No to single “risky” insurers

Big insurance customers want to diversify their insurance cover and may look to Lloyd’s to achieve that, The Economist reports.

It says the AIG near collapse caused firm to look at having more than one counterparty, though it admits “Eight months on, the revolution has yet to arrive. There has been no stampede of corporate customers from AIG.” It says this is because it is now backed by the AAA-rated US government.

The Economist says Lloyd’s may be the answer. “The customer gets a single contract, but the potential losses are spread. And because the market is partly mutually owned, the customers have the security of both syndicate members’ capital and, as a last resort, a shared cash pool funded by all members.”

Good points:

• the skill of Lloyd’s underwriters at dealing with unusual and complex risks
• improved risk management - should prevent the “herd mentality”, Lloyd’s’ historical weakness
• the toxic claims that brought it to its knees in the 1990s are now parcelled off to Warren Buffett’s Berkshire Hathaway.
• a single contract with one set of wording and terms

But the Economists suggests Lloyd’s Is not big enough and other subscription methods, with brokers splitting business or insurers subcontracting will be popular.

But it says: “In future many clients may just instruct their brokers to divide up the business even more—and sort out the resulting complexity.”