William Beveridge takes the helm of the Joint Hull Committee as the market is suffering yet another year of low rates and high losses. But he tells Michael Faulkner that the Lloyd's franchise board could come to the rescue
William Beveridge is frustrated. The new chairman of the Joint Hull Committee (JHC) and XL London Market hull underwriter is sitting in XL's elegant offices talking eloquently about the dire state of the hull market. Ominous phrases such as "bleak future" and "capital withdrawal" pepper the conversation.
The market only has itself to blame for its woes, he says. It needs to take a tougher line and show a more disciplined approach to underwriting. Then, he says, the withdrawal of capital from the market may actually prove to be its saviour.
In the past six or seven years the hull market's performance has been exceptional - for the wrong reasons. While other markets have enjoyed rating increases of over 1,000% and burgeoning returns, the hull market has managed only a limp rise of about 40% and continued losses. Last year the JHC estimated that the market lost globally $750m (£481m).
The hull market is now seen as the least profitable market, eclipsing even employers' liability (EL). It has not made a profit since 1996.
The situation is so bad that market sources have suggested that that the Lloyd's franchise board has convened a meeting of marine hull underwriters to discuss their poor performance. This could well be the prelude to some tough action by Lloyd's. Indeed, there is already talk of the franchise board preventing the bottom quartile of hull underwriters continuing to write business.
Such a move would certainly meet with Beveridge's approval, who is keen for Lloyd's to take a harsh line with the poor performers.
"Any moves that any market body makes to limit or remove underwriters who are unable to make an underwriting profit will only help the market place to deliver a stable and predictable product and to improve service."
He certainly expects the franchise board to be "asking some difficult questions" of underwriters this year.
"The franchise board has been doing a lot behind the scenes. It is scrutinising business plans in a major way. Lloyd's will protect its foundation stone - its reputation for always paying a valid claim - and ensure that the central fund is not exposed, which is what happens when people lose money." And the hull market is quite adept at losing money.
The simple answer to the woes of the hull market is that rates need to keep rising. Beveridge estimates that 50% more premium needs to be put on the books, although not necessarily across the board, as some risk are at the right level. The problem is that, as one managing agent colourfully puts it: "No one has the guts to quote the right price."
Underwriters, it seems, are desperate to maintain market share and are willing to charge ridiculous rates to get it. Beveridge tells the story of one of XL's clients that was lost to the market. The account had a poor claims history, having lost £5m over six years, with a major loss this year. The renewal premium was increased by approximately 100%, yet it moved to a competitor who offered an increase of only half that amount.
And this scramble for business is even manifesting itself in underwriters charging reduced rates on risks. In the past weeks the market gossip has been of new accounts being placed at terms as much as 20% lower than last year. There are even rumours of accounts being renewed at reduced rates.
But while these developments represent "a worrying trend and are very dangerous", Beveridge nevertheless sees an upside.
"The fact that that there have been instances of rates softening will only cause the market bodies to focus their attention harder on the hull market and ensure that all the questions that need to be asked are asked," he says.
He says that the market needs to be more disciplined. "Unless the carriers learn to say no, the market will not recover. The one thing that will make people do this is when others around them are losing their jobs. We are going to see that happen in six months."
So how will this discipline be imposed? Market bodies, such as the franchise board clearly have a role to play, he says. But the capital providers themselves have an essential part to play too as they provide the capacity.
Beveridge says that the existence of too much capacity is a fundamental part of the market's problems. There is currently the capacity to cover a risk worth £1bn, yet the average risk is a fraction of this - less than 5%. This puts an enormous pressure on the market as brokers are able to shop around and exert pressure on the underwriters to lower prices, he says. What will turn the market round and put upward pressure on rates is the withdrawal of capital.
"The people who control the appetite of the underwriters are the people who control the capital. When people eventually turn around and remove the capacity, then the market will turn. There will still be too much capacity, but there will be a fundamental desire to achieve the correct rates."
The hull market is at a precarious point. Beveridge suggests that some underwriters might actually break even this year "if they are lucky".
The question that he and everyone else is asking is whether rates will continue to climb sufficiently in the coming years to pull the market into profit. The alternative, according to Beveridge, is that rates slide back down again leaving the market to "drown like a rat".
What will happen is in the hands of the underwriters themselves. Beveridge says that the market needs discipline. The market says that it wants leadership. The question is: will Beveridge lead from the front?