London: International Insurance Center

Systems Changes, Technology, Talent Pool Position London Market for the Future

London’s insurance market comprises general carriers, specialty carriers, reinsurers, brokers, underwriters, claims handlers, lawyers, accountants and their adjuncts, who work together to sell “The City’s”— London’s financial and insurance sector— insurance products to the world. Although Lloyd’s remains the largest and best known London entity, it doesn’t operate alone. An international insurance “who’s who” clusters around One Lime Street, especially in postal zone EC3.

A stroll through London reveals its international character: AIG, Gen Re, Liberty, Markel, Aon, Marsh, Willis, Lockton, A.M. Best, S&P are among many familiar names. ACE, XL and others testify to Bermuda’s presence. Allianz, Tokio Marine, Swiss Re, Munich Re, QBE and others represent the world. Aviva, RSA, Hiscox, Catlin, Brit, Amlin, Beazley, et.al., represent the hometown. “London offers the greatest concentration of skill available anywhere; it’s the City’s main value,” said Dominic Samengo-Turner, chairman of Global Markets International and chief executive of Global Placement at Willis (www.willis.com).

One reason London became and continues to be an insurance center comes from it’s located on the prime meridian in Greewich; as a result the city can do business with Asia in the morning and with the western hemisphere, notably the U.S., in the afternoon, Samengo-Turner says.

Office construction also adds value. Some older buildings remain in the City, but not many. The area was heavily damaged by World War II bombing, and reconstruction, which has changed the City’ external landscape irrevocably, has accelerated in the last 25 years. The starkly modern Lloyd’s building, completed in 1986, was one of the first. The most recent is Willis’ new London headquarters opposite Lloyd’s. Marsh’s London office overlooks the Tower of London, and from anywhere in the City one can always admire the bizarrely beautiful “Gherkin,” built by Swiss Re on the site of the Baltic Exchange Building, blown up by an IRA bomb in 1992.

However, the internal changes in the London market during that period have been even more profound. To understand the transformation one needs to start with the past.

A Look Back

The City is one of the oldest parts of London, dating back to Roman times. The Tower of London was begun by William the Conqueror in 1078. Edward Lloyd opened his coffee house, the origin of Lloyd’s, in 1688.

Lloyd’s has always had company. A visit to the home of the Chartered Insurance Institute (www.cii.co.uk), which escaped serious damage from World War II bombs, along with St. Paul’s Cathedral, reveals an interesting discovery— fire marks. These metal plaques— many dating from the 18th century— are inscribed with the names of insurance companies, many of whom are still in business.

As merchants traveled the world, establishing colonies and businesses far from England, their need for insurance grew. By the end of the 19th century London’s insurers covered everything from tea plantations in Ceylon (Sri Lanka) to South African diamond mines. They insured property in the U.S., which led to Cuthbert Heath’s famous direction to Lloyd’s agents after the 1906 San Francisco earthquake and fire to “pay all claims.”

That is still an iconic statement. Lloyd’s is well-known for taking on risks that most insurers decline. However, as it approached its 300th birthday the world’s oldest insurer was in trouble. Its internal organization, laid down in the days of sail, was proving inadequate to meet modern demands. Then came the asbestos and environmental claims crisis. By 1992 Lloyd’s was faced with increasingly large claims on policies written more than 40 years ago. The initial reaction was the traditional response of recruiting new “Names”— the individual syndicate backers, who pledged 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. 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.

In the following year it adopted a reconstruction plan, and in 1996 set up Equitas as a run-off vehicle to deal with the claims. The “plan saved Lloyd’s when it was near collapse,” Samengo-Turner said; “if it hadn’t happened, the London Market would be a very different place today. A lot of good came out of that crisis.”

Those acts changed Lloyd’s basic structure and the London market forever. In retrospect they ushered in the modern era. Lloyd’s appointed its first chief executive (CEO) in 1983, its first full time chairman in 1993. Richard Ward and Lord Peter Levene, both businessmen from outside Lloyd’s, now respectively occupy those positions.

Roddy Langley has been both a witness and a participant in those changes. He worked as an insurance broker in London for 20 years and now operates his own public relations firm, Lysander PR. “Over the past 30 years or so, it seems to me that the London Market has become much more confident, purposeful and less hampered by tradition,” he said. It’s no longer regarded “as the dumping ground for global risks that nobody else wants to underwrite. There is a feeling that placing (re)insurance here is now much more part of the risk management process as opposed to being a last chance solution to it.”

Britain’s reputation for keeping traditions is well known but the London market has shown itself capable of adapting to changing conditions. “Business has become more expert with the London Market now intrinsically involved in issues that affect it, such as climate change and terrorism, and this has been reflected in the first rate and upbeat way Lloyd’s markets itself,” said Langley.”

In the Modern World

London is the center of the global insurance market for specialty lines, particularly marine, aviation and property catastrophe. Lloyd’s is one of the five largest reinsurers. Gross premiums written in 2008 were $28.7 billion. Willis, which has deep roots and is headquartered in London, places some $40 billion worth of insurance annually. London has achieved its position by taking advantage of its strengths and eliminating weaknesses to the extent possible.

Structural changes at Lloyd’s unleashed the entrepreneurial energies of enterprises, that were formerly tied strictly to Lloyd’s. Most “Lloyd’s companies” have transformed themselves into full service insurance companies and public corporations. As stand-alone entities, they are no longer tied entirely to Lloyd’s, although they continue to manage their syndicates and place a great deal of their business there.

The existing expertise and the capital made available by selling shares induced several companies to take the next logical step to write business outside of Lloyd’s. Catlin, Hiscox, Beazley, Brit, Amlin, Wellington (since merged with Catlin) and R.J. Kiln (now part of Tokio Marine)— colloquially the “Gang of Six”— are the best known. They write coverage in the U.K. both through Lloyd’s and outside of it. As the U.S. is Lloyd’s largest market, they all took steps to establish a U.S. presence. It hasn’t stopped there; most of these companies, directed from London, now operate globally.

Beazley is a good example. In addition to its London offices at Plantation Place, it has branch offices in major U.K. cities. It still writes the majority of its U.S. business through its Lloyd’s syndicates, but it also has a rapidly growing local presence in the U.S. that is managed from its office in Farmington, Conn. In 2005, it bought Omaha P&C from Mutual of Omaha, changed the named to Beazley Insurance Co. Inc., and is now underwriting an increasing volume of business, including management liability, professional liability, and commercial property— on an admitted basis. It also has offices in France, Germany, Singapore, Hong Kong and Australia.

Adrian Cox, Beazley Group’s head of Specialty Lines, doesn’t see this expansion as a conflict— on the contrary. “We expect to grow both in London and in the U.S.,” he said, “and growth in the London market supports our growth in the U.S. among smaller scale clients as our brand and reputation strengthens.” For example, he cites as a major factor in the growth of its architects and engineers (A&E) professional liability business in the U.S. the fact that it insures more than half of the top 50 A&E firms in the U.S. “Smaller firms look at that and say, those guys clearly understand our business,” said Cox.

The other U.K. companies have followed a similar pattern. They realized, however, that their competitors, especially those from Bermuda, enjoyed certain advantages in flexibility and tax treatment. The asset management firms, private equity funds, and investment banks, which have large stakes in those companies, realized it, too.

As a result, only Amlin remains, for now, a U.K.-domiciled company. Catlin relocated to Bermuda in 1999; Hiscox in 2006. Brit is in the process of setting up a Dutch holding company. Last March Beazley changed its domicile, becoming “incorporated in Jersey and tax resident in the Republic of Ireland.” The bulk of its business, however, is still managed from London. Nonetheless, the fact that so many have moved their domicile has become an issue.

The U.K.’s insurance industry is an important part of the country’s financial services sector and an important contributor to its economy. Lord Levene, speaking at the annual Lloyd’s City Dinner, stressed the “vitally important role that both The City, and financial services more generally,” play in the British economy. He noted that U.K. financial services account for about 8 percent of national output and contribute some 14 percent of total tax revenues in this country.

Technology Advances

“As far as technology goes, what we’re working on right now is taking it to the next level,” said Sue Langley, Lloyd’s head of operations and North America. She is directing the testing of the Lloyd’s Exchange system with selected brokers and managing agents, with the introduction of ACORD standards into their transactions, a delicate task.

Despite setbacks (notably Lloyd’s Kinnect project) electronic business processing now plays an important role in London. Companies like RI3K and Xchanging provide the platforms and software. Companies like TriSystems provide the communication links. Most back office processing is now done electronically, which has significantly reduced the approximately four tons of paper Lloyd’s used to churn out every day.

The “next level” Langley referred to requires synchronizing all of the terms that go into placing a risk; i.e., everyone speaks the same language, which reduces the chance for errors and misunderstandings. “It’s not policy wordings,” Langley said, “it’s making sure all of the critical information is contained in the same form.”

Those who have worked on this and similar projects insist that the introduction of technology will not replace personal discussions. “‘Support’ is the key word here,” says Jeff Ward, a director with TriSystems, “yet few fully understand what that actually means— it does not mean replace. Actually agreeing upon how to use the technology, and why, requires considerable negotiating and change-management skills across the market.”

The London Market’s future depends on keeping those skills; therefore, it is of critical importance to attract intelligent, well trained people into the industry. The CII held the first ever insurance specific careers event at the University of Manchester in November 2007 to support its graduate program, an event supported by Lloyd’s, Aon, Willis, Allianz, AXA, Aviva, Towergate, Groupama and Munich Re, according to Dr. Sandy Scott, the CII’s CEO.

The current economic crisis may help. “We expect the current U.K. situation for recruiting top talent to be particularly advantageous for insurance at the moment, given the low ebb of other financial services industries, and our aim is to ensure that this is not a once in a lifetime windfall but a strengthening of the reputation of the sector amongst those making a career choice,” Scott said.

The crisis affects more than recruitment. “Concern over the banking crisis has spilled over into the insurance industry,” said Richard Ward. “But their [the banks’] reckless risk taking differs greatly from insurance.” Most people in the London Market are only mildly concerned with global calls for stricter bank regulation. They feel it will not significantly affect the insurance industry. After all, “we’ve been there,” said Samengo-Turner of Willis.

Topics Carriers USA Agencies Talent Excess Surplus Tech Market London Lloyd's Uk