London’s Muted Reaction to Spitzer Investigations

October 28, 2004

The London market in general and Lloyd’s in particular has not been overly verbose in commenting on New York State Attorney General Eliot Spitzer’s ongoing investigation of the insurance industry. Apart from a widely quoted statement from CEO Nick Prettejohn that “Lloyd’s strongly supports the maximum possible disclosure and transparency for all commission arrangements,” there has been very little else.

Is this a product of the famous British reserve? Is it a muted reaction to what may be perceived as yet another aberration of the American legal system – the savaging of a high profile industry for political and/or monetary gain? Or is it simply the application of the old adage that when one is in a hole, one should stop digging?

38 percent of Lloyd’s business originates in the U.S. Lloyd’s is the world’s leading broker market, as well as its best known one, so obviously the venerable institution has a vital interest in monitoring anything that affects the U.S. insurance industry. Spitzer’s investigation does that in spades.

His most damning charges concern bid rigging, i.e. price fixing, which is illegal, and commonly a criminal offense, in most of the industrialized world. While Spitzer has said he won’t pursue Marsh, the company, which would have been difficult to do anyway, he left the door wide open to the prosecution of individuals. His charges concerning contingent commissions, have already resulted in a number of brokers, led by Willis, and closely followed by Marsh, Aon and the rest, to eschew their use in the future.

So far there’s been little reaction to his charges on “tying” reinsurance to primary policy placement, although one British commentator did label the practice “coercive reciprocation.”

Alex Letts, the CEO of London-based ri3k, which provides online trading and reinsurance processing through its unique platform, said that he isn’t surprised by the muted reaction. “Lloyd’s is above all a broker market, and they want to be very, very careful before they say anything [that could antagonize the brokers], as they depend on them for business.”

Even if there’ve been no comments, it doesn’t mean there’s nothing going on. In fact Spitzer’s investigation has brought a simmering controversy to the fore. Lloyd’s senior management and the senior management of the syndicates and the brokerage houses, have long recognized the need to modernize procedures. Now they’re under the gun, actually several guns, as never before. EU rules and the U.K.’s own Financial Services Authority are committed to increasing the transparency in financial services, including insurance. David Strachan, who heads the FSA’s insurance division, has said this repeatedly. As of January 1, 2005 his division takes over active regulation of the U.K.’s insurance industry.

Senior management, however, is working in a fragmented, and yes, to some extent reactionary, environment. There’s only so much they can do. Lloyd’s is after all a cooperative market – not a corporation. Transparency will require reporting what went on when a contract for insurance is bound. That means you have to have a trail, which can be easily followed, which in turn means using computers – not just to look up companies and get stock quotes – but implementing real programs, such as Lloyd’s much delayed Kinnect system, to enable regulators to trace transactions. Many brokers and underwriters, who actually work the boxes at Lloyd’s, don’t want this – it’s well — it’s too transparent.

“What they need to understand,” Letts continued, “is that this change must eventually happen. There’s a mandate for it. The real question now is how quickly can they do it.” Letts sees Spitzer’s investigation as focusing even more attention on the need to change the way Lloyd’s does business. “You can’t really ignore it,” he observed. ” It may take a few more weeks to impact on the psyche of the London market, but when it does, it will be a significant factor in getting the market to change.”

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