Modernising the market


Although this year will be remembered for the downturn in the global economy, organisations within the London insurance market are showing that advances in market reform are the keys to success for the future, writes Mairi MacDonald

In a year that will be remembered as the one in which the global economy entered the worst recession in generations, Lloyd's and London market practitioners can look back on a pretty successful 12 months.

Although AIG shocked the industry by becoming synonymous with the credit crunch and looked like it alone might singlehandedly harden rates before its government bailout, its failures have become the subscription market's greatest marketing tool imaginable. And, while Lloyd's underwriters and brokers may have been overwhelmed with new regulation in 2008, the market's tough modernisation stance has primed it for 2009.

William Stovin, president and chief operating officer of Markel International, summarises: "Lloyd's, as compared to other global markets, has had a relatively good year for two reasons: their investment strategy is a cautious one and is more centred around capital preservation than the higher returns that others may go for. And it has avoided a lot of the toxic exposures that a normal balance sheet would pick up."

He adds that, perhaps more importantly, the underwriting performance has shown signs of better discipline than 15 years ago, when the economy last tumbled. "That is down to the strength of the dominant managing agents in the market, as well as Lloyd's franchise performance director Rolf Tolle and the franchise board," he observes.

Less dependent on investment income, the Lloyd's and London market has proved its resilience in capital strength, backed up by an influx of new players to the industry. Despite the persistent criticism of London as a high-cost domicile, underwriters and brokers still see it as a strategic and competitive business centre, and improvements to its infrastructure have arguably strengthened this aspect.

David Hough, executive director of the London Market Insurance Brokers' Committee, comments: "General insurance has been less badly affected by financial turmoil than other areas, and London and Lloyd's have a great opportunity. Whereas a year ago a risk manager might have been happy to place all insurances with a single carrier, recent events have shown there is a risk attached to that, and syndication or coinsurance is seen as a very valuable risk management tool, which is, of course, the broker's strength. Hopefully, the broking community will see more ways to develop its skills."

The Lloyd's Legislative Reform Order was implemented in November this year and has been seen as a springboard for the market's modernisation programme. The admittance of non-Lloyd's brokers to the market was a key component of the LRO, and caused initial concerns, particularly among brokers, but the final document has satisfied most parties.

Mr Hough says: "At the outset, we were quite concerned about how the changes were being described. The original contract suggested the London broker wasn't adding much to the equation and we disputed that. However, since then, we worked with Lloyd's and the Treasury and we were pleased with the final document. We agreed with Lloyd's that any new broker entering the marketplace would be subject to the same standards of entry as the existing Lloyd's broking community, and that has been reflected in the final document."

Market reform agenda

This year has also shown that industry organisations can work together to make marked advances in modernisation with the market reform agenda.

Jeff Ward, business development director of Tri Systems, one of several technology specialists involved with market reform, says trade bodies need to keep pushing for market-wide adoption of technology that enables two-way electronic placing, claims and accounting Acord messages.

He highlights key areas of success in the market reform agenda - the E Bot accounting standard, which enables brokers and underwriters in the company market to exchange technical and financial accounts electronically; and the proposed Lloyd's Exchange. Mr Ward adds: "The Lloyd's Exchange will encourage both underwriters and brokers to exchange Acord placing messages on a peer-to-peer basis, but without the complexity and cost of doing so without a hub. Additionally, the Lloyd's Exchange will ultimately assist non-London market brokers to gain access to Lloyd's."

Mr Ward goes on to explain that the exchange - a pilot phase is expected to launch in April 2009 - could also allow access to a Lloyd's central data store or other Lloyd's central services.

This year saw all 250 Lloyd's and London market insurance companies and brokers sign up to the insurance market repository, with 98% signing up before the deadline at the end of October.

The decision of the entire market to participate in the IMR has been hailed as a massive success and was facilitated by business processing company Xchanging contractually agreeing to build a much bigger, faster and more robust repository system that can handle the anticipated growth in volumes of claims and business for the next four years. Stewart McCulloch, implementation director at Xchanging, says 95% of original premiums now go through that infrastructure and 20 000 documents a day of up to 100MB each are being fed through.

Lloyd's Market Association chief executive officer David Gittings says: "The whole of the market reform agenda is to make London as efficient as its international peers and remove so-called Londonisms to make it easier for brokers to place business in London. The repository goes a long way towards achieving that."

Mr McCulloch notes a change in attitudes towards developments within the market, with more individuals prepared to accept that reform, competition and modernisation are now part of the market's makeup.

He says: "To see the IMR come into fruition is amazing - it's a sign of the marketplace's maturity that all the organisations were prepared to sign up to make a major investment. London has the competitive edge - not only because we have the subscription market to share out risk and the central fund, but also things like the IMR make the risk very transparent, and the market is moving into a good place in terms of risk management."

He continues: "An awful lot of market reform is changing our platform and we want to work with the groups in the markets. When we set out, the existing infrastructure was designed for 1000 users in 100 companies doing one process. Now we have 5500 users and 250 companies doing at least four or five processes, so it has coped well but needs to progress. We are working on replacing the infrastructure of the marketplace - a new mainframe and a new backbone in terms of the IMR, which gives the market one of the most modern infrastructures in the world."

Mandatory disclosure

Never far from the minds of insurers and brokers in 2008 has been commission disclosure and with a response from the Financial Services Authority expected before the end of the the year, most are convinced that mandatory disclosure will be sacrificed in favour of a market-led solution in which brokers are made to offer clients better clarity on their right to understand earnings, as well as on whose behalf the broker is acting. The big three brokers, as well as those insurers that back mandatory disclosure, are expected to accept such an outcome as a move in the right direction.

Julian James, chief executive officer of Lockton, comments: "We think there should be as much transparency in the process as is practical and have been suggesting some form of industry guidance disclosure on request. Customers must be made aware of their rights, but there is evolution. It's an important step forward if they can come up with an industry-led solution."

In December, members of the LMBC voted to change its status to the London and International Insurance Brokers' Association. Despite fears that the LMBC's previous sponsor, the British Insurance Brokers' Association, would be sidelined by the new association and lose members, many larger brokers have given early indications that they will remain members of both. "One benefit is that when Liiba speaks, it will have a clearer constituency than it had before, which is good for everyone," comments Mr James.

Beset by setbacks in 2008, the minds behind Solvency II, as well the whole market, are expected to be focused on keeping it on track. However, the big issue for Lloyd's underwriters in 2009 will be how Solvency II will work for the subscription market.

There is ongoing uncertainty about exactly what Solvency II will finally look like and the effect it will have on carriers, levels of capitalisation and risk managers.

This year saw a number of acquisitions of Lloyd's syndicates, including the Argo's purchase of Heritage and Imagine by Max Capital, as well as Ironshore's acquisition of Pembroke from Chaucer in September. The latter was one of the largest Lloyd's deals of the year, and is expected to be among the last until capital comes back into the market and share prices improve. Robert Deutsch, Ironshore chief executive officer, is looking forward to expanding its Lloyd's platform and has confirmed that the company is eyeing up opportunities in property and marine. He says: "Lloyd's does a very good job of regulating the participants and the franchise board does an outstanding job of what it approves and disapproves. We looked at many syndicates and MGAs before buying Pembroke, and we were very encouraged by Pembroke when we eventually looked to acquire it."

He adds: "Rate increases are looking encouraging in many different areas, which is very positive, and 2009 will be a very good year for the insurance market and for Lloyd's and London as well."

A strong dollar is expected to spell good news for the Lloyd's and London market once the effects of any currency hedging that has been undertaken wears off.

Issue of competition

The competition issue has preoccupied the market in 2008 from the Competition Commission's interest into business insurance and whether the leader in the slip setting the price was anti-competitive. Mr Gittings says: "We had to persuade the CC that if the client had instructed the broker while underwriters independently priced that risk, then provided the underwriters responded positively to that, that would deal with their concerns."

Insurance block exemption also came to the fore and although as yet unresolved, market consensus is that the safety net of block exemption that cover model wordings - vital to the subscription market - is likely to be abolished. However, companies seem reassured that the European Union will not then attempt to prevent the market using model wordings. The EU is expected to respond in the first quarter of 2009.

Mr Hough says: "We were really pleased to develop this in the first third of the year and worked with LMA and International Underwriting Association to get agreed words to go into market reform contract - so these words are in all insurance placements going forward."

It can only be good news if trade bodies are working and co-operating with each other in the London market, as well as with the authorities in Europe, to come up with something that is a sensible, balanced response to the director general for competition at the European Commission.

A further issue for the market continues to be the conclusion of the premium payment improvements project designed to speed up the flow of payment of premium through the market - from brokers to underwriters.

Mr Gittings explains that the market is running a six-month pilot to see how the recommendations work before implementation next year. He admits that early feedback suggests delinking practises have been slower than expected to catch on, but says it is early days and admits the option of extending the trial period may occur. He explains: "We are anticipating that when we introduce electronic accounting later in 2009, it will solve the problem, because premium and documentation will come through electronically and it is, by definition, delinked automatically."

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