Lloyd's chief executive Nick Prettejohn talks to Jonathan Swift about the challenges confronting the London market
A decade on from joining Lloyd's, you may be forgiven for thinking that current chief executive Nick Prettejohn is getting itchy feet. Indeed, the man who joined the corporation in 1995 as head of strategy was, according to completely unsubstantiated EC3 rumours, talked out of departing last year by the market's top brass.
When questioned by Post Magazine about his long-term plans, Mr Prettejohn, who played a key role in the dark days of the Reconstruction and Renewal process, notes that there is still plenty on his plate to engage his interest.
He remarks: "If I think about whether I have got lots of interesting and significant challenges to address, then the answer is yes. The great thing about this place is that it is always throwing up new issues and there are still a lot of things that need to be done here. I am delighted that people want me to continue to be part of that and help drive it forward."
He adds: "Alongside maintaining underwriting discipline, the achievement of a better, a more efficient, more certain business process is absolutely fundamental to the long-term health and competitiveness of London."
"The objective (centred around London Market Principles slips) has been there for a while but the Financial Services Authority has given us greater impetus. The wider issues that (New York Attorney General Eliot) Spitzer raised has concentrated the minds of brokers and underwriters around the world, not just in London. If anybody had been under any illusion that these issues were not important before, it is fair to say that between Spitzer and (FSA chief executive officer) John Tiner, they do now."
The process to attain this objective officially began at the end of April when the Market Reform Group - which also compromises the International Underwriting Association, the Lloyd's Market Association and London Market Insurance Brokers' Committee - wrote to 250 companies asking them to participate.
A deadline of 13 May was set for replies but, to the surprise of some, no penalties or even identifying of laggards were mentioned to encourage endorsement of the project.
"What we have said, and what the FSA has said, is that we want a market-driven solution. It has always been a commercial issue and we were tackling it before FSA intervention as an important commercial issue. Voluntary solutions are better than compulsory ones."
Mr Prettejohn backs this up through a comparison of his experience with LMP slips. "It took quite a while for us to mandate the LMP slips because, until you have a critical mass of people who have bought into something and are demonstrating that they can do it, there is not much point in mandating something," he says. "So my view is let the market reach its own solution. If it then becomes sensible to mandate that market solution, then we will do and, if we need to use the threat of some form of sanction in order to push people over the finish line, then we will consider that too."
As for the progress of the MRG, Mr Prettejohn has the FSA's deadline at the end of 2006 etched on his mind. "I have publicly said we needed to be confident by spring 2005 that we are going to get where we need to be by the end of 2006. We will be reviewing progress, with the first milestone for us being the half-year stage and then we will report after a full-year. The market wants the pressure to be kept up but it has to be creative pressure rather than just constantly waving a big stick," he says.
Despite his optimism, the rumour mill in EC3 has been in overdrive, with stories of letters being sent to people who no longer work for companies and other senior people not receiving any correspondence at all. Mr Prettejohn counters this: "Initially, we received a good number of responses by the deadline and we are continuing to get them. But really, all we have been asking at this stage is that they have the board-level sponsor in place. And the most important thing is that these companies have a plan. We now need to get out there and look at those individual plans with those in the market."
For the larger companies, both brokers and underwriters, this has already started. "We are first going to do the larger firms so as to get the volumes and critical mass in the market," Mr Prettejohn concludes.
Interestingly, the MRG are not only working with the underwriters and brokers, but also with the Association of Insurance and Risk Managers.
"Ultimately, the most important thing in all this is the policyholder and ensuring that their needs are being met," says Mr Prettejohn. "But to achieve contract certainty means that there needs to be some changes on their part as well."
Asked about what these changes are, he replies: "We have a particular problem with them going late into the market with a risk, and, on occasions, erring on the side of not being too opposed to ambiguity in the sense that it may actually prove to be advantageous for them. I think we all need to change our behaviour, and that includes policyholders and risk managers, but I think it is refreshing to have such a positive engagement from Airmic."
Mr Prettejohn has publically spoken about the need for the London market to hold its nerve regarding pricing on a number of occasions recently.
With the market having just turned in a £1.36bn profit for 2004 - its third annual profit in a row - and a combined ratio of 96.9%, he is keen to keep up the good work.
The changes that Mr Prettejohn has helped implement since he became chief executive in 1999 are also likely to help. "Since the last soft cycle, we have put in place the Franchise team and the discipline it brings is filtering through, questioning peoples' business plans and the introduction of underwriting guidelines. But can I say with absolute certainty that we will succeed? Of course I can't. No one can. Unfortunately we can't unilaterally abolish the insurance cycle but we can do the best job possible to remove the worst excesses of the past."
In a move that marked something of a departure for Lloyd's last year, the corporation went to the City to raise £500m of long-term subordinated debt in order to boost its central assets. This was not though, as has been suggested, Lloyd's doing a dry run before a full LSE flotation.
"The reason we did the bond issue had nothing to do with any plans to float the society of Lloyd's, it was about meeting policyholder claims in a way that was economically efficient for the membership. It was about our competitive position and strengthening our hand with the rating agencies. It had nothing to do with a flotation."
Although admitting that the idea has been suggested before, Mr Prettejohn believes there is little scope for a potentially successful stock market float of Lloyd's.
"In order to float the society, you would require an entity that made money. In order for someone to think there was a reason to pay for it, you need to have income streams that exceed your cost base. The way the charging system works within Lloyd's, however, means it is not there to make a profit, it is to provide systems to members and run, in the broadest sense the infrastructure of the market, the licences, the brand, the central fund and so on. So the most important thing for us is to get the franchise model, the brand, the capital system and how the licences work in as good a shape as we can, rather than change the objective."
Last year, Lloyd's also took part in a major branding exercise, although Mr Prettejohn is quick to stress that it was never intended that it would end with him standing in front of a curtain and unveiling a new logo or product to an assembled throng of interested people.
"The objective is to establish a common language among the key people who matter in terms of the stakeholders, such as the underwriters and brokers, and to get some degree of commonality about what is understood by the Lloyd's brand," he says. "We will then relate that into a practical approach, to marketing the brand. So one of the first manifestations of that is the 2004 annual report, in that it is a lot different to what we have done before."
Although the findings will filter down to all its events and other literature, Mr Prettejohn notes that while Lloyd's may be one of the world's best-known brands and is intrinsically linked with insurance, it "is least appreciated in the UK".
"There are all sorts of reasons for this," he continues, "one of which is Lloyds TSB, another the issue of losses in the late 1980s and early 1990s and the impact that had on private individuals. It has coloured some peoples' view of the Lloyd's brand but outside the UK that ceases to be an issue."
A sign of Lloyd's respect globally is underlined by its expanding office base and the fact that it has held recent events in places in which it has not yet a presence, such as Russia. As with many of the corporation's rivals, one of the markets that attracts Lloyd's is China. Mr Prettejohn says: "We have a representative there and are in lengthy and constructive discussions, and have been for a couple of years, with the authorities about having an onshore reinsurance licence."
He believes these will "conclude satisfactorily", although he is reluctant to predict when this may be, adding: "In the short run, in terms of business, it is not going to represent a significant opportunity. In the longer run, it could represent a very significant one for the market." Another market that interests him is India and he admits: "We've been thinking what the approach may be there but that is at a more formative stage."
Another issue that will be taxing the minds of the Lloyd's management is the consequences of the recent tribunal in the Central Fund arbitration involving Swiss Re.
Mr Prettejohn says net of tax, this has left it with a Central Fund shortfall of "approximately £225m". He adds: "We will continue to look at that over the coming months. Obviously we need to set the contributions and syndicate loan rates for next year by the end of the summer."
One option could see Lloyd's increase these contributions but Mr Prettejohn is quick to dismiss the idea of one large single change: "If we need to raise them then the answer will probably be to do it over a period, rather than in one hit. Opinions differ on that and, if we need to do it, we should make sure we do in a way that is most consistent with the financial profiles of the businesses in the market. So with a critical decision like that we would get feedback from the market."
So, as a high-profile figure, the question remains: does he still get the chance to go walkabout on the Lloyd's floor or is he too busy in his office on the 12th floor of the building? "I try to," Mr Prettejohn remarks, "but it is easy to get embroiled in meetings, you get to the end of the week and you realise that you have done nothing but sit in endless meetings. I do try to keep up informal contact with as many people as possible who I have met over my 10 years."
Indeed, Mr Prettejohn is impressed with the quality of staff now employed in the EC3 insurance market. "The quality of people has continued to improve during the past 10 years, particularly in management. You only have to look at the people who have newly arrived such as Preben Prebensen at Wellington on the underwriting side, or Bruce Carnegie-Brown at Marsh on the broking side, to see that the London insurance market has attracted some very talented people."
Of course, successful industries have been made on much less but Mr Prettejohn notes that even with the quality staff, history and brand "we don't have a God-given right to exist".
He concludes: "We have to earn our right to exist and we can't always assume things will be the way that we have known them to be in the past. We have to make sure that it is a no-brainer for people to locate business and place their risks here."
Nick Prettejohn: Lloyd's biography
1995: head of strategy
1996: managing director of Lloyd's Business Development Unit
1998: assumed responsibility for Lloyd's North America business unit
July 1999: appointed chief executive.
- Roundtable: Is a single customer view taking off in insurance?
- O’Connor replaces Fairchild at the helm of Broker Network
- Home insurance insurtech Buzzvault launches
- Stackhouse Poland makes fourth acquisition of the year
- Aviva promises to 'reinvent' insurance and end dual pricing
- Ed unveils CEO Hearn’s replacement and plots Bermuda office
- CBL Corporation expected to be placed in liquidation, sees further delays to watershed meeting