Chris Aujard looks at Lloyd's work in four significant areas - alternative risk transfer, captives, e-commerce and market distribution arrangements.
Lloyd's a definition: A market place in the heart of the City of London's financial district, the origins of which were as a coffee house run by Edward Lloyd in the 18th century. It is characterised by quaint business procedures involving brokers bringing “slips” to underwriters who sit on “boxes” in the “room”. A world centre for traditional insurance, with an emphasis on the marine sector.
This is the traditional, narrow view of Lloyd's. Does it still hold true in the face of today's rapidly evolving insurance world? Yes, in that Lloyd's clearly remains a competitive broker-driven market place, known for high quality underwriting and a strong marine sector. No, in that Lloyd's is also at the centre of a number of exciting developments.
Alternative risk transfer, usually referred to simply as ART, is the now not so sexy buzzword doing the rounds in the City. Not as easily pigeon-holed as its younger brother, e-commerce, this form of business encompasses new ways of handling risk beyond the traditional insurance policy, often using techniques and ideas developed in the investment banking world. The forms of ART which have found favour in recent years are multi-year policies, securitisations such as catastrophe-linked bonds, insurance-linked derivatives, and financial guarantee business. Many of these new products now work alongside traditional insurance as alternative solutions to the risk problems of major companies.
The emergence of ART presents Lloyd's with a range of new opportunities to expand and develop. In the short term, Lloyd's focus is on two key areas. The first is liberalising the rules regulating financial guarantee business, thus allowing underwriters to market products which combine conventional and non-traditional elements. The second involves addressing the often inaccurate external perception that Lloyd's lacks the capability to use ART techniques.
Our ART team is working hard to build a stronger skill-base in support of ART practice within the community and to educate those outside the market about the business that can and is already being underwritten at Lloyd's. We anticipate with confidence a greater deal flow in the medium term.
Another arena in which Lloyd's is making headway is its drive to develop as an alternative captive domicile. This began in 1998, with changes to the Lloyd's bylaws, providing for the establishment of captives. SmithKline Beecham set the ball rolling in January 1999 with its captive, run through the PXRE managing agency.
Following the successful roll-out of this captive vehicle, the captive team at Lloyd's is now undertaking a wide-ranging programme, aimed at educating the captive market about the unique advantages of setting-up at Lloyd's. A cost comparison document, recently prepared in conjunction with risk management consultancy RIRG Ltd, clearly showed that establishing a captive at Lloyd's is a competitive option for a large multinational organisation with a wide geographical spread of risk. As costs fall in the years to come, interest in Lloyd's is bound to grow. A variety of advisers and multinational companies have already expressed strong interest in the Lloyd's captive concept.
No discussion on business developments at Lloyd's, and any significant business for that matter, would be complete without mentioning e-commerce. The image of an electronic Lloyd's has driven many initiatives over the years and, to some extent, these have changed radically the way business is conducted. However, the face-to-face business relationship, which is a hallmark of the big complex risks often placed at Lloyd's, remains intact and is likely to do so for the foreseeable future.
Despite this, e-commerce can and does have a place within Lloyd's and will develop further as brokers, underwriters and clients become more familiar with the benefits it brings. A steering committee has been established within the market, not only to discuss and plan the future course of e-commerce but also to monitor actual developments. The joint Lloyd's/International Underwriting Association (IUA) forum is also, among other things, addressing the potential for using e-commerce as a tool to achieve greater co-operation between Lloyd's and the London companies market. Several major syndicates are actively doing business through the internet and most are planning to develop new electronic channels for doing business.
Although the broker will always play a vital role as Lloyd's primary marketing arm, traditional channels of distribution are not immune from change. It is widely recognised that Lloyd's underwriters need to shift their relationships with brokers onto a more commercial and less regulatory footing. The underwriting community is now taking a more active role in marketing its own business opportunities.
To focus attention on this process of development, Lloyd's recently issued a consultative document, entitled Developing Broker Relationships, outlining proposals on opening up access to the underwriting talent within Lloyd's. It suggests creating two categories of broker - full Lloyd's brokers, with permission to deal with the subscription market, and sponsored intermediaries, specially chosen by underwriters to do business with. So far, there has been a wide range of responses to this document, reflecting the diversification in the market as to the way business is and will be conducted.
We all hope that the exciting sense of regeneration currently pervading the market will continue well into the future. However, with constant talk of changes in the funding, structure and membership of Lloyd's, the only thing we can safely predict about Lloyd's future in this new millennium is that it will not be standing still. Perhaps, at the end of this century, we will be looking back at a Lloyd's where ART products and captives (all virtual of course) are at the heart of its business.
Chris Aujard is head, development projects, Corporation of Lloyd's.