Captives will form part of a diverse membership in the Lloyd's of the future. Nick Doak explains.
In Lloyd's recently published three-year strategic plan, Priorities for Growth, the Lloyd's Market Board, (LMB) rejects the view that Lloyd's will consolidate into a loose “bourse” comprising a handful of businesses. “More than 30 insurance and reinsurance companies have acquired interests at Lloyd's already. We also expect that diverse sources of private capital will ensure some businesses are independent of any outside insurance interests. Others will be captives or specialists in alternative risk transfer techniques. We foresee at least 50 underwriting businesses operating within Lloyd's and possibly a considerably larger number,” says the LMB.
This commitment to further development of Lloyd's as a captive domicile recognises clearly that the future shape of any insurance market is going to be vastly different from that of its past. Perhaps nowhere else in financial services has so much changed so rapidly as in insurance in the last decade. The days of “a premium for a policy”, more or less take it or leave it, have gone. In its place have come a multitude of alternative risk products, of which captives have perhaps the longest history, coupled with great future potential.
In the 1998 Captive Insurance Directory, Tillinghast-Towers Perrin lists some 3,966 captives, an increase of 171 on 1997, despite a soft market. It is estimated that the premiums paid into captives in 1997 were £11.2 billion ($18 billion) and their aggregate invested assets were £60 billion ($104 billion). The majority of Fortune 500 and FTSE 100 companies now have them. Why domicile them at Lloyd's?
From the outset, Lloyd's believed it would prove attractive to three main categories of customer. First, UK-based multinationals, whether they are seeking to establish a captive for the first time or have decided to move their captive operations, or part thereof, back on-shore. Second, European and US multinational corporations that are seeking access to the London market or wish to start writing third-party business. And, third, corporations from Asia and from other emerging markets, where Lloyd's has a strong brand appeal and where, coincidentally, the formation of captive structures is at a relatively early stage.Many of these companies may at first only want to dip their toes in the water, as it were. But the hope is that eventually, as they recognise the depth of expertise and the other benefits available within the market, they will expand their Lloyd's commitment.
The first captive
The programme for admission of captives to the Lloyd's market was a very tight one. It was in the middle of the year that the chairman, Max Taylor, first publicly laid out Lloyd's intentions at a speech to the Luxembourg Rendez-Vous, albeit work had been under way since the previous year.
By the end of 1998, just in time to meet regulatory requirements, SmithKline Beecham (SB), one of the world's leading healthcare companies, became the first company to establish a captive syndicate at Lloyd's, working with Amlin Capital Management (ACM) which acts as the syndicate's managing agent. The syndicate will write a substantial proportion of SB's risk portfolio throughout the world.
In its announcement, SB cited precisely the reasons Lloyd's had postulated as advantages it offered to captives: - spread of licences, no fronting fees, Lloyd's ratings and capitalisation by letter of credit rather than cash.
Commenting on SB's admission, Alastair Rodger, the director responsible for captives at ACM, said: “SB will be the first of an elite group of substantial multinationals from around the globe who will benefit significantly from the advantages that Lloyd's offers.”
One of the prime considerations for any multinational seeking to operate within the market is the extensive network of licences that Lloyd's has built up over the 300 years of its history. Lloyd's is currently authorised to write business directly in more than 60 territories around the globe. As part of the Lloyd's market, therefore, a captive syndicate would derive enormous advantages in those countries where Lloyd's has licences, not only by saving on fronting fees but also by enabling policies to be written on a standard format worldwide.
Further benefits will include: Lloyd's market-wide ratings from Standard & Poor's and A.M. Best; possible savings in excise taxes and withholding tax where Lloyd's has a licence and the UK has a double tax treaty; and the saving of being able to support underwriting at Lloyd's with letters of credit.
In addition, Lloyd's offers a considerable range of intangible advantages resulting from its position right at the heart of the global insurance market. For many multinationals with London offices, Lloyd's represents a time-efficient way of controlling their self-insurance operations. In particular, Lloyd's provides access to the world's greatest single concentration of underwriting expertise and innovation, with enormous potential benefits, especially for those who are seeking to write third-party business and for those who wish to employ Lloyd's capacity and expertise as a reinsurer.
This breadth of expertise will prove a powerful draw for captives. Furthermore, Lloyd's will offer a wide range of benefits from the captive service providers that are being established within the market.
Lloyd's gains, too
What benefits will Lloyd's gain from admitting captive syndicates? To be of lasting value, any business relationship must be mutually beneficial. For Lloyd's, captives are a key strategic and commercial initiative as it builds its business to meet the challenges of the next century.
Customers, from private individuals to multinational corporations, are growing in sophistication, and sophisticated customers have always been Lloyd's natural clients. The challenge is to create sustainable competitive advantage based on Lloyd's unique characteristics while embracing new risk management mechanisms both as a commercial necessity and as an exciting opportunity. The way in which customers buy insurance has changed.
In personal lines, insurers, banks and other financial institutions selling direct are increasingly courting individuals.
At the other end of the spectrum, multinationals have at their command a wide number of risk management options. That is why Lloyd's is expanding the range of risk management tools that it offers and streamlining its distribution system.
Providing a domicile for captives is a crucial missing link in the Lloyd's chain of products and services. Lloyd's needs to provide this service to strengthen relationships with a key customer base and to enhance responsiveness to their needs. Captive syndicates will bring fresh opportunities for reinsurance and will enable underwriters to run their larger clients' entire risk programmes through the market.
It remains to be seen how large Mr Rodger's elite group of substantial multinationals will become, or what other non-traditional insurance products will emerge from the market. Even allowing for Lloyd's well-established reputation for innovation and flexibility, the answers to both questions will still have the capacity to surprise.
Nick Doak is manager, media relations, Lloyd's. Tel: +44 (0) 171 327 1000.