With the pressure mounting from rival jurisdictions and constant in-fighting hindering progress, is London's heyday over? Nick Thorpe investigates some of the main challenges facing the market.
Insurance accounts for a third of the gross domestic product of the City of London and employs some 50,000 people, according to International Financial Services London. Patrick Snowball, group executive director of Aviva UK has called it "the last great industry in this country". Yet the market is in the midst of a talent crisis and has yet to give its full backing to technology and the inevitable push to automate its processes. So can the market survive and what measures is it taking to address the growing needs of an increasingly demanding industry?
Age old debate
The London versus Bermuda debate has raged for some time now, the media quick to highlight any perceived clash between bowler hats and garish shorts. On the surface Bermuda seems to have it all - white beaches, endless golf courses and attractive tax breaks. This is in contrast to deplorable public transport, constant security threats and a minefield of regulation in London. But Dan Glaser, managing director of AIG disagrees with that popular assessment. "I think you can underestimate where people want to live. London has a definite advantage over Bermuda - time zones, the spread of different businesses, a huge talent pool, and quality of life."
The main stumbling block for London in competing with Bermuda appears to be its regulatory and tax burdens. Bermuda has the obvious advantage of a zero tax regime, although its looser regulation is not considered a bonus by everyone. As Stephen Catlin, chairman of Catlin put it, "It is a lot easier to do business in a well-regulated environment." Speaking at a recent UK Financial Services Authority (FSA) event in London, he said candidly. "I won't lie to you; regulation was not a factor in our redomiciliation in 1999, it was the tax regime in the UK. We would come back onshore tomorrow if corporation tax was 0%."
But whilst the favourable tax regime of the island is an obvious draw for businesses looking to grow, Catlin refutes claims that the redomiciliation of companies will take business away from London. "In my experience, very few people who have moved to Bermuda have ceased doing business in London. It's just not a viable business model." David Gittings, chief executive of the Lloyd's Market Association (LMA) agrees. "No one has gone to Bermuda and taken their business with them. They have redomiciled there for sure but they have also carried on doing business in London."
But the dynamics could be about to change - in London's favour. The recent $12bn expansion of the Florida Hurricane Catastrophe Fund is expected to cost Bermudian's $2bn to $3bn, and the mad scramble to reallocate the stranded capacity might give London the edge, especially when considered alongside the recent sale of Equitas to Warren Buffett's National Indemnity for $7bn, effectively relieving the London market of run-off liabilities that had in some cases hung around its neck since as far back as the 1930s.
The FSA's recent drive towards contract certainty, an attempt to avoid further fiascos such as the coverage dispute involving the World Trade Center and Swiss Re, is on course to end the "deal now, detail later" model. The project was notable in the fact that rather than implementing a new set of regulations, the FSA challenged the industry to become contract certain by themselves. The tactic worked and saw an unprecedented industry response with staunchly pro-London insurer Brit announcing in early January it had become the first company to be 100% contract certain. However, when compared to London, the youth of Bermuda is arguably "making the market faster and more flexible than the London market," according to Warren Cabral, managing partner at Appleby. "Generally, Bermuda has been increasing its levels of regulation," Cabral added. "Perhaps the two regimes will meet in the middle. That is the virtue of competition, including regulatory arbitrage between legal domiciles."
While the FSA pursues a more hands-off approach to regulating the insurance industry, there remains a raft of more ingrained regulatory pressures in the UK. Certainly the investigations by Eliot Spitzer in the US and the current investigations into business insurance by the European Commission have only added to organisations' long list of concerns and, when coupled with the increased cost of doing business in London, cheaper and more softly regulated insurance centres can seem more attractive. "Certainly for new operators, the tax, regulatory and cost regime of their HQ will be an important factor in deciding where to locate," said Cabral.
The FSA is in the midst of reshaping the UK's financial services industry by rolling out "principles-based regulation". Put simply, this approach consists of 11 main principles which articulate the actions and behaviours that the FSA expects from firms, essentially shifting the emphasis from how they get to the outcome to just "the outcome". As John Tiner, chief executive officer of the FSA, confirmed, the new regime will make companies more responsible for regulating themselves. "Principles place the responsibility squarely on the shoulders of firms' senior management," he said.
Although still not short of detractors, the transition to a more hands-off approach has gradually been accepted by an industry that has witnessed an eventful few years. "The outcome of a principlesbased approach has to be client confidence in the industry. We protect people's dreams - regulation cannot transcend those emotions," said Joe Plumeri, chairman and chief executive of Willis. "Leaving an auditable paper-trail is, clearly, imperative in this post-Spitzer environment," added Richard Garnett, managing director of Yellowblox.
With regulatory changes affording the London market a rare chance to transform itself, there have been renewed efforts to revisit the automation conundrum that has been troubling the market ever since the doomed Kinnect project breathed its last sigh. Announced in 2001, Kinnect was a much-heralded attempt to convert brokers and underwriters to an electronic platform. It was pulled in January 2006 after repeated hurdles and a widespread reluctance to adopt the system. "The modernisation of the London market is now imperative," agreed Garnett. "Had Kinnect succeeded, we would not be having this conversation now. In fact some people estimate that the failure of Kinnect has put the London market back more than five years."
For a market that writes almost $60bn business a year and is, according to Lloyd's, "the largest single contributor to UK financial sector exports," it is no wonder that outsiders stare in disbelief at the bulging files being carried around Lime Street, Leadenhall and Mincing Lane. The cultural resistance to the introduction of new technologies and, consequently, a new way of doing business is palpable within the industry, according to Gittings. "Culturally the market has traded face-to-face for over 300 years and there is a definite resistance to change," he explains. "But all we are talking about is the exchange of information and how we communicate. I think at the end of the day people are worried about what this change means for them and their jobs."
Efforts to automate the market have been noteworthy in their failures in the past and it is only with the emergence of providers such as RI3K, The Insurance Workplace, IBM and eReinsure, along with the use of ACORD standards, that an automated London market finally looks like becoming a reality. Richard Ward, chief executive of Lloyd's and known for his support of technological solutions, has made no bones about the state of play: "Over the past year, the London market has demonstrated that it wants to change and there is clear evidence that progress is being made, but the pace of change is still too slow." Ward has a stated aim to have all new claims processed electronically by the end of 2007, backed up by the introduction last year of an "electronic filing cabinet", a document repository that enables claims and premiums to be handled quickly and efficiently without the need for paper files. As of March 2007, over a quarter of all premium transactions in the London market were being handled electronically.
Elsewhere in the market, Lloyd's syndicate group, the Group of Six (G6), became the driving force behind getting the market to adopt ACORD standards, allowing the electronic transfer of data and documents between syndicates and brokers on a peer-to-peer basis. And the broking community quickly came on board, with Aon signing up to peer-to-peer and shortly after announcing its intentions to move to a full electronic trading capability. Benfield later announced it was ready to provide live risk messaging to all G6 members. And most recently, Lloyd's teamed up with RI3K to allow all of the business placed through its new Shanghai office to be handled electronically, providing the clearest signs yet that Ward's drive for automation may finally be coming to fruition. "Here, in one bound, Lloyd's is showing that the industry's most important market is also hell bent on becoming the most modern," agreed Alex Letts, chief executive of RI3K.
Last chance, London
The one thing that unites every market, whether it is London, Bermuda or the Middle East, is the need for talented staff. At Lloyd's, for example, the LMA is driving a new graduate recruitment process with a dedicated website and charm offensive aimed at university career departments, according to Gittings. But the drive to lure graduates back to the industry is one solution to a wider problem. Competition for intellectual capital and the search for qualified staff consistently tops surveys as the number one issue for insurance companies, both in London and Bermuda. "The competition for human talent worldwide is acknowledged to be a factor in the driving up of salaries for professional people," adds Cabral. If the London market is to continue moving forward and remain competitive, it has to address the most basic issues first, starting with how to retain the talented claims professionals that make the market so successful.
- Lloyd's calls for further tax breaks
- Lloyd's pilots automatic slip checking
- S&P upgrades Lloyd's to "A+"
Timeline to Lloyd's upgrade
20 October 2006 - Lloyd's announces deal with Berkshire Hathaway's National Indemnity Company to reinsure Equitas' liabilities for £3.8bn ($7bn), effectively ending the legal liabilities of Lloyd's and bringing finality to Names reinsured by Equitas. S&P revises outlook on Lloyd's to positive from stable.
28 March 2007 - Fitch ratings upgrades Lloyd's insurer financial strength rating to "A+" from "A" with a stable outlook. Fitch previously regarded the potential for reserve deterioration through Equitas as being a significant drag on the Lloyd's ratings.
29 March 2007 - AM Best affirms "A" insurer financial strength rating of Lloyd's, but stops short of an upgrade.
23 April 2007 - Standard & Poor's upgrades Lloyd's to "A+", citing the "unstoppable momentum behind improving London market business processes" and the successful completion of phase 1 of the Equitas transaction.
The numbers - how London and Bermuda compare
Benfield has estimated that the net income of the 40 largest insurance companies in Bermuda totalled $11.6bn in 2006 in stark contrast to the loss of $2.1bn reported in 2005. Total premium income topped $58bn and the combined ratio for the group was down from 116.6% to 86.3%. Almost all companies recouped their losses from the 2005 storms, leading to spectacular share buybacks and generous dividends.
London, meanwhile, at the last count, had a conservative gross premium estimate of $52.8bn (£26.7bn) in 2005, with Lloyd's accounting for $29.4bn (£14.9bn) of that. Although total figures for 2006 are not yet available for the London Market, Lloyd's has reported gross written premiums of $32.4bn (£16.4bn) and record profits of $7.1bn (£3.7bn). This led to a combined ratio of 83.1% for Lloyd's which chief executive Richard Ward readily pointed out was almost three percentage points below that of Bermudian reinsurers and 12 below that of US reinsurers. "This result is clear evidence of the flexibility, responsiveness, resilience and underlying financial strength of the Lloyd's market," added Ward.
So when faced with cold hard figures, there isn't a lot of daylight between the two jurisdictions.
Source: Global Reinsurance.