Lloyd's is planning to change the balance of its global business with the focus on China, Europe and Asia Pacific. Adrian Leonard reports
Lloyd's has always been a proudly international institution. Its capital comes from sources all around the world and it is licensed to write business in more than 60 territories, from Australia to Zimbabwe. Including the geographic sources of reinsurance business, Lloyd's accepts premiums from more than 100 countries.
Yet, despite this regional spread, Lloyd's business is dominated by UK and US risks, which together delivered 69% of its gross premium income in 2000 (see box top right).
This concentration of business is something Lloyd's wants to change, as the US and UK account for only 52% of non-life premiums worldwide (see box right).
Since 1999 the US has been dominating the Lloyd's market, accounting for a growing share of premium income and edging up to the UK as the largest sector.
Lloyd's New York operation president Wendy Baker says: "I wouldn't be surprised if the US represented 50% of our business by 2005."
Other data from Lloyd's tell another story. Statistics Relating to Lloyd's, the annual document produced by Lloyd's market reporting and solvency department has detailed figures for 2000.
These show that only Canada and France contribute more than 2% of Lloyd's total business. Other countries among the nearly 100 that Lloyd's does business in, make relatively minor contributions to total premium income.
On a practical basis, the numbers could be divided differently. For example, in terms of regulation, the EU is a single market, while in the US each state has its own set of regulations and its own supervisory infrastructure, without mutual recognition of other states' regulation. In effect, the US is 50 markets, each providing a relatively small share of Lloyd's business compared to the UK. This hasn't escaped the attention of Lloyd's Canadian operation, which declares on its website that Canada, where Lloyd's premium is £379m, is Lloyd's "second largest market outside the UK, and [its] second largest licensed jurisdiction".
However, UK brokers who are finding capacity in short supply will take little comfort from splitting such hairs. With approximately £1.3bn in additional capacity on Lime Street for 2002, some want to know why they are seeing none of it.
Lloyd's spokesman Adrian Beeby agrees the bulk of the market's new money may not be focused on the UK now, but he says it is likely to be redeployed in the medium term, some of it to UK risks.
"A lot of the new capacity has been directed to areas of business that have seen strong increases in rates, particularly US property, where terrorist risks have been rated for the first time, and aviation. In the short term, we have also seen rate increases around the Middle East and surrounding the conflict in Afghanistan," he says.
That capacity will go where it is in greatest demand, he says. "Historically, when new capacity is created, it is drawn towards regions and lines commanding more attractive rates, but as those rates stabilise, they look to other markets, including the UK."
In comparison, Beeby cites the Bermuda experience. Insurers and reinsurers were capitalised in the island market to answer specific capacity demands - US excess liability in the 1980s and natural catastrophe in the 1990s. But over time this capital has been redeployed for more general use. The same will happen at Lloyd's, Beeby says. "Ultimately you will see that capacity drawn back to the UK."
Despite the importance of the US and UK markets, Lloyd's is keen to grow its business elsewhere. The market opened a representative office in Spain last summer. Earlier this year it announced that its Spanish premium income almost doubled, rising from ¤58m (£35.8m) to ¤110m (£67.9m).
According to Lloyd's chairman Sax Riley, Europe "remains key" to Lloyd's strategic thinking. Speaking at the opening of the office in Madrid, he said: "The opening of a registered office here is an important part of that strategy."
Lloyd's director of worldwide markets Julian James says the market has targeted three broad geographic areas for growth. "We see opportunities to develop a position for Lloyd's underwriters in many parts of the world.
"First, we believe there is an opportunity to write more business in continental Europe, and we have embarked on a programme of promotion of the market not only to brokers there, but also within Lloyd's."
Europe's common statutory and business culture are a big draw, he says. "We believe continental Europe has a favourable regulatory environment, a broker and agency-driven distribution network, which fits in with our own views of distribution and, we believe, great demand for the specialty insurance products that Lloyd's underwriters have to offer."
Proof lies in the February presentation in Madrid, he says. It was Lloyd's first broker presentation in Spain, more than 300 people showed up, and their basic comment was why had Lloyd's waited for 300 years to do this.
Within the EU, under the Freedom of Services Act, Lloyd's can underwrite any class of business which the UK Financial Services Authority has authorised it to underwrite at home, although sometimes there is a requirement for a physical presence. Lloyd's now has 12 representative offices in Europe.
Even Russia has made it on Lloyd's chairman Sax Riley's globe-trotting itinerary. He travelled there last year to meet local insurers. Lloyd's took in $28m (£20m) in Russian reinsurance premiums in 2000.
James says Riley made a commitment for Lloyd's to support brokers and customers in Russia. Lloyd's is not a licensed insurer in the Russian Federation; it supports the local market through reinsurance.
Second, Lloyd's is targeting the Asia Pacific region for growth. "We are looking to develop market position over the long term," says James.
Lloyd's has several ventures in Asia, including Lloyd's Japan. It recently launched Lloyd's Asia in Singapore, where three managing agencies have permanent operations. "Singapore passed legislation this year that formalises our presence there," James says. "We see Singapore as a springboard for all of the Asia Pacific region."
Third, and for the long term, Lloyd's has its eye on China. "We were allowed to open a representative office in China 14 months ago, and we are currently working with the Chinese regulator, the CIRC, to explore ways that Lloyd's underwriters can offer more capacity in China than they do at the moment," says James.
"We are focusing our development opportunity in those three distinct geographic areas, but we are not ignoring the existing markets."
Despite ambitions to build a presence in new markets, and the drive to maintain and grow in established overseas markets, Lloyd's is not about to turn away from its home market in the UK.
Beeby says: "We are committed to the UK. Managing agencies have expanded their UK operations, even in the past few weeks, and particularly in liability lines where capacity is tight.
"We remain a leading and profitable UK motor insurer; more than 90% of FTSE 100 companies rely on Lloyd's for coverage; more UK brokers are being accredited to trade within the Lloyd's market; and, as always, Lloyd's underwriters are the natural choice for UK brokers with difficult, complicated and unusual risks. That is not about to change."