Will Lloyd's announce a profitable year before its supporters lose patience? Members, particularly private capital, are historically a patient bunch and have shown great resilience during the recent downturn – the sharpness of which was unexpected.
Those trading through Lloyd's reconstruction and renewal in 1996 and staying with the market since can be forgiven for having an air of desperation, following the announcement of poor results for the 1998 underwriting account. Similarly poor results are expected for 1999 – already the subject of a plethora of cash calls.
The year 2000 may be better and hopes run high that 2001 may see a return on capital. However, history shows that, as soon as forecast results improve, potential investors conclude insurance is the route to easy profits. Recovery becomes short-lived and an abundance of capital leads to a weak market.
The feeling in the marketplace is that new chairman Sax Riley is presiding over a welcome change in Lloyd's attitude to private capital. It will be interesting to observe what changes are proposed to capitalise on a loyal band of supporters representing around 25% of Lloyd's capital base. Could it be that Sax, following Max Taylor as chairman, has led to a pax?
From first-hand experience, it is far more demanding to manage a loss-making business than a profitable one. The show has to be kept on the road while costs have to be contained or reduced. It is an aggressive approach to finance which Lloyd's syndicates appear for the moment to have lost.
With insurance being a high-risk business and capital providers taking large risks for occasional good returns, is it too much to ask that employment terms be adapted to reflect this – that the bonus element in remuneration packages be a more significant proportion of total remuneration and that perhaps basic pay be capable of being reduced in bad times within the terms of an employment contract?
If business managers demonstrated some concern for the plight of the capital provider by showing a willingness to take the rough with the smooth, they could contribute to a smoothing of the violent swings in results. This would enhance investor loyalty and could also contribute to the prevention of the unhealthy surges in investor demand when times are good.
Avoid cash calls
Managers should also respect the fact that Lloyd's members' losses have to be funded with cash as opposed to the comparatively softer option of investors in listed companies suffering through a reduction in a share price. They should therefore do all in their power to avoid cash calls, rather than relying on them to sustain their business.
For more than 300 years, Lloyd's has met valid claims without a failure, contrasting with a steady trickle of company failures – particularly the spectacular demise of Independent Insurance. Its success can be put down to strict solvency standards coupled with the ultimate support of a central fund.
However, Lloyd's needs to be wary of becoming so strict that adequate profits cannot be made. One new and profitable operation has decided to pull out as a result of a capital requirement judged by management to be too onerous.
There needs to be a culture in Lloyd's businesses of maximising shareholder value on similar lines to the sea change in attitude by certain publicly listed companies such as Aga Foodservice and Volkswagen.
A good example of the opposite approach is Marconi – its share price has suffered but it has been planning to reduce the price at which executive options may be acquired, insulating executives from poor share price performance for whatever reason. Shareholders are not happy. Lloyd's syndicates seeking long-term capital loyalty could do well to adopt the old-style culture that the Names' interest is paramount – assuming, of course, that customers' requirements have been met.
Time for training
Do insurance underwriters learn lessons from the past? Probably not, unless they have been trained thoroughly and built up their knowledge and skills working with good businesses.
Elsewhere in the financial services industry, with high staff turnover, expertise seems to be self-taught and standards of care, which few have the time or inclination to instil into others, are diminished in the interests of cost-cutting. Good training and an element of staff continuity would surely yield cost savings and reduce the risk of underwriters making poor decisions.
Former Lloyd's chief executive Ron Sandler's review of the whole financial services industry – no doubt including Lloyd's – will be observed with keen interest by those involved with the market. His ability to tackle complex issues with a calm, logical approach should see him succeed.
One hopes the result will be a culture of customer priority and openness which just may prevent a repetition of catastrophes such as the personal pensions mis-selling debacle in the 1990s.
For the future, one-year accounting is not the answer for Lloyd's but the ability to smooth results on a tax-effective basis may be. This could be achieved by allowing prudent reserving to be allowed for tax purposes – consistent with the government's desire to have annual statutory accounts used as the basis for tax computations.
Therefore the government, with more appropriate tax rules, and management, with more relevant employment arrangements, could usefully combine by sharing more directly in the fortunes of a vital city business, leading to reduced heartache and enhanced stability.