Hurricane Spitzer to Take London by Storm

By | December 6, 2004

There’s still some sense of disbelief over here in London at the moment. Hurricane Spitzer seems to have struck New York full on, but the hope that it may not hurt London too much is palpable.

The thinking goes that while Premium Settlement Agreements–those contingent commissions–were a global phenomenon, they are not criminal activities but merely questionable from an ethical perspective. PSAs have existed in London for years, and, as elsewhere, will now be curtailed.

Bid rigging however is a different story. It’s a criminal activity and one that could get you sent down for a stretch. Fortunately, there’s no indication (not yet, at least) that any such activity of this nature was happening in London. Heads down, then, fingers crossed, and get on with underwriting. It’s a bit like watching a major catastrophe from afar. One sympathizes, feels relieved it’s not him, but rides out the few tremors that do rumble over the ocean floor.

For London, the effects will be every bit as profound as in New York. This will impact every underwriter in Lloyd's and most in London, given the distribution chain they inhabit.

Well that’s one way of looking at it and it’s not completely out of nature with the London mentality that this is a storm that will blow itself out. And, of course, it also completely misses the point. It’s also going to be a few weeks before the penny fully drops in London that the insurance industry has changed forever. Take the relationship between the brokers, their customers and markets. That alone has swung 180 degrees. As a senior analyst at Legg Mason said in a recent Financial Times interview, “The leverage in that relationship has changed … it will never be the same.”

In itself, this should be enough to send up the warning signals in the broker-centric London market but, again, it misses the underlying fundamental. It is perhaps easier to embrace a notion that there is a slight balance of power shift between two sides within the game. But it’s altogether much more difficult to embrace the thought that the rules of the game have just been rewritten half-way through the first period.

The more traditional London market man will tell you that the Spitzer allegations are all about transparency. By transparency, it seems convenient to mean remuneration. But Spitzer does not stop at transparency of remuneration, nor will he. For Spitzer, transparency is about the business process. Is it fair? Is it open to abuse? Is it creating temptation for unscrupulous people? And the conclusion he has already reached is that the answer to all these questions is most certainly, “You bet. Change or face the full force of the law.”

That means that the entire business process from the retail end of the equation through to the last line on the reinsurance contract will be expected to become fully transparent. Intriguingly, Sarbanes-Oxley is on the same track, and many companies were in mid-review of their processes when Spitzer unleashed his attack. This has simply added to the urgency and to the scrutiny that internal compliance teams will be expected to apply.

For London, the effects will be every bit as profound as in New York. Over a third of Lloyd’s business comes in from the United States and the lion’s share of this business comes through U.S. brokers with global presence. The brokers will be doing everything they can to reform and modernize their business so that they can demonstrate to their customers, shareholders and inquisitive lawyers that their business practice is not just clean, but is geared toward preventing malpractice and remaining untainted. This will impact every underwriter in Lloyd’s and most in London, given the distribution chain they inhabit.

Problematically the impact will not be one for which, historically, they have shown any real appetite, as technology will be the key tool and an electronic market will be the outcome. This can’t ensure 100 percent transparency, but it will support the drive toward a transparent market in a way that no other solution could.

Thus, by nature of the modernization drive within the broking houses, the underwriting organizations too will have to modernize. This modernization will be imposed on them by their producers who have no option but to change. The ripple effect will wash over the London market without fail and some will embrace the changes. Others will struggle to implement and arrive panting at the finish post, out of puff for sure, but still alive and kicking–and certainly fitter than ever before.

Some, however, will not be able to change, either through issues of cost, technology or just mentality. For them the bell tolls. If they cannot adapt in time, and this will be a time-sensitive issue to meet legal requirements, the brokers will not be able to produce for them and the lights will simply go out overnight. This may sound harsh, but markets and evolution wait for no man, and it will allow a new breed of super-electronic, transparent and efficient underwriting organizations to emerge from the wreckage.

Frankly it’s about time too.

Alex Letts is chief executive of ri3k, which is creating a sustainable technology infrastructure for the reinsurance industry. For more, visit www.ri3k.com.

Topics Catastrophe Natural Disasters New York Agencies Windstorm Hurricane London

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