On July 3 2000, regulation of Lloyd's brokers passed from Lloyd's to the General Insurance Standards Council (GISC). While I believe virtually all Lloyd's brokers welcome the concept of universal regulation of general insurance within the UK, I suspect many thought any adverse implications would be felt by provincial brokers. These include those who are unable to meet the financial standards set by the Insurance Brokers Registration Council (IBRC), irrespective of the higher solvency requirements the GISC will require for those intermediaries relying on earned, rather than received, brokerage.
However, these are now becoming confusing times for Lloyd's brokers, some of whom, initially, welcomed the end of what they saw as the intrusive involvement in their corporate life by Lloyd's in the form of the monitoring department – which incorporated the previous regulator, the brokers' department.
Doors of perception
These brokers have seen the hierarchy at Lloyd's trying to open the doors to (apparently) all and sundry, with capital requirements set at less than 10% of those applied to most existing Lloyd's brokers while, at the same time, dreaming of the introduction of ecommerce. The more cynical among us might view the enthusiasm for ecommerce as an attempt to not only remove the Lloyd's broker from the supply chain, but to follow this in time with the demise of the wholesale broker and the development of Lloyd's Direct. However, if fax transmissions stack up often unread in the offices of syndicates, why does Lloyd's believe underwriters will respond to risks which have been submitted electronically?
On the other hand, the regulatory arm of Lloyd's is signalling its intention to protect the large sums of money currently handled by Lloyd's brokers. To achieve this, given the numbers of insurance entities the GISC is expected to regulate, the level of supervision that it can provide has to be supplemented, especially as the loss of the Lloyd's Brokers Security & Trust Deed was part of the price Lloyd's underwriters had to pay to help bring about the reality of the GISC regulation. Lloyd's has therefore made assessment of the credit risk run by Lloyd's underwriters a regulatory issue.
Twenty-six managing agents have commissioned an external organisation, Thomson Financial, to provide them with some basic information. However, I have my doubts about the value of some of the information requested in terms of assessing credit risk, whereas certain pertinent financial information is ignored. And I suspect those Lloyd's brokers with embarrassing information to hide will bluster and claim any such information is commercially sensitive and refuse to co-operate. Accepting the initial request from Thomson Financial only as a starting point, the fact remains that it's a lot better to respond to their request rather than having to deal with 26 individually customised questionnaires.
All of which leaves managing agents with a dilemma, namely how do they comply with their regulatory obligations if they can't obtain the necessary information that would enable them to make an informed judgment. On top of this underwriters have a further major concern. Together with most financially aware people in the insurance industry, they understand how little protection the IBA account affords to insurance creditors.
Long ago Lloyd's supplemented the IBA system with the Security & Trust Deed and, only a year ago, expanded the wording of the deed to make it more effective. The likelihood of greater financial loss to the market following the insolvency of a Lloyd's broker has to be substantially increased with the demise of the Security & Trust Deed. Thompson Heath & Bond (THB) is not the only Lloyd's broker to regret the passing of the old regulatory regime – that not only did a good job of protecting underwriters' interests but also, despite the inevitable moans (in the past) was widely respected by brokers and underwriters alike. Little wonder that at a recent market meeting, Chris Harman of Harman Wickes & Swain summed up the various shortcomings in the current arrangements and came up with a description of what was needed – before July, he pointed out, it was called the monitoring department.
Such a move is clearly not going to happen, at least for a while, so what is the likely outcome?
I would expect the average managing agent to be aghast at the prospect of exercising effective credit management over several hundred (provisionally accredited) Lloyd's brokers in addition to the existing Lloyd's broking community. A few of the large agencies may have the resources and inclination to deal with every Lloyd's broker, but I doubt it. And for the smaller agencies, just contemplating the additional work has to be a nightmare.
One only has to look at the financial statements of many smaller Lloyd's brokers (and a few of the larger ones) to see what a precarious financial state many are in and very often they are only surviving through investment income.
Underwriters, rightly, complain about the speed at which money works its way through the London market system and, although their own reimbursement of claims monies due to Lloyd's brokers often leaves a lot to be desired, I have to accept that, on balance, they are more sinned against than sinners.
At THB, as with a number of other Lloyd's brokers, we rely upon the Lloyd's market to a very large extent and therefore are committed to working with our underwriters to ensure such underwriters form part of a profitable strong market, which can provide our clients with the long term relationships they require.
For many in the Lloyd's market the words “agency cull” relate to something that happens to small non-Lloyd's' brokers dealing with the company market.
Any such cull will usually consider the size and profitability of the account, the potential for delivering the type of business sought in sufficient quantity going forward and, in the case of Lloyd's now, will need to consider the credit risk.
This situation hasn't suddenly arrived and any forward-looking management will have been taking steps for some time to grow their business, consider mergers and understand and react to the problems that their underwriters face.
The hard market we're entering will be hard for even the best run broker to deal with. However, especially for the smaller Lloyd's brokers, reliant on investment income, with their business widely spread throughout the market, thinking they will be saved by rising rates and definitely for those producing unprofitable business to the Lloyd's market, the message is clear – the Lutine Bell tolls loud and clear for you.