Lord Levene Stresses Lloyd’s Special Relationship with U.S.; 2004 Priorities

January 15, 2004

Speaking at a joint meeting of the Downtown Association and the Insurance Brokers Association of New York (IBANY)* yesterday, Lloyd’s Chairman, Lord Peter Levene, reminded his audience of the longstanding special relationship between Lloyd’s and the U.S., and outlined London’s priorities for 2004.

Citing past instances of common cause, ranging from World War II to Sept. 11, to Prime Minister Tony Blair’s recent appearance on The Simpsons (albeit in cartoon format), Levene said he welcomed “this opportunity today to talk to you about some of the key issues on my mind, namely tort reform and trade barriers in reinsurance, and share my vision for 2004.”

Launching into one of his favorite topics – tort reform – Levene stated: “If there were an Oscar awarded for the most talked about issue, resulting in the least action, then tort reform would win it. But as we enter 2004, I am as convinced as ever of the need for expedient and far-reaching change. And it’s not just me. Only last month, we were delighted to have Hank Greenberg as guest speaker at the Lloyd’s 2003 City dinner in London. The dinner was attended by some 200 chairmen and chief executives of major British companies, politicians and insurance executives. He chose tort reform as his sole topic, leaving us in no doubt about his conviction of the need for reform on the three key fronts – asbestos, class action, and medical malpractice.”

Unfortunately Levene, along with most other commentators on the subject, doesn’t sees little chance of that happening in a presidential election year. He told his audience that in his view tort reform should not be considered a “political issue, but an economic one.” He cited “the negative impact of spiraling litigation on the American people,” and noted that it “transcends all political boundaries and crosses most industry sectors. And it needs an appropriate and collective response.”

Calling the spiraling cost of civil litigation a “cancer at all levels and all sectors of industry,” Levene called for progress on three fronts, stating: “First, to see leaders and influencers set aside their political agendas – and compromise on what is an economic problem, not a political issue. Second, I would like to see the insurance sector work together to achieve greater awareness of the problem by industry at large. Third, I would like to see us all step up the momentum for legislative change and give tort reform our best shot in 2004.”

Addressing the problem of reinsurance trust funds, Levene reminded his audience that, while the U.S. generally stands for free trade, it had put up what he sees as unconscionable economic barriers to “foreign reinsurers,” which requires them to “over-fund by enormous amounts under a gross liability system – even when they are placing retrocession back into the US market.”

He noted that U.K. insurers received over 6 billion dollars of US reinsurance premium in 2002, about half of it with Lloyd’s, and that “American reliance on international carriers continues to grow.” He pointed out that under the present requirements Lloyd’s now has “about 9 billion dollars tied up in the associated trust funds, much of it unnecessarily sitting there when it could be deployed much better elsewhere. All this despite the fact that we are already highly regulated in the UK.” Levene indicated that some progress had been made, and he does see some possibility of resolving the issue in 2004.

Discussing this year’s priorities, Levene noted that Lloyd’s entered 2004 “in extremely strong shape,” having posted record profits during 2003. “But we are determined to maintain and improve our position further,” he continued, “and two key areas on which we are focusing this year are quality of underwriting, and quality of service.”

While Levene is neither the first nor the last head of a major insurance group to lament the industry’s dismal performance in providing adequate rates of return to investors, he may be among the most listened to. Citing statistics from the Insurance Information Institute, he told the audience that the “rate of return has been sliding dramatically since the 1970s – and averaged just 2.8 per cent in the first three years of this decade. What investors in any other industry would settle for that I wonder?”

“Lloyd’s is determined to get it right,” he continued, in describing the “very decisive steps” it has taken to “to improve the quality of underwriting going forward.” He noted that the key objective of the new Franchise structure “is to deliver consistent, strong financial performance, avoiding the stomach-churning peaks and troughs we have become used to. The first year of these new arrangements has helped to ensure that our plans for 2004 are grounded in the reality of external market conditions, and set to deliver this objective.”

Lloyd’s $26.7 billion 2004 capacity, “matching last year’s record, certainly proves the continuing attractiveness of Lloyd’s as a marketplace,” he continued. “It is partly the result of established market players maintaining or increasing their capacity and we have also seen a wave of new smaller ‘start up’ businesses, including a number in the professional indemnity sector.”

Levene echoed statements by Lloyd’s CEO Nick Prettejohn that the organization is actively engaged in managing that capacity, and is willing to “shrink it where necessary.” He noted that “successful underwriters in our market have shown a much greater inclination to shrink their books of business than the least successful, as shown in the last down cycle.”

Levene concluded with a discussion of service standards, observing that the need for profit should not be the only criteria used to measure success. He quoted Edwards Deming, who “astutely observed, ‘Profit in business comes from repeat customers, customers that boast about your service, and that bring friends with them.’ We cannot afford to become obsessed with financial issues at the expense of forgetting the customer.”

Levene’s wide experience outside the industry [he had virtually no experience with insurance before becoming Lloyd’s chairman] enables him to look at it from a long-range point of view. “One of the first things that struck me when I came into insurance was – frankly – how inefficient it is in terms of its processing and service delivery,” he observed. “That inefficiency is why we have recently appointed Lloyd’s first head of business process reform. His remit is to co-ordinate and drive through business process across the market.”

He cited two initiatives designed to improve service. “For the first time in over three centuries, we have now mandated a standardised form to record all deals done in the Lloyd’s market. Tried and tested over the last year, this new ‘slip’, as we call it, will make an important difference to quality of service. It ensures that the terms of insurance contracts are agreed and clear before they come into force. A small step for mankind but an important one in insurance, where certainty has sometimes been missing in the past. This clarity will make quicker and more efficient the whole process of placing insurance – and also, critically, the business of agreeing claims. It will raise the standards of insurance documentation, resulting in important gains for brokers and policyholders.”

The second initiative is the introduction of the Kinnect platform. It’s designed to solve the very modern problem posed by the “plethora of different computer systems.” Levene noted that “Those used by the different carriers and brokers all vary widely, and dealing with each of them drives up costs and takes time.” Kinnect which is “compatible with these systems, and which allows them, for the first time, to communicate and to exchange data electronically, will reduce the enormous scope for errors, and the delays which mean a claim can take too long to be settled.”

“So far, Lloyd’s has invested over 60 million dollars in this initiative,” he continued, “and amongst its users are Marsh and Willis, two of the largest brokers. Last month, we were excited when Willis passed the first risk through the Kinnect Platform, and we look forward ultimately to its adoption right across the insurance industry, saving time and money on the processing of risk.”

After summing up his remarks, Levene concluded: “We pride ourselves on our expertise, our innovation, our creativity and we relish the challenge of finding new ways to insure against your new risks. Above all, we value the trust that the people and businesses of New York, and the United States as a whole, have placed in us. Thank you for listening and long may our special relationship continue.”

*Despite the somewhat confusing acronyms the IBANY is not to be confused with the IIABNY. They are separate organizations.

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