On the face of it, the Lloyd’s strategic review was a bit of an anti-climax. But then, nobody ever promised a revolution. There are challenges to face and new areas of focus, but having fared the economic turbulence so well, the plan is simple – keep doing what we’re doing
Given the media fanfare that surrounded last year’s announcement of a strategic review of Lloyd’s, readers of what was finally published last month could be forgiven for being a little disappointed.
On the face of it, the review, conducted by Deloitte and setting market priorities for the next two years, essentially promises more of the same. Lloyd’s states that its goals are: to maintain and develop the attractiveness of the market; to ensure London remains a competitive centre for financial services; to improve the operating environment, for example, through claims and electronic reform; and to keep a handle on regulation (think Solvency II).
So far, so much to be expected. But hang on. First, despite the media hype, the management at Lloyd’s said from the beginning that they were not expecting any revolutionary change to arise from the study. Last summer, when the review was announced, Lloyd’s chairman Lord Levene told GR’s sister title Insurance Times: “What may come out of this will be fine-tuning. We are not suddenly going to move into banking.”
Chief executive Richard Ward added: “We’re going to stick to our knitting: keep to the basics and remain boring when it comes to investments.”
And yet, while the headlines attached to the review may lack the wow factor, dig into the detail and there is some meat to be found.
The bigger picture is that, against the backdrop of a stuttering global economy, reinsurance generally and the Lloyd’s market in particular have remained relatively unscathed (see this month’s results season for the evidence). Lloyd’s is firmly established in the USA and the UK, which combined account for 66% of its business.
As more Lloyd’s carriers become multi-platform players, and other reinsurance centres spring up, it is increasingly becoming the home of complex and specialist risks. It remains a subscription market, with two-thirds of its business being placed via subscription, and a commitment for that to continue.
And with 45% of its business coming through the big three brokers, it has firmly established the distribution relationships that are fundamental to its survival.
The review pinpoints a number of factors in the market’s recent success. It talks of a strong balance sheet; a conservative investment strategy – in marked contrast to many competitors; underwriting discipline and a focus on underwriting profit, at the expense of volume where necessary; limited exposure to the lines most affected by the economic downturn; and, of course, an absence of major catastrophes in 2009.
But there are challenges as well. The review highlights: the need to maintain underwriting discipline; the strong ties the market has with London and the importance of the City remaining a competitive environment for financial services; the growth in importance of regional distribution centres; and the need to be more attractive than rival markets for specialist insurance, such as Bermuda.
So what next? Well, according to the review, Lloyd’s has decided to expand its geographical reach and product diversity, but, crucially, it will remain a specialist market and not chase growth in areas where it is already well-established. This means not particularly seeking growth in SME or personal lines, or any further development in the US excess and surplus lines and reinsurance markets, where it is already predominant.
Instead, Lloyd’s will be looking to grow in emerging markets, initially through reinsurance rather than primary insurance, through expansion in pre-existing markets such as China, Singapore and Japan. And it will make greater use of coverholder companies to access reinsurance business in established markets such as the USA and Canada.
Closer to home, that “sticking to the knitting” includes tough performance management to protect the central fund and the reputation of the market. There is also a focus on operation efficiencies, including the ongoing electronic reform and claims transformation projects (see Claims, page 32).
No change here
Ward has this to say about the review in its final form: “This is about evolution, not revolution. We have stood up well in the face of the worst recession since the great depression, and we don’t see a huge necessity to change direction.
“The Lloyd’s subscription model, backed by a layer of mutual security, is serving us and our customers well, as is our location in the heart of the London insurance market.”
The review should perhaps be seen as an internal audit, an exercise to check, rather than simply presume, that the market is on the right course. Because, as Ward implies – if it ain’t broke, why fix it? GR