Back in the early 1990s, the then CEO of Lloyd's, Peter Middleton, commented that the only constant in the market was change. Every year since that sentiment has held true, none more so than last year. During the course of 2000, both Lloyd's and the wider London market announced a number of initiatives aimed at lowering costs and improving competitiveness.

For many market observers, these initiatives have not come a moment too soon, though, as ever, there is a degree of cynicism about how effective they will be. The LMP2001 proposals are a case in question. The very nature of the London company market – ostensibly a gathering of branch offices of international companies – means consensus comes courtesy of head office; the International Underwriting Association (IUA) has no power to bind its members to its decisions.

Even so, the IUA, along with Lloyd's, is championing LMP 2001 (see page 26), and the market continues to support WISe, the latest incarnation of the various network projects that have been on the go since the 1980s. This would seem like a good idea: at last year's London Processing Centre (LPC) conference, a survey undertaken by technology group CMG revealed that 94% of voters thought that electronically processing risk is the best use of internet technology, while 54% stated that processing claims over the internet is an urgent requirement. Nevertheless, out of those polled, only 7% considered they had their e-commerce strategy under control.

Lloyd's appears to be taking the lead position at the moment in employing technology. Following the opening up of the market to non-Lloyd's brokers – as long as they are overseen by an accredited regulator – at the beginning of this year, Lloyd's continues to work on its new portal,, which will act as an introductory platform between remote brokers and underwriters. Expected to be launched this spring, could substantially reduce the extremely high cost of overseas business placed at Lloyd's by cutting out several stages in the chain from local broker to syndicate.

Within the UK, all General Insurance Standards Council-regulated brokers are now able to have a bite of the Lloyd's cherry, providing they satisfy certain Lloyd's accreditation standards relating to customer service standards and systems compatibility. In addition, European-based brokers and those operating in territories in which Lloyd's is licensed to transact business – more than 60 countries around the world – may now access the market, as long as they meet the same standards as the UK brokers.

Headcount reduction

Lloyd's costs have long been a bugbear of the market, and for years the Corporation powers-that-be have been implementing a number of measures to lower them. During recent years this has included outsourcing many of the previously central functions – the liveried waiters and doormen are no longer employed by Lloyd's, for example – though whether the management reaches its stated target of reducing the Corporation headcount to 500 this year remains to be seen.

But fundamental change is taking place, and it should help the London market improve its competitive position. Among other measures during the course of last year, the LPC and the Lloyd's Policy Signing Office agreed with internet-enterprise company Xchanging to develop a join bureau. Announced in October, the new company is expected to process premiums and claims totalling more than £20bn each year for 220 insurance companies and Lloyd's syndicates. Jointly owned by the IUA, Lloyd's and Xchanging, the new company is anticipated to eventually offer services to the global insurance market. Speaking at the announcement of the new venture, IUA deputy chairman Tony Mednuik commented, “A co-ordinated and streamlined approach to processing is critical to the future success of the market. This initiative will take us rapidly towards the latest internet-based generation of business-to-business processing, whilst simultaneously helping to take cost out of current procedures.” Lloyd's CEO Nick Prettejohn added that it will also result in “better service for our customers and their brokers.”

In the meantime, cutting costs is being somewhat overshadowed by the harsh market conditions which finally appear to be biting – and hard. Towards the back end of 2000, Reliance National Insurance Co (Europe) Ltd, the London-based arm of US liability insurer Reliance Insurance, was put onto the open market, but no buyers were found, possibly because of Reliance's exposure to Unicover, the failed US workers' compensation pool. Last month the London operation moved into voluntary run-off.

Despite tough trading conditions, Reliance is the only London company market participant to stop writing in recent months. Lloyd's has seen a greater falling away, with Bermudian-owned PXRE pulling the plug on its syndicates towards the end of last year, and Berkshire Hathaway shutting down syndicate 62 –` which it had acquired just weeks previously as part of its purchase of Marlborough Underwriting Agency Ltd from UK composite insurer CGNU plc – in January. Despite these foreboding signs, Lloyd's has actually seen an increase in capacity for the 2001 year of account, supporting the prediction of rating agency Standard & Poor's (S&P) that new London market capacity was headed for Lloyd's. Rob Jones, director of insurance ratings at S&P, commented, “The London market is slowly becoming Lloyd's. The companies sector has dwindled somewhat ... Most global groups have some degree of interest at Lloyd's which they may increase over a period of time.”

New capital to the table

Whilst that may not hold true of PXRE, other international insurers have been upping their already well-established stakes. History has shown that Lloyd's outperforms hard markets – though it tends to do the same in a negative way in soft markets as well – and for several commentators, this could well be the ideal time to take advantage of the global tightening in rates and conditions.

Whatever the reasons, 2001 has seen three new syndicates come to the market, both new start-ups with a spread capital base. Cathedral, headed by Elvin Patrick, a former deputy chairman of Lloyd's and underwriter for syndicate 566, has brought £81.2m to the party, while Managing Agency Partners, with a strong team of high-profile Lloyd's underwriters at the helm, has added £139.7m in what is believed to be the biggest Lloyd's start-up.

In total, about £1bn in capacity has been added to Lloyd's for the 2001 year of account, the largest increase since 1993/4. While private capital – names – has remained fairly static, several corporate members have boosted their underwriting capacity substantially. One of the largest increases was at DP Mann, ultimately owned by Berkshire Hathaway, which upped its capacity by £143m to £400m. Chairman David Mann commented: “Our capacity has remained static for several years, but this year it has increased through both a market correction and our cautious optimism that 2001 will see a greater demand for our products. Certainly the signs are much more positive than they have been for some considerable time.”

The disappearance of retro capacity certainly seemed to have had a profound effect on rates in the recent renewals, with reports of major hikes in the majority of classes. After several years of “talking up” in the lead up to the renewals season, it would appear that correction has indeed been the order of the day. For many it may have come in the nick of time; recently unveiled forecasts from Chatset Ltd are predicting losses in the order of £1bn or more for both the 1998 and 1999 year of account, after members' agents charges, and an overall loss of £205m for 2000. Over the course of last year, a number of syndicates were downgraded by rating agencies, and several ceased trading, including Sterling 529, Standfast 991 and Stockton Re's 53, 808 and 1121. Chatset editor Charles Sturge estimates that corporate-owned syndicates have experienced average losses of 11.7% and 14.9% of stamp for 1998 and 1999 respectively, while those with mixed capacity – capital from both corporate and private sources – have only been hit to the tune of 9.2% and 9.5% for the same years.

The reason he surmised, is that corporate investors have not had the benefit of the “in-depth analytical services” of members' agents. “Corporates do not have the same advantage of having an independent eye looking over their shoulders and find as a result that they are left with the worst of the underwriting talent and therefore the worst syndicates,” he suggested. “Names may take a degree of comfort from this, but in the long term if the result is lower standards and lower profits, it must be bad news for Lloyd's.”

Weaker underwriters out

Of course, the converse view is that the recent tailing off of the poorer performing syndicates has already weeded out the weaker underwriters, though some of the former corporate owners would claim that changing goal posts such as higher risk based capital loadings imposed by Lloyd's centrally were major influencing factors in their decision to leave the market. Nevertheless, at the beginning of 2001, 108 syndicates were trading at Lloyd's compared to 123 at the start of 2000, and way down on the all time high of 401 at the start of the last decade. Compared to then, capacity is much more concentrated, with Australian giant QBE controlling a huge £835.6m for the 2001 year of account. Other major players include Bermudian ACE with £725m, US-owned St Paul with £502m and XL Brockbank, also owned by a Bermuda-based giant, with £457.7m. Following the trend of recent years, it is the overseas insurers which continue to provide the lion's share of capital to the Lloyd's market, attracted by the swathe of overseas licenses and a persistently strong brand name.

This was recently underlined by Chubb's approach to buy the 72% of Hiscox (with £360.4m capacity for 2001) that it doesn't already own. The news of Chubb's approach sent Hiscox shares rocketing by almost 50%, and it came just days after Amlin, another of the UK quoted Lloyd's agencies, announced it had secured an extra £50m in secured banking facilities, led by Lloyds TSB and NatWest. With investment market sentiments shifted away from dot.coms and into more traditional stocks, insurance is finally regaining the analysts' eyes. And with Lloyd's organisations poised to take advantage of the turn in market conditions, it is likely that the Hiscox deal will be the first of a number of Lloyd's acquisitions over the coming months. As Lloyd's new chairman, Sax Riley, said in January, “With rates hardening in many sectors and syndicates reporting a healthy renewal season, all the vital signs are good.”