With its square mile of talent and changing attitude to reform, could London – and Lloyd’s in particular – be the main beneficiary of the Solvency II era?
A few years ago, many were writing off Lloyd’s and the London market. Efforts to reform the business and introduce much-needed automation were stagnating, businesses were relocating to lower-tax domiciles such as Bermuda and the market was reeling from major catastrophes and growing legacy issues.
Today, Lloyd’s is where everybody wants to be. Recent entrants have come from Europe – including turnkey operators SCOR, Skuld and Chubb – although the steady trickle of Bermuda firms has also continued, including Allied World and hotly tipped White Mountains, which is reported to be establishing a syndicate for a 2011 start.
Lloyd’s 320-year history and its concentration of talent and expertise have helped to establish one of the world’s best infrastructures for (re)insurance.
Still the home of insurance
Lloyd’s director of performance management Tom Bolt drew attention to London’s benefits during a debate on domiciles at the Baden-Baden symposium in October.
“Choosing domicile is increasingly a short-term decision,” he said. “What’s important in the long term is market access and that is what London offers. We may or may not be the domicile of choice, but London is still the home of insurance. London has the largest international insurance market in the world, with a gross written premium of £245bn.
“We have something that our nearest competitors – New York and Tokyo – can’t match, which is intimacy. In our patch of the Square Mile, there are 50,000 insurance professionals.”
Nevertheless, the market has its demons, including failed technology initiatives and a lack of overall discipline. The turning point for Lloyd’s came four years ago. A £3.8bn ($7bn) deal with Berkshire Hathaway in October 2006 saw the resolution of Equitas, the organisation formed to handle the market’s 1992 and prior-year liabilities. The deal, along with the market’s business process reform efforts and Central Fund strengthening, saw Lloyd’s upgraded to A+ by Standard & Poor’s in April 2007.
The managing director of Lloyd’s insurer Antares, Stephen Redmond, says: “The genuine benefits Lloyd’s has are its security ratings, its global licences and the ease with which business is transacted, even if there remains a traditional nature to it. The market discipline witnessed in the past eight years in particular, through very expensive global natural catastrophes, has demonstrated the robustness of the Lloyd’s model.”
Looking forward, not back
The market’s earlier success with contract certainty and more recent endeavours with technology, including the Lloyd’s Exchange and endorsement pilot, which went live in September, have helped it to shrug off past failures including the £7m Kinnect platform, shelved in 2006.
Redmond also notes efforts to improve the claims process. “I hope the legacy challenges or technological failures of the past are put to one side, and that people look forward as opposed to looking back.
“London could have been fairly criticised in the past for moving at the speed of the slowest when it comes to reform and change. We don’t have that luxury any more because there are other markets in other jurisdictions that are very willing – but not necessarily able – to pick up the pieces.”
There is concern that the UK’s corporate tax regime is putting many off at a time when London could be a key contender for international (re)insurers undergoing group restructuring ahead of Solvency II.
The industry has worked hard with the government to bring down the rate of tax. In its 2010 Budget, the coalition government announced it would lower corporation tax from 28% to 24%. Chancellor George Osborne told MPs the low rates would act as adverts for the countries that introduce them.
But Graham thinks there are still challenges ahead. “We’ve got some significant tax reform taking place in how we tax international company profits. Until we get through the next 12 to 18 months, I don’t think we’ll get any companies moving back to the UK.”
Competition from other reinsurance domiciles, in particular Bermuda, New York and Singapore, could draw capital from the market. If the mooted New York Insurance Exchange goes ahead, Redmond thinks it would inevitably be a competitor for Lloyd’s. “But one mustn’t forget there was a New York Insurance Exchange many years ago and Lloyd’s ranked alongside it. Lloyd’s continued and [the New York exchange] didn’t.”
In Baden-Baden, Bolt highlighted Lloyd’s access to other markets, with licences in more than 80 territories. “If you have a super-complicated risk in a far-out part of the world, somebody in the underwriting room will know about that place and will probably have worked on that kind of risk before,” he said. “This kind of bespoke policy and the ability to syndicate the risk is going to be more and more important.”
But changing distribution channels means (re)insurance is moving fast. Big risks are increasingly retained locally and that requires a presence on the ground. The platform Lloyd’s has set up in Singapore has 16 syndicates.
Capital and capacity
Ironically, the continued interest in Lloyd’s has the potential to exacerbate the predicament. “It will chase premiums down,” Deloitte insurance partner Ian Clark says. “Lloyd’s [is looking for] new capacity to bring something new to the game.
“If someone comes into Lloyd’s from the Far East bringing business from South East Asia, that works very well. Or if another player comes in and transfers in an existing book of European business not written in Lloyd’s – that also works well. It is a signal of a good market when you get this regeneration.”
Clark predicts Lloyd’s is set to benefit from Solvency II despite uncertainty over UK corporate tax. Its main strength lies in its unique capital structure (it posts capital above that required by each syndicate) at a time when organisations around Europe are contemplating increased capital requirements. “If, as we all believe, the industry will need to hold more capital, it’s increasingly more efficient to be in Lloyd’s,” Clark says. GR