd’s met all the claims and funding requirements.

It returned to overall profitability in 2002, recording profits of 834 million pounds ($1.3 billion at the time). In 2003, while other insurers had a good year, Lloyd’s had a great one with a $3.387 billion profit on an annualized basis. In 2004, it dropped to 1.36 billion pounds ($2.45 billion) primarily due to $2.16 billion in net claims from the Florida hurricanes.

Three factors combined to produce the comeback: 1) the introduction of corporate capital, which now provides over 85 percent of Lloyd’s capacity; 2) strong management from Chairman Lord Peter Levene, Prettejohn, and (until 2004) CFO Andrew Moss, and 3) a real and ongoing commitment to achieve underwriting profits on the part of the syndicates coupled with effective efforts to modernize Lloyd’s cumbersome structure and procedures. The first provided disciplined capital, as the companies are mostly publicly traded; the second organized how things should be done; and the third made use of the money and the organization to achieve the profits.

In retrospect, adopting and enforcing those criteria would probably help any insurer. Lloyd’s also has more control over the companies that run the syndicates than the industry as a whole. However, bear in mind that as late as 1999 there were over 300 underwriting syndicates. Today there are 62, but there are only 44 managing general agents who run them. Getting 44 ducks in a row is a lot easier than lining up 300, especially when the ducks are large well capitalized insurance companies to begin with who wholeheartedly support the initiatives. That is the underlying reason for Lloyd’s recent success, and that began in 1994.

Lloyd’s MGAs are owned and controlled by professionals. U.K companies include: Beazley Group, 2005 underwriting capacity $1.42 billion; Hiscox plc, 2005 capacity $1.416 billion; Amlin plc, $1.6 billion, down from $1.882 billion in 2004; Catlin Syndicate 2003, $900 million; Wellington plc, 2004 capacity $1.372 billion; R.J. Kiln & Co., four syndicates with a combined capacity of $1.14 billion–to name a few.

U.S. Bermuda companies with a significant Lloyd’s presence are: ACE (Syndicate 2488–formerly Charman Underwriting); Markel (Syndicate 3000); St. Paul/Travelers (Syndicate 5000); General Re (Faraday Syndicate 435), XL (Syndicate 1209) and others.

Limit Underwriting (a subsidiary of Australia’s QBE), is the largest Lloyd’s MGA with a combined capacity of nearly $1.8 billion in four syndicates. Munich Re has a Lloyd’s MGA operation, as do Gerling, Danish Re and Odyssey Re.

The full list of MGAs on the Lloyd’s Web site (http://marketdirectories.lloyds. com), is dominated by public insurance companies. They are required to observe certain standards of transparency and accounting practices (even if they don’t always do so), and have been instrumental in making those standards mandatory at Lloyd’s. As a result of the increased presence of the big boys, the British insurers have grown as well. Most of them are now public companies, and they are increasingly seeking opportunities both inside and outside the Lloyd’s market (See IJ, June 6, 2005).

About the only place where Lloyd’s still seems to be struggling is with the mountains of paperwork it produces (about four tons a day on average). Lord Levene and people like Alex Letts, CEO of RI3K (a reinsurance processing platform), have often expressed how appalled they are at the continued necessity to handle some $25 billion in premiums, as well as all the claims and related documents by hand. As anyone who’s ever visited Lloyd’s ultra-modern headquarters has observed, the brokers still run around from underwriting desk to underwriting desk with bulging slipcases, despite omnipresent computer terminals.

Project Kinnect (formerly Blue Mountain) was supposed to solve the problem, but it has been very slow to get off the ground, despite the nearly $200 million Lloyd’s has invested in it. Ultimately Lloyd’s along with the rest of the U.K.’s insurance industry, has little choice but to make electronic processing work. It’s the only practical way for the FSA’s regulatory authorities to investigate and verify that applicable accounting rules and transparency standards are being observed. When that happens, Lloyd’s should be comfortably launched into its fourth century.

Topics Agencies Claims Excess Surplus Underwriting Market Insurance Wholesale London Lloyd's