James Sutherland explores some of the factors behind Lloyd's remarkable growth in Asia, and examines ways in which Lloyd's underwriters are beginning to work more closely with local markets.
For the first time in its 300-year history, Lloyd's has broken through the $1bn barrier in Asia-Pacific. In 2001, the market collectively underwrote $1.37bn in gross premiums in the region, up 42% on the year before. That represents a huge year-on-year increase in any context, but it is a particularly striking development for Lloyd's, a market which is traditionally seen as heavily reliant on the UK and US for its income.
Lloyd's involvement in Asia is wide-ranging, but three characteristics distinguish Lloyd's business there from its activities in other regions. First, the majority of Lloyd's Asian income is comprised of reinsurance, rather than direct premium. It is well documented that Asia suffers one of the highest levels of exposure to natural perils in the world, ranging from earthquake exposure in Japan to typhoon and flood risk in the south. Lloyd's, as a global reinsurer, has gained considerable experience handling such catastrophe exposures in other parts of the world, and thus can deploy extensive expertise in Asian markets.
Second, Asia is more important to Lloyd's than other regions as a source of transportation and energy risks, two areas in which Lloyd's expertise is well known. Third, while most of Lloyd's Asian business is reinsurance, underwriters have been steadily increasing their direct writing in recent years (except perhaps in Japan), as they increase their involvement in specialist insurance lines.
The increase in Lloyd's Asian portfolio is down to more than just chance. One of the drivers behind the growth is strategic. Currently, around two-thirds of Lloyd's business emanates from just two countries: the UK and US. However, despite the currently attractive market conditions in the US, there is a persuasive argument that Lloyd's would benefit from a more balanced global portfolio.
This view, currently expressed by a number of Lloyd's syndicates (the underwriting businesses within the market) was only reinforced by the impact of the terrorist attacks on the US on September 11. Further, the Asian economy is expected to grow more quickly than the rest of the world over the next three years. This is especially true of north-east Asia, where China stands out as both the largest economic market within the region and the fastest growing, with a forecast growth rate of around 8% to 2006. As a result, a number of market players are actively seeking to expand their Asian business, arguably a marked shift from before, when Lloyd's capacity tended to be more opportunistic, moving in and out of Asia depending upon the prevailing market conditions.
Yet timing is another key factor behind the increase in Lloyd's Asian business. One year ago, rates in most lines of business in Asia were relatively unattractive to insurers. Lloyd's underwriters generally regard Asia as lagging behind the more mature insurance markets in terms of the insurance cycle, perhaps by 12 to 18 months. Prices in the region were notoriously cheap for a long time, and 11 September understandably had less of an impact on insurance rates in Asia than elsewhere. As Lloyd's underwriter Neil Wray, chief executive of the Catlin agency's Singapore operation, says: "Even in the age of cable television and the internet, geographical separation understandably made the immediate impact much less pronounced."
However, that has changed in the last year. Mr Wray further explains: "The process of catch-up is now gaining considerable momentum, and we are probably on the cusp of a real hard market." With a shortage of global reinsurance capacity generally, and evidence of a squeeze in Taiwan (and possibly Indonesia and the Philippines), prices look set to continue to rise.
Rates to rise 44%
Recent research commissioned by Lloyd's and sponsored by the UK government backs up the view that the market is hardening.
Virtually all of the Asian brokers, corporate clients, and risk carriers interviewed in the study expect prices to continue rising throughout 2002, by 44% on average, and ranging from 32% in Hong Kong to 52% in Singapore. Lloyd's underwriters are poised to take advantage of these conditions. Damien Smith, treaty reinsurance underwriter at Hiscox, expects rates to continue to harden throughout 2003. Catlin's Mr Wray is also cautiously optimistic. "Hard market duration is extremely difficult to predict, but rates should not plateau until 2005," he says.
In addition, Lloyd's is experiencing greater demand for capacity from the Asian region for certain lines of business. The research reveals dissatisfaction among brokers in Australia and the rest of Asia (with the exceptions of Hong Kong and Singapore) over the availability of market capacity generally. This has been exacerbated by the collapse of Australian insurers, which were active in the Asian market in lines such as professional indemnity, and the subsequent scaling down by other carriers of their presence in the region.
In countries where Lloyd's is unlicensed, its approach is to work in partnership with local insurance companies. Instead of writing direct insurance business, underwriters in London can take advantage of local market knowledge and the established distribution infrastructure, developing niche products through facilities or facultative reinsurance. Dominick Hoare, joint active underwriter at Watkins Syndicate, believes it is a model that works well, enabling the syndicate to access those risks that benefit from specialist expertise, even in the absence of a primary broking network.
At the same time, this partnership approach means that Asian insurers can offer new, innovative and customised insurance products, based on intellectual property accumulated and developed in other markets, through their activities in other parts of the world. As Mr Hoare states: "The aim is to add value, rather than simply adding capacity." Typically, these products are developed co-operatively, and offered through quota-share arrangements, facultative contracts, or other partnership structures.
Ultimately, however, the expectation of Lloyd's underwriters is that the whole business dynamic will shift as the Asian market matures and becomes better populated by professionally trained experts. As the local market retains more risk, the buying pattern will move towards developing excess-of-loss links with global reinsurers. For Lloyd's underwriters, the aim must be to build and develop a local market for specialist risk, which complements the domestic market, rather than competing with it.
For direct business, binding authority arrangements (where underwriting authority is delegated to a local broker) often provide the best means for a Lloyd's syndicate and a local market partner to work together. As at July this year, Lloyd's had binding authority arrangements in place with 165 brokers in region, 129 of which were in Australia and New Zealand, and most of the remainder in Hong Kong. Although in recent months the capacity crunch and the need to return to profitability have forced underwriters to make some difficult decisions about how to allocate capacity most effectively, a significant amount of Lloyd's business worldwide is done on this basis, and a number of these arrangements continue to flourish across Asia. Managing agents are quick to emphasise the time and effort they invest in such relationships, and see a two-way education process as crucial.
A number of Lloyd's managing agents also opt for a permanent physical presence in the region. In Singapore, three managing agents have established a presence as part of the Lloyd's Asia project, which received full regulatory approval from the Singapore authorities in February 2002. Catlin is among the three, and also has an office in Malaysia. The Watkins syndicate underwrites for the region using Singapore as a base, and has a service company in Hong Kong. Underwriter Dominick Hoare summarises their strategy: "A strong local profile underlines our long-term commitment to the region. Business can be locally serviced, and we can share expertise and knowledge with the market." Indications are that local presence also leads to the syndicates seeing better quality business, rather than that which has simply been declined by local insurers.
Lloyd's underwriters expect increasing Asia-Pacific business volumes in a number of specific lines of business. The study shows that 80% of local industry professionals expect demand for liability cover to soar in the region over the next two years, with the most likely growth areas being general liability, D&O, professional indemnity, and professional liability. Lloyd's already enjoys success in specialised professional liability in Japan, for example, where the focus of Lloyd's underwriters has been on professions and classes of business that are not comprehensively served by the local market (such as errors and omissions cover for computer consultancies and software developers). Marine liability is another specialist area seen to offer opportunities within Asia, and the Watkins syndicate has recruited a new marine liability underwriter this year as a result.
However, Lloyd's research also indicates that other key specialist lines will grow. These include political risk, energy, construction, and transportation. In addition, fuelled by September 11, the local market anticipates increased demand for terrorism and business interruption insurance. These views seem to match with the experiences of Lloyd's underwriters who specialise in the region. Catlin Asia, supported by several other Lloyd's syndicates, has recently completed a new facility which provides cover for Singaporean terrorism risks, given the scarcity of local capacity. Catlin is working with local companies to promote and distribute the product, both on a reinsurance and a direct basis.
Similarly, Catlin and others have identified opportunities for London to expand its role in the energy sector, following the lack of treaty capacity for the class. The agency has recently seconded an energy underwriter to Singapore to cope with the expected increase in demand. Watkins Syndicate Singapore's energy underwriter has now been based there for two years, and has already led business in the region.
There is also evidence that new, typically small to medium-sized energy risks in Western Australia are coming to Lloyd's through the Singapore hub. With so much upstream exploration underway in Asia at the moment, and the development of new technology to drill deeper offshore in the region's largely unexplored waters, Lloyd's is set to increase its underwriting over the longer term.
There is clearly a growing appetite for Asian business in London, as the Asian insurance industry finally emerges from the protracted soft market, and as insurance infrastructure develops there. As Hiscox's Mr Smith explains: "The problem in recent years has been inadequate pricing, rather than a lack of capacity, so as long as premiums increase to acceptable levels, then I expect Lloyd's reinsurers will write more Asian business."
Today Lloyd's underwriters sense that Asia is perhaps following in the footsteps of Australia, which was a mere fronting market only 20 years ago, but is now at the cutting edge of underwriting.
Similarly, just a few years ago, insurers in the rest of the Asia-Pacific region offered only a handful of products, but today the pace of development is rapidly increasing. Deregulation is the key to that development, and Lloyd's is supportive of regulators' attempts to raise professional standards, which it expects to contribute towards improved technical underwriting and sophisticated management skills in the region.
Ultimately, Lloyd's is optimistic about the future of the Asia-Pacific region, and, collectively as a market, it is investing considerable effort in the development of appropriate business partnerships. Improving pricing conditions are expected only to drive further growth in Lloyd's Asian portfolio, and lead to even stronger business relationships between the two markets in the future.