Lloyd's is arguably the world's leading insurance market but, as Marcus Alcock asks, is the current agenda of reform sufficient to retain that pre-eminence?
'You've never had it so good,' Prime Minister Harold Macmillan told the UK public in 1957. His famous pronouncement was in part a bid to alleviate the gloom that might have been expected in the wake of the Suez crisis as a nation began to come to terms with the fact that it was no longer an imperial power.
However, Mr Macmillan was also alluding to the undeniable fact that the UK was experiencing its first consumer boom; the advent of new technology, low unemployment and inflation created a demand for new goods that were previously unaffordable to the general population.
Nearly 50 years later, it seems that the same phrase could equally be applied to the City of London. According to research commissioned by the Corporation of London and published in May, the capital city is deemed to be one of only two genuinely global financial centres alongside New York.
London, however, has nudged into first place, underpinned by its culture of trading, skills base, quality of professional support and proportionate regulatory environment. It is also ahead in terms of the cost of its capital at both initial public offering stage and beyond but can this pre-eminence be extended across the City, and in particular to Lloyd's, which continues to promote itself as the world's leading insurance market?
Is the old lady of Lime Street really keeping pace with other leading City institutions and does the current process of reform go far enough to ensure the market grows and evolves throughout the 21st century?
In some ways, the case could be made for a Lloyd's that is in long-term decline, as least as far as certain lines of business are concerned. Nowhere is this more true of Lloyd's status as in the reinsurance market, where it is struggling to compete with the superficially more attractive offshore domiciles.
With Bermuda leading the pack on this front, such locations offer a low - or no - tax-rated regime with a level of regulation and bureaucracy that many see as a welcome relief from the excesses of the Financial Services Authority.
In this respect, significant warning has already been given, with Lloyd's heavyweights Amlin and Hiscox deciding to establish new reinsurance companies in Bermuda during the past 12 months in preference to Lloyd's.
If this is not enough to concern Lloyd's, the raft of new companies deciding to take advantage of rating conditions in the wake of Hurricane Katrina last year did not automatically opt for Lloyd's as they might have done in the past. This time the choice was clear, and it was a definite rebuff for Lloyd's - Bermuda is the place for start-ups.
Yet for some commentators, the fact that Lloyd's has not seen much of the new money that has come into the industry of late is not in itself something to worry about.
Robin Oakes, partner at accountants and Lloyd's specialists Mazars, believes that while recent reformist measures will not attract investors, this is not a concern: "There is no evidence that reducing the number of checks per slip, enhancing quality and speed of contract production or boosting electronic trading have anything to do with attracting more capital.
"In fact, why assume that Lloyd's needs to attract more capital? Last year, additional capital was raised and it was used by Lloyd's players to establish operations in Bermuda. Why was this? Possibly because they saw the opportunity to write business that was shown to Bermudian underwriters but not to London."
Mr Oakes adds: "There seems to be an expectation that London results will grow smoothly - Bermudians write business, which by its nature is volatile."
His colleague Andrew Hubbard elaborates on the theme. "Bermuda had a much greater need to repair balance sheets after the storms so it had to raise more capital. London didn't have the same holes in its balance sheets so didn't need to in the same way," he explains.
"So to simply say 'Bermuda was the one that could raise all this capital, why couldn't Lloyd's?' is too simplistic. The fact of the matter is that capital is mobile and will go to where it can get the best return. Anything London does to enhance it's profitability will, therefore, also have the consequence of making it more attractive to capital."
Besides, he adds: "There is some evidence that Lloyd's capacity will rise for next year. Several players seem to be planning to expand capacity as they see opportunities. Therefore, there is a much more positive conclusion one could draw from what has happened."
According to Mr Hubbard, the wider context must also be looked at if comparisons are to be made between Lloyd's and its Atlantic island competitor. "Bermuda is a small island and its infrastructure is consequently constrained," he points out. "London has everything the insurance world needs in one place and also enjoys a unique position vis-a-vis the time zones of the world, sitting between South-east Asia and the US and able to trade with both."
Moreover, he says that while Bermuda tends to specialise in certain lines of business, London does it all. Also, while Bermuda has a heavy weighting towards the US, London has a wider net.
Market advisers are not alone in these sentiments, as there are others who continue to see advantages to Lloyd's over offshore domiciles.
Andrew Beazley is chief executive of the Beazley Group, which - despite establishing a company in the US in 2004 to underwrite surplus lines business - is one of the largest players at Lloyd's and a member of the G6 group of listed Lloyd's vehicles.
This group is now driving forward technological change in the market in the wake of the demise of Kinnect, the trading platform backed by the Corporation of Lloyd's that cost some £75m and was finally jettisoned in January this year.
"We looked at doing a structure that was either Lloyd's or Bermuda, and Lloyd's won hands down," declares Mr Beazley. In his opinion, Lloyd's remains attractive not least because it offers investors liquidity, which means that investors can enter and exit reasonably easily if need be.
In addition, although he says the rate of regulatory change during the past three years has been "a massive diversion" for many of Lloyd's managing agencies - and the time has now come to "blow the whistle, say time out and look at rules we can lose" - nonetheless the fact remains that "clients want to buy from a well-regulated market".
Asked whether Lloyd's can afford to be complacent, he replies: "Absolutely not. If Lloyd's and the London market cease to be an attractive place to do business, then that business will move."
According to Mr Beazley, there are three main areas where Lloyd's has to ensure that it remains successful - clients, talent and capital.
"For clients, Lloyd's has to have transparency and responsiveness, while brokers want ease of administration and a competitive cost base," he comments. "On the talent front, the question is have you got the breadth of talent to survive? London is a good place to live and the working environment is attractive but the danger for it is the burden of regulation, which is starting to have an impact on the working environment."
As far as capital is concerned, he summarises the issue: "Can London make good returns? Yes, it can but we have to watch out for the expense of our operation and the level of tax - and Bermuda and other players have an advantage there."
On this latter key issue, Mr Beazley urges the Treasury to look again at the extent to which the industry is taxed if it wants to ensure that the UK remains a globally competitive player. "They have choices, the government has choices, and it needs to look at the tax issue otherwise the business will go elsewhere," he warns.
Of course there is not much that Lloyd's itself can do to remedy this issue, no matter how much clout chairman Lord Levene believes he can muster amongst the corridors of power. Where Lloyd's can make a difference, however, is in getting its own house in order by streamlining business and reducing costs.
As such, after years of prevarication and disappointment, it seems that real progress is at last being made on these twin issues. Much of the current credit belongs to the work of the Lloyd's Market Association and the G6 group of Lloyd's managing agents - Beazley, Catlin, Hiscox, Wellington, Kiln and Amlin - which are working together to modernise the market.
At present, the G6 is carrying out a pilot of a new approach to contract checking, which it hopes will speed up the way that insurance contracts are checked, produced and issued as a step towards contract certainty. Yet the goals of the G6 are more wide-ranging, and could ultimately lead to electronic trading.
One G6 achievement that Mr Beazley would like to see is the move towards a more centralised clearing system. "This would include a central clearing for syndicated transactions, so clients would pay a cheque in and the premium would be paid to central clearing."
He recognises that such a step would have profound consequences for brokers, as it would take away some of the transactional work that has been their bread and butter for so long. "Their business would instead revolve around their core competency, which is advocacy, not moving money," he explains.
However, brokers themselves are hardly standing still or allowing the managing agencies to dictate the terms of the reform of Lloyd's.
Alex Letts is chief executive of Ri3k, the electronic reinsurance trading platform that last month slashed its prices by some 80% in the wake of a momentous decision by Aon that looks set to dramatically increase the flow of business conducted in the market electronically.
"Electronic trading is the Holy Grail for the market," he explains. "It's always feared it, and that's why the announcement that Aon made is so seismic - it's the single most important announcement that's been made in recent years."
The announcement he refers to was put out by Aon UK last month and said that July will see the broking giant have the ability to trade electronically across all its London market lines of business (PM, 29 June, p6). It added that this month sees the start of a phased transition from physical to electronic distribution, making it possible for all contracts and endorsements placed by Aon in the London market to be signed online.
So will the market see electronic trading develop in a meaningful way at Lloyd's in the near future?
"It will happen and it's got to happen," comments Mark Veale, group change programme manager at Lloyd's broker THB. In his opinion, the market functions well at the front-end - the negotiations between broker and underwriter over large, specialist risks - but there is no reason for not pushing ahead with much greater transformation of back-end processes.
So why has the transformation not already occurred? "You've got a very diverse audience," Mr Veale explains, "and there's a history of vested interests in maintaining the status quo - job security and expense account interests - but external interests are starting to be felt."
According to Jonathan Clark, senior vice-president at Crawford and Company International, even without the current spate of reforms revolving around electronic trading and contract certainty, there are other reasons to believe that Lloyd's maintains an edge over competitors.
"However you view it, one of the reasons that London does well is that there is a great concentration of skills here," he says. "There are challenges but the industry recognises this and is taking steps."
He adds: "We are also in the European Union and have the lever of freedom of services. Furthermore, in the US, Lloyd's has established a good business model for some of the risks in that market."
Ultimately, however, he stresses that the continued global success of Lloyd's will come down to the core principles that have seen the market though over the years: "It's going to change but fundamentally Lloyd's is a place where people come to meet and underwrite business and the whole structure of the market is designed to help that. One of the things I also see is a good relationship between claims people and underwriters."
It will be interesting, therefore, to see whether the market's reformist agenda manages to maintain the core principles that have guided Lloyd's through the centuries of its pre-eminence, or whether the tampering is such that the baby is thrown out with the bathwater.
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