The London market continues to shrug off challenges from overseas. It has the people and the skills, it has the ‘brand’ – but will this be enough to keep the world at its feet? We report from a GR roundtable that debated London’s place as a global leader
In our latest roundtable, held in the Dome Room at No 1 Cornhill, London and chaired by Global Reinsurance, guests considered the many questions facing the London market companies as they take on board the changing landscape of international insurance and reinsurance.
Ten specialists in underwriting, law, finance, run-off and actuarial analysis provided their own unique perspectives on a range of issues that could transform the way insurers and reinsurers do business, from regulation, taxation and law, to pricing and recruitment.
The financial crisis has been relatively kind to the London market. Lloyd’s, which is at the centre of the market, has seen its members report some record results in the past 12 months, as it is a long-term product of a wide international spread of business and high underwriting standards. All this was aided by the fact that buyers of insurance and reinsurance have favoured a broader syndication of risk during the financial crisis and recovery – a situation that favours the syndicate market of Lloyd’s and the London market as a whole.
London’s historical advantage in insurance and financial services has brought a high concentration of skills to the city, and it is this depth and breadth of talent that remains London’s key advantage moving into the future. Speakers agreed that the London market’s future success would, however, depend on its ability to innovate and attract capital.
Staying at the top
Global Reinsurance kicked off the morning’s discussion with a timely question. “The London market continues to be a global player. But the global landscape is changing – for example, the New York Insurance Exchange is gaining momentum as an idea – so what does the London market need to do to move with the times, and remain a leader?”
KPMG’s restructuring insurance solutions director, Barry Gale, was the first to step in with an answer. “This question really has two parts: what are the threats to London maintaining its position as leader? And where might those threats come from?” he said.
“It’s about innovating, and it’s about attracting capital, as far as I’m concerned. The London market has proved that it’s at the forefront of innovation over time. As long as it continues to innovate, then I think it’s got a very good chance of remaining the leader.”
He continued: “As far as attracting capital is concerned, for me that’s largely about stability in the tax regime and in the regulatory regime, and the London market has been – or the UK has been – pretty good in providing that stability over the last few years.”
At this point, Global Re UK chief executive Maik Wandres stepped in. “London has got a significant advantage in having such a wide range of skills, in such a close geographical space. I recall Richard Ward, chief executive of Lloyd’s, recently pointing out in
the Lloyd’s strategy that there are 40,000 people in the London insurance market, and another 10,000 elsewhere in the UK, which equates to about a quarter of all people working in the financial services sector in the City.
It’s a very efficient and transparent market, not least because of the concentration of expertise.
“Elsewhere, be it in the USA or in mainland Europe, you’ve got long distances between companies. Much of the communication takes place via telecommunication and it is all very secretive. It was quite an experience when I first came to visit Lloyd’s – everything was so transparent, and everybody knew everybody else. This must be good for the market, and for competition.”
Director of BMS’s broker replacement services divison, Andrea Viera, agreed: “Lloyd’s has a personal face, and having worked in several different countries, in several different insurance organisations, the personal face is attractive: one, for a professional doing business, but two, in actually sorting out difficult issues, and having a little bit more of a camaraderie in willing to do business.”
She adds: “I worked in New York for a while, and you know, this was 20 years ago, but you never met a person who was just around the corner. Everything was at an arm’s length.
Even though sometimes a physical difference doesn’t separate you, I think the London way of doing business has an attraction.
“I’m sure for some people it seems a bizarre concept, however, so I think one of the challenges will be how we can maintain the right level of personal interfacing with the necessary technological advancement that we need to put in place, to make sure that we stay efficient and able to deal with servicing future interest.”
Solvency II and other regulation is never far from people’s minds, and this roundtable was no different. PRO Insurance Solutions chief executive David Vaughan opened up the discussion saying: “I think at some stage you’re going to get a big tipping point, when people work out that Solvency II exists and think: are they over-capitalised, are they under-capitalised? What do they have to do – do they stop lines of business and create a new line? I think we’re progressing that at the moment.”
Jonathan Broughton, a director at actuarial firm EMB, said some companies would be facing a “major problem”. “Solvency II is trying to drive managers to understand the risks they’re taking on board. Having that clear transparency about what’s going on should stop mistakes from happening,” he said.
“Some companies have got it in hand, because they took it very seriously early on, and did spend a lot of time and money on it, but a significant number of companies are now thinking ‘oh dear’ and are realising they have a major problem.”
He added: “A key use of an internal model, which has not really been done before within the insurance sector, is to simultaneously look at the liabilities and the assets, and in doing that, what’s happened historically is there are a bunch of actuaries that do the liability modelling, and a completely separate team that looks at the investments, and they don’t talk to each other. They might exchange a spreadsheet of cashflow patterns and that’s about it. But that’s changing.”
On the subject of Lloyd’s, roundtable guests discussed whether the new franchise performance director Tom Bolt, who replaced Rolf Tolle at the beginning of 2010, would bring a change in supervision and tone at the world’s premier specialist insurance market.
Viera said: “I think it will be interesting. Tolle gave us some very significant changes, which he’s been highly praised for. Tom Bolt’s a very capable individual, but he’s got some pretty big shoes to step into.
“I think Tom Bolt has come up with some initiatives that will still keep us at the forefront as market leader and innovator. I have no doubt that that will continue.”
Global Reinsurance asked whether there needs to be more flexibility given to underwriters, some of whom have complained of excessive box ticking.
LECG Smart senior manager Romy Comiter said: “I think for the underwriting to be effective and to stay effective, they need to make sure they have the right systems and the right data in place, so I do think you need to empower the underwriter more. And the underwriter needs to change the way they do business and be willing to accept this information.
She added: “Sometimes it’s only box ticking at Lloyd’s, but the business is a lot more than looking someone in the eye. It’s understanding the risk, it’s understanding the implications of the outside forces; so if you’re going to place a risk, you don’t necessarily just need to see the performance of that company and the claims history. You need to understand what’s going on in the economy. Underwriters have to ask how they price the risk and whether they have the information they need to do it.”
Navigant Consulting director Michael Cook thought Bolt has already changed perceptions within Lloyd’s. “We’ve had some reorganisation of Lloyd’s in terms of the management of responsibilities after Tolle left, so I think there will be a change of style, but I think Lloyd’s is about evolution, not about revolution. It’s not going to throw away what it has done for the past few years.
“There hasn’t really been much publicly said about the claims situation, and the first speech Tolle gave [after leaving] was about claims. So I think that is what will happen with Lloyd’s, and is what the change will be. I think Lloyd’s feels that it has addressed a lot of the underwriting. It now needs to move to the other big piece of the business, which is the claims side of it, and the issue of flexibility.
“There is no flexibility in claims right now, and I think there’s a huge desire among the syndicates to be able to handle claims in the way they see fit, rather than the current process with a centralised facility.”
This brought the conversation on to how the claims process might be improved, including the claims transformation project at Lloyd’s.
Global Reinsurance asked how many claims were going through the pilot.
Broughton explained: “Lloyd’s tells me several hundred have gone through, and that it’s above its expectations. I think this is something that’s being driven by pressure on Lloyd’s from managing agents to take back control of claims handling.”
PRO Insurance Solutions’ Vaughan asked whether the focus on the larger claims was something with which Lloyd’s should be comfortable, adding: “I understand that it may make sense to Lloyd’s to spend more time on the more complex claims, but if this aspect of the
claims transformation project was extended through the wider company market, a company like ours would probably still want to have diligence on the smaller claims.
“Otherwise there is a real risk that an underwriting organisation focuses on or looks forward to the renewals, and has those in mind when reviewing those claims, while creating a moral hazard, and so we would still want to peer review even some of the smaller claims.”
Senator Group director Philip Seaman replied: “I think it’s very difficult in a market like Lloyd’s to actually put a figure to it. If you’re writing space
or aviation risk on one hand and personal motor on the other hand, it’s tough to say ‘right, every claim above £10m is going to go through this process’. So you have to have an approach that is specific to the line of business. With that said, you can’t make the model too complex, because then you get the same problem that you’re trying to tackle: you slow down the claims process.
“It’s all about understanding the business and what the claims are. Speed is not the only issue when it comes to claims, and I think building the relationship between the insurer and the policyholder is one of the most crucial things when it comes to clients. Those things aren’t really being tackled in the claims department.”
European regulations came under the spotlight again. GR turned the conversation to the block exemption regulations, which are currently under review, and asked whether the removal of insurance block exemption from certain aspects of anti-competition would bring uncertainty to London market business. And whether it would lead to a rise in legal involvement at an earlier stage.
Holman Fenwick Willan insurance and reinsurance consultant Peter Schwartz said: “That would be nice, but historically the insurance profession, and certainly the less far-sighted participants, have thought that this might be an unnecessary expense. I don’t think so, however.
“In terms of what the European Commission is actively encouraging insurers and reinsurers to do, there’s a six-month window for compliance and, as with Solvency II, that’s not a holiday and it’s not an opportunity to sit back and wait for five months before you start doing something. It’s a period for getting to know your portfolio, your suite of agreements for transacting business, and conducting the self-assessments that you should be doing all along.
He added: “I think the penalties for non-compliance in competition, as most of you will know, are fairly severe, both financial and personal, so it’s worth getting on with.
“With regards to the standard terms and conditions, the Commission was not persuaded that there is anything special with the insurance industry to warrant exemption. Other sectors have them and they manage to be competitive. The fact that you have standard terms and conditions doesn’t necessarily mean that it’s anti-competitive. It does now mean that it’s not covered by the block exemption regulation, so any standard terms and conditions that are used should be only adopted voluntarily.”
GR asked: “Is the market still holding on and waiting for guidelines to come from the European Commission, or have those guidelines come already?”
Schwartz replied: “There are going to be some revised horizontal guidelines, which the Commission is working on, but one of the important things for this market is that the Commission is very interested in the way that the subscription market works in practice.”
The roundtable speakers had a short conversation on the repercussions of the court decision surrounding the Scottish Lion solvent scheme, in which a Scottish court decided that creditors of Scottish Lion Insurance had to be unanimous in approving a solvent scheme of arrangement for the company.
Gale said the ruling would have very little impact in the London market. “Schemes are still as valuable a tool as they were a year ago, for exiting insurance business. We said all along that we felt Scottish Lion was a distraction – a very unwelcome one clearly – but there was a wrong decision made.”
Swiss Re (UK) director of specialty insurance, David Scasbrook, said: “I think people have many options before transferring the risk to another party, just as Scottish Lion did, or the passive or proactive management of their liabilities. These questions may be more important than whether they can do a scheme or not, and that’s certainly something that we’re seeing in the marketplace.
Solvency II will actually hasten some of those decisions perhaps, and encourage people to think of reinsurance as a potential solution more than they have been in the past.”
A separate regulator?
In the final question of the roundtable discussion, Global Reinsurance asked whether there should be a separate insurance regulator.
Cook began the topic by saying he did not see how the regulation of banking and insurance could be separated in an efficient way: “There is too much commonality between them. They are on a scale between retail banking at one end and insurance at the other, and there’s too much commonality between what insurance companies, asset managers and banks do.”
Vaughan said: “One of the lessons I thought came out of the financial crisis was that the insurers that were impacted – those who on the liabilities side got issued – were affected because they were exposed to the financial markets. I would think there are some skills that need to be looked at, and how you compartmentalise it is always an issue.”
He added: “I personally think it works reasonably well; people have different skills in an organisation but all still under the same umbrella.”
Global Re’s Wandres said: “I think the movement in the past has been to merge supervisors. And moving back to separate regulators would clearly be a step backwards; even though that still seems to be working in the USA.”
Cook pointed out that several organisations, such as large retail companies, have entered the insurance arena despite not having their primary business as insurance or banking.
Viera added: “I think the FSA has done a lot of good. I do think it would be nice for public protection to somehow separate it, so that they realise that insurance and banking are different, and I think that we’ve seen – when they’re comfortable with the risk profile – they are applying the right type of audits and support to businesses. I would just like a little bit of distance between banking and insurance. We have so much area that crosses over, but we are different creatures in how we approach business, which needs some sort of recognition in the public’s eye.”
In response, Scasbrook said: “Maybe the FSA should just keep regulating both but, for the public perception, make the two different. A new organisation would appear to be two separate regulators, but would actually use the same pool of resource.”
Vaughan added: “The way banks and insurance companies have managed their capital is hugely different, and I think that’s something that again the public should understand to some extent.”
But Wandres countered: “Is that not positive for the insurance industry, if the general public observes the insurance industry to be regulated as intensively as the banking area? Because, if nothing else, it underlines that UK insurance companies are secure, and this can only be good for our market. The question is what this means on an operational level. What intensity will be applied, when regulating insurers as opposed to banks?
Senator Group’s Seaman agreed, saying: “I think there are too many grey areas [between banking and insurance] to separate it, and I think it should be under one banner. You’re going to have the different skill sets within the same organisation, but maybe they could be branded outwardly as two sets.”
In conclusion, our roundtable guests believe the London market’s future looks bright due to the level of time and effort that is being invested in its future by a range of interests.
Changes in regulation, especially Solvency II, look set to dominate the horizon and, as we have heard, legal precedents continue to have their effect.
Our roundtable participants did agree, however, that it is not just external forces that will steer the market in 2010 and 2011.
London, with Lloyd’s at its heart, is arguably one of the few insurance markets in the world to have a distinctive brand image and a collective strategy. It is forging ahead with process and technology reform, while staying ahead of the curve on regulation, training and product development.
It is also pressing into new markets, and another landmark was reached in May when Lloyd’s received a licence for direct business.
Some of the issues and obstacles our guests discussed require dialogue and adaptation within the market and others require more significant moves and legislative change. The next three years will be critical in terms of whether the London market will extend its lead, but for the time being the market has a chance to keep the world at its feet. GR