The turmoil in the market has led to the loss of certain business, according to market reports, particularly to continental European re/insurers

London is having a turbulent time. With massive exposures relating to the US terrorism attacks confirmed, but still not finalised, capacity has been constrained for some re/insurers while others have found their capital raising exercises did not excite the investment community in the same way as those of their Bermudian competitors. In addition, there have been withdrawals, particularly on the reinsurance side, as companies such as CNA and Royal & SunAlliance have decided that the reinsurance business is too risky for their liking.

The turmoil in the market has led to the loss of certain business, according to market reports, particularly to continental European re/insurers. And with the NAIC deadline for Lloyd's putting 100% of its gross exposures to WTC looming, uncertainty seems to be the order of the day.

Despite these problems, Lloyd's - long seen as the lynchpin of the London market - has announced record capacity of £12.3bn for this year, and recently launched consultation on the so-called Bain Report. This sets out a series of proposed key reforms of the market, including:

  • modernisation of the Lloyd's structure, replacing the regulatory and market boards with a franchise board;

  • reporting results according to GAAP accounting principles rather than the three-year accounting system currently in place;

  • changing names' trading basis, including an end to unlimited liability status; and

  • ending the annual joint venture.

    The Bain Report proposals are a further milestone in the past ten years of Lloyd's reforms following the Task Force Report, headed by David Rowland, in 1991. This particular report paved the way for the introduction of corporate capital to the market, one of the biggest changes in the market's history and probably Lloyd's saviour in the dark days of the mid to late 1990s. Nowadays, corporate capital supplies the lion's share of the market's capacity, with about 50% of the total capacity for the 2002 year of account coming from the ten largest corporate capital investors, mainly US and Bermudian re/insurers, though Australian giant QBE has a substantial investment in the market.

    In an interesting twist, some of the traditional Lloyd's organisations have set up overseas operations themselves. GoshawK Re is a new Bermudian reinsurer recently established, and the Catlin underwriting agency has announced it is in the process of setting up a Bermudian presence. In addition, two other Lloyd's agencies are believed to be actively investigating the option.

    IUA's position
    But London is not just about Lloyd's. The International Underwriting Association (IUA) represents probably the greatest concentration of international re/insurance operations in the world. Figures on the size of IUA capacity are impossible to come by since many of its members are branch offices of parent companies headquartered overseas, but the list of IUA members demonstrates the organisation's immense power and diversity. The IUA, too, has not remained complacent in the face of international competition, and a year ago teamed with Lloyd's to form the IUA/Lloyd's Joint Forum to address London market reform. The IUA's London Processing Centre (LPC) has been merged with Lloyd's Policy Signing Office (LPSO) to form Ins-Sure in a bid to streamline London market processing, and although London Market Principles 2001 (LMP 2001) has spilled over into 2002, momentum for reform and cost saving is gathering.

    A major byproduct of the London market model is run-off. As re/insurers withdraw from classes of business or fail - a situation brought back to the headlines last year by the failure of Independent Insurance, an erstwhile darling of the market - run-off specialists often step in to manage the book to extinction. A vast proportion of the run-off business involves long-tail liability business with many years to run until the book is finally wound up, but London has become a centre of expertise for this business and currently is exporting its knowledge around the world. Later this month, UK run-off specialist Carvell will be holding the first run-off rendez-vous in Singapore, hot on the heels of the annual ARC congress in London. Both these events are gatherings of run-off professionals and service providers which provide an opportunity for parties to meet and discuss various issues including commutations. And with the current crop of withdrawals and failures, both in the UK and internationally, they promise to be interesting events.

    Sarah Goddard is the editor of Global Reinsurance.

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