International

April 3, 2006

The London insurance market: The City and the regulators

For 317 years London’s insurance market in general and Lloyd’s in particular has been adapting to changing conditions both locally and globally. It’s never been easy, but the fact that it has happened at all-let alone for over three centuries-evinces the continued ability of London’s underwriters and brokers to survive and thrive despite the curve balls thrown at them by the global markets, the regulators and the electronic age. A recent visit to “The City” conveys the distinct impression that London will continue to be a major player in the world’s insurance industry now and in the years ahead.

A look around EC3

In the United States, the insurance industry once crowded together on Pine Street in New York, Wilshire Boulevard in Los Angeles and others. Those streets are now mostly memories, but in London the same tight-knit fraternity of the insurance world still exists in EC3-a postal zone rather than a street. Lime Street, Fenchurch Street, Mincing Lane-they evoke the industry’s past, present and future. And make no mistake that’s where the City’s leaders are looking.

Following Lloyd’s move into its new building 1986, a construction boom sprouted all over The City. Swiss Re moved into its striking-if somewhat bizarre building-popularly known as ‘The Gherkin’ or pickle-on St. Mary Axe two years ago. Hiscox now occupies a state of the art building 50 yards across the street from Lloyd’s. Beazley moved into its ultra-modern new headquarters at the beginning of March. Willis is in the process of constructing its high-rise London headquarters (already dubbed ‘Plumeri’s Palace’ by the locals) across from Lloyd’s on Lime Street.

The new buildings testify both to past financial success and to the confidence the carriers, brokers, syndicate managers and underwriters have in the future of the London market. About the only negative note recently has been Aon’s announcement that it plans to move most, if not all, of its London operations out of the City to the Docklands by 2009. A number of underwriters and brokers fear such a move could diminish the face to face contact between them, which is seen as a quintessential part of the underwriting process.

The City’s essence, however, isn’t in its streets and buildings, but in its people. Although London’s insurance market moved at a rather glacial pace throughout most of the 20th century, about 20 years ago a new generation of leaders began taking bold steps to bring the market up to date. The process accelerated in 1994, when Lloyd’s accepted corporate capital to back its syndicates. Now men and women, many from outside the insurance community, remain dedicated to assuring that both the London Market and Lloyd’s work more efficiently and competitively. They realize that London’s survival as a global insurance center depends on it, as new realities demand new solutions.

New rules, regulations

One of those realities arrived in 2001, when Lloyd’s ceased to be a self-regulating body under the Lloyd’s Act and became subject to the supervision of the U.K.’s Financial Services Authority (FSA). As of January 2005 the FSA assumed regulatory authority over the entire British insurance industry. Its mandate is to insure honesty, fairness and transparency in the financial/insurance markets. In December 2004 the FSA gave notice that it was time to end the industry’s hoary practice of “deal now, detail later” under which coverage was bound, but actual policies spelling out the details often weren’t issued for several months. The coverage dispute over the World Trade Center involving Swiss Re, Willis and others helped put the need for contract certainty on the front burner.

However, rather than implementing a series of regulations, the FSA issued a challenge to Lloyd’s and the rest of the London market to come up with their own rules and to be at least 85 percent compliant with them by next December. “Lloyd’s has taken it as an opportunity to implement change,” said Steven Haasz, its Director of Change Management and Human Resources. Change within the venerable institution, however, has never been easy. To start with Lloyd’s isn’t a corporation, it’s a market, made up of individual syndicates, who do the underwriting and brokers who bring in the business. In effect its Chairman has about as much real power as the president of the local Lions Club, maybe less. He can’t simply order change; it has to be accepted by the brokers and underwriters.

“Contract certainty equals process reform,” said Dane Douetil, Group CEO of Brit Insurance, who also heads Lloyd’s Market Reform Group. He, and the other 15 committee members, are formulating the guidelines the FSA wants to cover the subscription market, as Lloyd’s is frequently referred to. Duncan Boyle, former U.K. Chief Executive of Royal & SunAlliance, chairs the Association of British Insurer’s Market Group for Contract Certainty for the non-subscription market. “It’s not a question of whether the market should reform,” Douetil continued; “it must reform. The FSA has set Dec. 31 as the date, and they’re willing to force change if they have to.”

At the time of this interview on March 14, Douetil had a lot on his mind-Brit’s 2005 results were due to be published the next day, and on March 20 the FSA was due to announce whether it would proceed with a plan to promulgate its own rules. He can breathe easier. Despite record catastrophe claims, Brit posted pre-tax profits of £62.4 million ($109 million), off around 46 percent from 2004. And the FSA announced that it has “put on hold its work to develop rules to bring about contract certainty in the insurance market.” Speaking at the FSA’s Insurance Sector Conference CEO John Tiner “acknowledged the progress made by the insurance market in meeting the FSA’s challenge to achieve contract certainty.”

Douetil had said he was “confident, but not complacent” that the market would be able to produce appropriate guidelines within the time frame set by the FSA. He noted that the Reform Group is dedicated to producing “clear and unambiguous policy wordings,” and that all of the Lloyd’s Syndicates were now “working together to “achieve that goal,” which he indicated would ultimately be “more efficient for the entire market.” Getting all the underwriters and brokers to agree is in itself quite an achievement.

Haasz might have even anticipated the FSA’s no-go decision. “We were already at 60 percent of compliance last December,” he said. “We should achieve the 85 percent target.” Everyone stands to benefit. “We’ve capitalized on a management opportunity and succeeded in changing the market’s behavior. From now on everyone will know what’s covered.”

That’s a plus for Lloyd’s that also benefits the burgeoning insurance market outside of it.

Topics Legislation Agencies Excess Surplus Underwriting Market London Lloyd's

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Insurance Journal Magazine April 3, 2006
April 3, 2006
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