Despite challengers, all international roads still lead to London, reports Adrian Leonard

London has declared itself to be at the centre of the global re/insurance industry for decades, perhaps centuries. Although new locations - notably Bermuda - are challenging London's pre-eminence, the evidence shows that London remains a healthy nerve centre for international risk transfer business, and especially reinsurance and wholesale insurance. Localisation of underwriting and the favourable tax treatment of companies domiciled in Bermuda and Dublin have not made London redundant. Every one of the world's 20 largest reinsurance groups is represented in the City, and almost every new company with global ambitions has raced to London.

New entrants

Consider the new Bermuda companies. Almost without exception, they have dashed to London for a piece of its action, as well as to recruit from its pool of highly experienced underwriters. Allied World Assurance Corp, the 'Class of 2001' member sponsored by AIG and Chubb, opened a branch office in London in late August this year. AWAC will use the branch to 'passport' into the London market under EU home-state supervision rules, using its year-old licensed European reinsurance subsidiary in Dublin.

Although little open market international business is traded in Dublin, authorisation is rather easier to obtain in Ireland than it is in the UK, and tax treatment is favourable. This combination has made the city a popular stepping-stone into the London market. AWAC will write London market reinsurance from an office in Billiter Street, led by Michael Baldwin, a former Chubb vice president and a veteran of the UK's Royal Insurance.

AWAC is only the latest to follow the Dublin to London strategy. Axis Capital, run by the former Lloyd's underwriter and market personality John Charman, opened a London office in June 2003. Now licensed in its own right, Axis 'Global Insurance' no longer needs to passport in from Dublin, although an additional Axis representative office takes some business back to the Bermuda balance sheet. The London company is run by Jack Gressier, an old colleague of Mr Charman who first underwrote beside him at Lloyd's 15 years ago. The operation is located in Minster Court, site of the London Underwriting Centre.

Exactly two years after terrorists crashed into the World Trade Center, Endurance Worldwide Insurance announced it was moving into the same building in London, making Minster Court its "permanent headquarters," and increasing the concentration of new Bermudians in London. Chief executive Mark Boucher (another former Royal man) had taken up his post almost a year earlier, in late 2002, when the Bermuda parent received authorisation to operate in the UK.

A few months earlier, Arch Capital incorporated its UK operation in Bishopsgate in London. It is led by Bob Van Gieson, another Chubb veteran, who has recently staffed up the operation with high profile underwriter appointments in speciality areas including D&O, CAR/EAR, and (with another underwriter from the Royal) offshore energy. The company isn't exactly new, but it has managed to escape all of its underwriting from 2002 and prior, and grow very rapidly with a clean balance sheet. To support that growth it announced in late August the appointment of Nick Metcalf as director of underwriting for Europe. Previously, Mr Metcalf was chief executive of XL London Market, the Bermudian giant's shrinking Lloyd's operation (see below).

Another not-quite-new Bermudian London player is Aspen Re. It was born of the Wellington Managing Agency at Lloyd's, and had Wellington's reinsurance book as its foundation. Aspen never really left London, despite its Bermuda registration: Aspen Re is a subsidiary of a UK company, and its key executives reside in London. Parent Aspen Insurance UK is the largest independent FSA approved reinsurance company in the UK, Aspen says. It continues to grow, most recently by stating its ambition to enter the London aviation insurance market. In addition, the company has established a physical, licensed presence in the US through Aspen Specialty Insurance and Aspen Re America, finally launching a major UK reinsurer onto the international stage, filling a void left by Swiss Re's acquisition of M&G Re in the late 1990s.

Montpelier Re has no London underwriting operation, but it has opened a UK contact office on Fenchurch Street, putting it close to its London cedents. DaVinci Re, the class of 2001 invention of Renaissance Re, is the only Class of 2001 member to have eschewed London completely, although catastrophe-focused RenRe has been wildly successful itself without launching in EC3. Its Dublin office has been sufficient to service its European clients.

Quanta, the newest Bermuda open-market reinsurer, has established a London representative and services office, which has just been moved to permanent premises in Seething Lane. Quanta looks set to follow the well-trodden path from Ireland to London, having obtained a licence to underwrite in Dublin through its Irish subsidiary. At the time of writing it had not yet obtained authorisation from the Financial Services Authority to underwrite in the UK, but sources say the company hopes to be active in the fourth quarter of 2004.

Entering Lloyd's

If this is not achieved through the company market, Quanta may underwrite in Lloyd's. In August 2004 it registered Quanta At Lloyd's Ltd, the corporate name which could be used to back a mooted £80m professional liability syndicate. Risk-based capital ratios imposed by Lloyd's centrally may have an impact on the choice of Lloyd's or the company market, however.

Regardless of the platform, a key underwriter on the team will be Mark Wheeler, recruited from Lloyd's managing agency SVB earlier this year, and whose year of gardening leave has recently expired.

Many of the Bermudians who came to the London market in earlier years also ventured into Lloyd's, with mixed success. Mid Ocean Re was one of the first into 1 Lime Street, buying a stake in the managing agency Brockbank in 1996. It has since moved most of the business into the London company market, and downsized the Lloyd's syndicate. The remainder, XL London Market, writes typical Lloyd's business, primarily marine speciality lines.

The rest is handled by XL Capital's London company market operations, which include XL Re and several insurance businesses. In the summer of 2004 they all moved into a brand new office building on Gracechurch Street.

XL Re's London business is its largest, including the continuing London market business of acquisitions Mid Ocean Re, CAT Limited, and NAC Re.

Ace also came to Lloyd's, buying the managing agencies Methuen, Ockham Worldwide, and later Charman. The latter consolidated the Bermudian company's new Lloyd's holdings, but it too has downsized, moving business into the company market. Others have done the same, notably Markel, which inherited the former Octavian syndicates. Australian insurer QBE acquired the agencies Bankside and Janson Greene with its purchase of Limit, but following a recent reorganisation it too looks set to put more emphasis on the company market. However, all these foreign investors remain important players in Lloyd's.

Despite the successes, the outcome has not always been good for the companies that invested in Lloyd's, for the market itself, or for London's reputation.

Since 2001, the Council of Lloyd's has undertaken to pay some £776.4m from the New Central Fund, the market's mutual guarantee account. A very large share of that bail-out money can be chalked up to insurance company ventures into the market from Bermuda and elsewhere. For example, Bermuda's Stockton Re (now in run-off) moved into Lloyd's in the late 1990s to back the Crowe syndicates, but left the Central Fund to pick up a tab of £86.7m for its liabilities.

Other failed insurers, such as Australia's HIH, backer of the Cotesworth syndicate, have cost even more. Cotesworth's Central Fund claims so far total £381.2m, after HIH collapsed. The next-largest Central Fund hit was the Shrewsbury vehicles backing the dedicated stamp capacity of US insurer Alleghany's Venton agency (later Alleghany Underwriting). They saddled the Central Fund with £138.2m in liabilities in 2002 and 2003.

US insurer Unum is out of Lloyd's too, its failed venture Duncanson & Holt having cost the Central Fund £129.8m, although Unum continues to trade.

Behaviour modification

The franchise directorate at Lloyd's is taking strong action to prevent these sorts of underwriting calamities from occurring again. The measures are varied and wide-ranging, and include efforts ranging from the review of syndicates' business plans to the limitation of qualifying quota share reinsurances. Most recently, Lloyd's has embarked on a new process to build a direct relationship with international coverholders, those insurance intermediaries granted binding authority by Lloyd's underwriters.

Binding authorities granted by Lloyd's (and by company market underwriters) allow foreign agents to accept business on behalf of London, and serve to extend significantly the reach of the market. This is most important in the US, where managing general agents typically accept speciality business from retail brokers and manage the documentation and claims on behalf of London. For Lloyd's, premium from delegated authorities granted to about 2,300 coverholders with 5,000 binding authority contracts is expected to generate gross premium income of £3.6bn in 2004, about a quarter of total income.

However, when binding authorities go wrong, they can go catastrophically wrong, so Lloyd's centrally has intervened. In February 2004, the Council of Lloyd's passed a new byelaw governing binding authorities, and in the late summer it began to communicate directly with US coverholders for the first time. By year end all US coverholders (and eventually all Lloyd's coverholders) will be obliged to enter a contractual relationship with the Corporation of Lloyd's in the form of an 'undertaking'. Those that do not sign the document will be unable to renew their binding authorities.

The undertakings, which were sent out in the late summer, set out the expectations Lloyd's has of its coverholders, with a view to protecting Lloyd's reputation. They also give the Lloyd's market new audit powers over coverholders, although the Corporation is quick to explain that it expects managing agencies and coverholders' sponsoring brokers to take responsibility, and will intervene only as a last resort.

LMP reforms

Market-wide reforms include the well-documented London market principles, a set of initiatives to improve London's service levels and efficiency.

Unlike the internal decrees of the Lloyd's franchise directorate, market-wide initiatives are voluntary. The International Underwriting Association of London, the body which represents re/insurers operating outside of Lloyd's in the London market, is unable to impose its will on members.

However, it has been a key player in driving the London market reform process, and most of its members have been supportive of the ongoing efforts to overhaul market practice.

The highest-profile of these is the introduction of a consistent placement document, the so-called LMP slip. Its use is intended to ensure contract clarity and certainty at the time of placement. Lloyd's made use of LMP slips mandatory from January 2004, albeit with a number of exemptions, and by about mid-year its use in the Lloyd's market exceeded 80%. However, the quality of the LMP slips has been inconsistent, so Lloyd's announced a new initiative in early September to check up on them. An 'action team' of 'LMP slip auditors' will check about one in four slips for errors and omissions just days after the lead underwriter has accepted the risk.

LMP slips (and the less widely implemented general underwriters' agreement, which outlines the authority granted to the lead underwriter to make decisions on behalf of followers) address the front-office concerns over London's business practices. Back-office inefficiencies are also being addressed, through a set of initiatives including London's accounting and settlement reforms, launched in July this year. The goal is to move to full electronic processing of accounting and settlement transactions between brokers and re/insurers. A key element of the process has been to adopt ACORD electronic message standards, which will help speed up information flow and settlement.

Reform projects covering claims and documentation are also underway.

Positive

Even as it reforms, London is making barrel-loads of cash, driven by the global hard market. IUA statistics reveal a positive cash flow in excess of £2.5bn for the company market in 2003, representing a 25% increase over 2002. Ins-sure Services, the London market's joint processing bureau formed through the merger of the Lloyd's back office with the company market's London Processing Centre, recorded company market premiums of £5,557m, up from £4,199m in 2001. Claims processed reached £2,893m, down 18.5% from 2002.

Lloyd's has performed admirably too. For 2003 it reported earned premium of £11,711m, up 9.8%, which yielded a profit of £1,892m, up 127%. Interim reports by various market participants so far in 2004 indicate an even stronger performance this year: Brit Insurance (which also operates in the company market) reported an interim profit rise of 69%; Kiln's profits were up 61.4%; Wellington was up 33%; and Amlin reported a 17.2% rise, to name only four.

It is not unusual for London to report good results when international re/insurance markets are healthy overall. Likewise, its performance tends to be catastrophic during soft cycles (although a few entities are consistently profitable). At the moment, confidence is exuded from every side street and alleyway of London postal district EC3, which has clearly not lost its position as the heart of the international insurance sector. However, it is by no means certain that the current market reforms, the discipline instilled by the Lloyd's franchise directorate, and the influx of new underwriting entities with sophisticated risk analysis skills and bottom-line targets will allow London to break its traditional role of leading the international market into the depths of the pricing trough. Only time will tell if that has changed.