Syndicates – The Heart of the Market

Catlin, and Other Lloyd’s Syndicates

As underwriters, syndicates are the heart of the Lloyd’s market. Until the end of the 20th century they were largely funded by wealthy individuals, who pledged their fortunes to back the risks accepted by the underwriters, i.e. unlimited liability.

After the near death experience Lloyd’s underwent in the 1980s, it became apparent that the structure, which dated to the days of sailing ships, no longer worked well in the modern world.

Change came slowly, but it came. The dam broke in 1994, when Lloyd’s, after three centuries of denial, authorized corporations to pledge their capital to back the syndicates.

Corporations, by definition, enjoy limited liability. Public companies are required to file annual reports and disclose what they are doing. Once they became the main principals backing Lloyd’s syndicates, modernizing Lloyd’s structures was imperative.

Following a plan announced in January 2002 the Council of Lloyd’s replaced the existing regulatory and market boards and committees with a single franchise board.

It also phased out unlimited liability, replaced the increasingly cumbersome three-year accounting procedures with annual accounting in 2002, and ended the formality of winding up and renewing Syndicates annually.

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.

The changeover to a franchise system was completed in 2003. Lloyd’s became the franchisor, the manager of the marketplace, with the managing general agents (MGAs), who operate the syndicates becoming franchisees.

Nick Prettejohn, Lloyd’s CEO at the time, described the changeover as “a fundamental step in our strategy of reform. It makes us more accessible and transparent, and enables us to report results that can be compared easily to those of other insurers.”

By 2006 the corporate influence had grown to the point that UK companies with the biggest stakes in Lloyd’s – Amlin, Beazley, Catlin, Hiscox, Kiln and Wellington (now part of Catlin) – were being called the “Gang of Six” due to their influence. Lloyd’s also has a highly influential U.S./Bermuda component, featuring AIG, Berkshire Hathaway, XL, ACE, Liberty Mutual and Markel among them. Other international companies include Munich Re, Swiss Re and Tokio Marine.

Rolf Tolle headed the Franchise Board until he retired this year. Tom Bolt, an American, from Berkshire Hathaway, replaced him. He took over one of the most important positions at Lloyd’s, as “Underwriting Performance Director.”

In order to assure the financial soundness of the syndicates, Bolt and his team collect data from all of them – their business plans, their capacity, what type of business they want to underwrite and where. They have the power to demand changes, and/or to reject syndicate proposals outright, and have done so.

Bolt’s approach, like that of his predecessor, is decidedly low key. He subscribes to a directional, rather than a confrontational approach to regulation.

“For me the best football games are the ones where you really don’t notice the referees,” Bolt said in an interview at Lloyd’s. “They have a quiet word here or there,” but they calm things down and avoid problems. That’s more or less Bolt’s approach to his job. “If I do the job well, like a good referee, it gets better results.”

This “control and good practice has transformed Lloyd’s,” said Sue Langley, Lloyd’s head of operations, in a 2009 interview.

Moreover, while the syndicates are in effect insurance companies in the broad sense of the term there is a significant difference.

Lloyd’s operates as a “subscription market.” A single syndicate, usually managed by an insurance company, rarely assumes total responsibility for the complex risks they underwrite. Coverage is spread over many syndicates in various percentages, according to their agreement (subscription) with the lead underwriter. The practice may go back to the days of sail, when a lead underwriter would lay off certain percentages of risk to other underwriters, but it still works well in the modern world. A Lloyd’s broker assumes that he’s not putting all of his insured’s eggs in one basket.

Catlin – A Modern Syndicate

The structural changes have not only brought about market stability, but have also unleashed the entrepreneurial energies of ambitious enterprises, which were formerly tied strictly to Lloyd’s. Many “Lloyd’s insurers” have transformed themselves into full service insurance companies and public corporations.

As stand-alone entities, they may continue to manage their syndicates and place a great deal of their business there. They have also established ancillary operations in other markets and through other vehicles. In addition they can underwrite risks through Lloyd’s, which has licenses all over the world, rather than having to obtain individual licenses in many different countries.

A prime example is Catlin.

Founded in London in 1984, Catlin relocated its corporate domicile to Bermuda in 1999, the first UK insurer to do so. The Bermuda company is a separate entity. However, more than 700 people work at its London headquarters on Mincing Lane, and “approximately 500 of them work primarily for Catlin’s Syndicate 2003, the largest syndicate at Lloyd’s [see page N26] with 2009 capacity of £1.6 billion [$2.464 billion],” said media head James Burcke.

Catlin has a well-established U.S. presence. In December 2006 it acquired Wellington Underwriting, and subsequently combined the U.S. operations of both companies. It currently underwrites a number of different classes of business on an admitted and nonadmitted basis. Coverage is underwritten on behalf of Catlin US by the Catlin Syndicate, Catlin UK, Catlin Specialty Insurance Co., a nonadmitted carrier, and Catlin Insurance Co. Inc., an admitted insurer. What paper coverage is written on “depends on the type of business being written, and the needs and desires of the client,” said Burcke.

Catlin is “modern” in the sense that it is spread geographically around the world, and writes business according to circumstances from its “hub” centers. Burcke explained: “We no longer manage the business according to ‘platforms’ but rather by ‘underwriting hubs.’ The hubs are located in London (which includes the syndicate and Catlin UK), Bermuda, United States, Europe, Asia-Pacific and Canada.

“All of the hubs, with the exception of Bermuda, underwrite business on behalf of the Syndicate. Nearly all of the business underwritten by the International hubs is written on Catlin Syndicate paper.”

Burcke also explained why Catlin has only one syndicate. “The original Catlin Syndicate (Syndicate 1003) was established at the start of 1985 with capacity supplied by traditional Lloyd’s Names,” he said. “A second syndicate (Syndicate 2003) was established a decade later to underwrite on behalf of capacity supplied by Catlin itself. At the end of 2002, Catlin purchased the capacity that had been supplied by Lloyd’s Names and Syndicate 2003 became the sole Catlin Syndicate.

“Under Lloyd’s current rules and due to the fact that 100 percent of the Syndicate’s capacity is supplied by Catlin, there is not a need for more than one syndicate. Catlin did establish a life insurance syndicate in 2009.”

Operating just one syndicate doesn’t mean that business lines are limited. On the contrary, a look at the classes of business Syndicate 2003 writes, as listed on its Web site (www.catlin.com/cgl/underwriting/classes_of_business) includes: accident and health, aerospace, airlines, cargo, energy, general aviation, livestock, marine, kidnap and ransom, medical malpractice and pharmaceutical products liability, political risk, specie, trade credit and U.S. professional liability, as well as a number of other lines and reinsurance.

The recent financial crisis has had little effect on the Lloyd’s market, and no serious effects on Catlin. It hasn’t really had a “big impact on the Syndicate’s operations,” Burcke said. “We have become more selective in writing certain types of casualty business that were exposed to claims arising from the crisis, but the Syndicate was never a major underwriter of these classes of business to begin with.”

Syndicate 2003 will continue to play a central role in Catlin’s future, even though, as Burcke said, “It’s hard to predict what the future will bring.” He added that “during the past 10 years, Catlin has spent much time and effort to develop its international network of offices, nearly all of which underwrite business on a local basis on behalf of the Syndicate.

“We will continue to strengthen these operations, as they distinguish Catlin from many other participants in the Lloyd’s market.” The company is also likely to serve as a role model for other Lloyd’s companies.

10 Largest Syndicates at Lloyd’s (2009)

If you examine managing agencies (since some managing agents manage more than one syndicate), the 2009 rankings based on gross premiums written would be the following (in billions):

*Kiln became a wholly owned subsidiary of Japan’s Tokio Marine in 2008.

Topics Carriers USA Agencies Excess Surplus Underwriting London Lloyd's