Even by the standards of the reinsurance industry, Lloyd's has seen dramatic change in the past few years. While everyone acknowledges that these processes have brought greater discipline and financial strength to the market, some people are concerned that it could lose its long-established reputation for innovation and individualism. David Clarke argues that the fears are misplaced.

The Lloyd's market is often cited as a microcosm of the international reinsurance industry. With so many of the world's top companies represented there, and more than 150 syndicates trading in the same open plan building, it has a greater concentration of underwriting skill and reinsurance activity per square foot than anywhere else in the world.

Lloyd's has, of course, had its share of the industry's troubles. Although the crisis brought about by losses totalling more than $12 billion in the late 1980s and early 1990s is now over, the market has had to reinvent itself. The process leading to the Reconstruction and Renewal Plan (R&R), which brought the crisis to an end in 1996, made some fundamental changes. These included the introduction for the first time of corporate capital and the creation of Equitas, the world's largest reinsurance run-off company, to cover all liabilities from 1992 and earlier.

Radical as these developments were, however, they marked only the beginning. Sir David Rowland, then chairman of Lloyd's, repeatedly went out of his way to say that the process of renewal had to be a continuous one. There followed a series of measures to speed processes (including a recent move to daily claims settlement), reduce costs and rediscover some of the disciplines that had clearly been lost in some parts of the market. Above all, Lloyd's has been catching and then keeping up with the demands of the global market, most notably electronic commerce, and continues to do so.

While these changes were internally driven, many others were dictated by external market forces quite beyond the control of Lloyd's. The trend towards consolidation into fewer, larger units has been reflected at Lime Street as much as anywhere else. While the market's capacity and premium income has remained roughly unchanged over the past decade, the number of syndicates has fallen by more than 50% from its peak. Whereas all syndicates used to specialise in either marine, non-marine, motor or aviation, the big players now are nearly all composites, writing multiple classes of business.

Corporate capital has expanded to account for more than 60% of capacity - a figure that is certain to go on rising as reinsurers continue to acknowledge the value of having a presence at Lloyd's. The new investors have brought with them new demands for underwriters, including stricter controls and greater accountability to the people who have to pay the bills.

These changes have strengthened the market; indeed, it could not have survived without them. There will still be occasional bad years, since these are inevitable in a cyclical business where people take risks, but there will be no return to the disasters that befell the market a decade ago. There are too many controls in place, and a greater sense of realism.

Fear for innovation

So far so good, but these changes have been accompanied by an understandable concern that Lloyd's may lose one of its greatest assets - its ability to innovate and accept risks that cannot be placed elsewhere. The most vociferous warnings have come from the Names - the individuals whose wealth still supports a large proportion of the market, but who fear they may be squeezed out.

Michael Deeney, the new chairman of the Association of Lloyd's Members, wrote recently: "Innovation, the development of new insurance products and new approaches to risk management are vital to future success. Unfortunately, the bulk of insurance capital is held by large insurance companies, which tend to be bureaucratic and slow."

Similar sentiments were expressed by David Denning, chairman of Copenhagen Re (UK), who retired earlier this year after more than 40 years in the industry, starting as a Lloyd's broker. Mr Denning acknowledged that professional standards and disciplines had risen, but went on: "The main assets of Lloyd's are its innovation and sheer charisma. I feel that, with corporate capital, things will be done in a very different way people are so risk averse nowadays and Lloyd's used to be so risk willing."

Concerns like these are understandable, and go to the very heart of Lloyd's, but are they justified? I do not wish to become involved in the debate about the future of Names, who remain a part of the market, but it does seem to me that innovation and risk taking are still alive and well at Lloyd's.

Lloyd's is acutely aware of the need to foster creativity at a time of cut throat competition - and so are the owners of the corporate capital that support most of the market. From a hard-headed business perspective, the ability to innovate is one of the few protections that underwriters have against falling rates. It is also one of the qualities that differentiates Lloyd's from most of its competitors, and ensures that it continues to have an influence well in excess of its share of global premium income. Encouraging creativity is, therefore, a business imperative.


At the time of writing, Lloyd's underwriters have, in the space of a few months, launched several products that are either entirely new or new in the way they are applied. For example:

* Cover can now be purchased against the costs incurred in aborted merger deals through TOI Corporate Services, in conjunction with brokers Prentis Donegan and Partners.

* SVB Syndicates recently sold its first policy to give financial institutions cover of up to $500 million against the cost of rogue trading which has been deliberately concealed or falsely recorded by employees.

* Hiscox is taking the lead in a new type of cover to protect firms involved in the UK Private Finance Initiative scheme, against losses caused by government and regulatory intervention.

* Crowe Life and Kiln has underwritten term life insurance, via a specialist scheme, for the old, ill and those who "live life on the edge".

* Sedgwick has become the first Lloyd's broker to secure an insurance facility for property risks following approval by Lloyd's for the reintroduction of cover for war on land.

* Brockbank Syndicate Management has unveiled cover to protect businesses susceptible to the weather, such as ice cream manufacturers, from unseasonable temperature fluctuations.

* Cottrell and Maguire now offers cover, aimed at small and medium-sized businesses, against certain aspects of claims arising from sexual harassment, unfair dismissal and discrimination cases.

Lloyd's is also heavily involved in a number of alternative risk transfer projects. While some of these, such as the decision to admit captive syndicates are arguably just a case of the market catching up, others in the pipeline promise to be at the leading edge.

This list, which is by no means comprehensive, demonstrates conclusively that Lloyd's has not lost its ability to innovate and develop highly specialised, risk-willing products. To quote Peter Tritton, director of client and public relations at the brokers Aon: "Lloyd's continues to display imagination, and is seeking new ways to provide cover to its diverse clients. Radical change is not new to Lloyd's and, having survived a difficult decade, it has proven itself resilient when under extreme pressure. That fortitude continues at the direct interface between underwriter and broker as they seek the best available terms."

The disciplines and professionalism within the market that are universally acknowledged to have improved in the past decade can assist rather than hinder this approach. It is in no one's long term interest for underwriters to produce products that are exciting, but unsustainable - not even the purchasers'.

Lloyd's may be a wiser, slightly more world-weary place. It may, as has sometimes been suggested, be less jolly than it used to be. But the inventiveness continues, and long may it do so.

David Clarke is managing director of the Lloyd's Non Marine Association (NMA), which represents Lloyd's underwriters. Tel: +44 (0) 171 327 4931; fax: +44 (0) 171 623 9390.