The bigger picture

In some respects Lloyd's new chief executive, Richard Ward, has it easy. The market is in much better shape than it has been for a while. The Names seem to have been appeased for once, capital levels seem reasonable, and the rating environment in the wake of Hurricane Katrina appears to be passable - for the time being.

There are just a few niggling concerns he might want to address as he filters through his in-tray, however. Such as how Lloyd's can pick up the pieces after the Kinnect debacle, the corporation's torturous attempt to get the market to sign up to an electronic trading platform.

The Kinnect project was finally abandoned at the start of the year once the apparatchiks had accepted that no one really wanted it, after accruing costs in excess of £70m.

There's also the small concern as to whether Lloyd's in its present form will actually exist in a few years' time, given that its excessive costs and burdensome regulatory structure are driving some of its biggest names to the cheaper environment that is Bermuda.

With Amlin and Hiscox having established new companies in Bermuda, the worry must be just how far the defections will go. After all, Hiscox has indicated that it might well relocate to Bermuda wholesale.

Lloyd's itself has not been insensitive to the threats posed to it and, in an attempt to set out its game plan for the next three years, has released its own strategic plan to transform Lloyd's into a low-cost service provider to its constituent insurance companies.

The possibilities open to members include an attack on mutuality by the voluntary use of the once-sacred Lloyd's Central Fund, as well as the possible creation of a Lloyd's insurance company in the US.

Yet even where its grand new vision is concerned, Lloyd's is already in trouble, given that one of its main architects, the head of business strategy Stuart Degg, left the corporation at the beginning of February.

Acting chief executive Luke Savage has tried to explain the loss of Degg as merely a reflection of Lloyd's moving from "development to the critical implementation phase" where the new optimal platform is concerned. But for many observers, the strategy's principal architect leaving so soon after its unveiling - and so soon after former chief executive Nick Prettejohn left - simply didn't look good.

Clearly some damage control is needed.

But is Richard Ward the man to pull it off? As former head of the International Petroleum Exchange (IPE), his track record is impressive. During his tenure at the IPE he pulled off a demutualisation of the exchange and also managed to move it from being a physical trading floor losing out to its international competitors to an electronic trading platform which is now top of its game. Some might suggest there are comparisons with what Lloyd's might want to achieve.

Up to the challenge?

According to Nigel Hanbury, chief executive of members' agency Hampden, such comparisons are wide off the mark. "I think it's an obvious conclusion to make that he demutualised his own market," Hanbury says."But Lloyd's is quite different to the IPE, as it's a market governed by the Lloyd's Act. But what appeals to the market about him is his get up and go and, clearly with the failure of Kinnect, he's got the skills we need."

And it's the ramifications of the failure of Kinnect that really concern Hanbury, as he feels that unless something can be achieved collectively then the smaller players in the market could well be left out of future electronic developments - a possibility which could have far wider implications than simply squeezing them out of lucrative deals.

He suggests: "There's a clear problem that some of the bigger players want to deal peer to peer, with the bigger underwriters dealing with the bigger brokers, but that may have ramifications for the market. If we don't have a subscription market, then Lloyd's will be finished. And that's a widely held view - Standard & Poor's said it would worry them if Lloyd's got any smaller. Lloyd's can't possibly allow this to happen."

There exists the possibility that Lloyd's as a proper marketplace, with a range of syndicates offering diverse lines of risk bound together by a common brand and common levels of service, simply won't exist in a few years' time.

As things stand, Lloyd's looks like it could well develop into a two-tier marketplace, with one set of agencies dealing with the biggest risks and developing their own electronic trading platform, while the lower division is left to its own devices and can only write the 'slops' that aren't wanted by the choice syndicates.

This is not just fantasy. Already six of Lloyd's largest players - Amlin, Beazley, Catlin, Hiscox, Kiln and Wellington - have formed unique relationships with the biggest brokers at Lloyd's to develop data messaging and work on other forms of electronic transfer, in a move which appears to leave other agencies in the lurch.

In total, the six represent a combined capacity of £4.7bn, which equates to approximately a third of Lloyd's 2006 capacity of £14.7bn.

Of course one of the unspoken reasons for the development of Kinnect was to build a system which would prevent precisely this sort of two-tiered Lloyd's, and provide a service for small and large syndicate alike.

According to IT consultant Roger Foord, Kinnect was always going to be a doomed venture simply because the way business is conducted in the London market isn't suited to the sort of instantaneous trading decisions that an electronic platform could possibly provide.

As he points out, the sort of complex underwriting arrangements that are necessary for some of the bigger commercial risks can't simply be decided at the press of a button, but instead require a more detailed negotiation between client, broker, and the various parties on the slip.

This is a basic fact which he feels senior management - some of whom have no background in insurance - are still failing to grasp. Foord says: "My understanding is that Lord Levene is still banging on about the possibility of changing Lloyd's into an electronic trading floor and he's so wrong about that."

Moving on from Kinnect

Simon Sperryn, chief executive of the Lloyd's Market Association, is not so sure that some sort of move forward in the wake of Kinnect can't be made."It was a tough decision (to close down Kinnect) but one that had to be made. It became apparent that Kinnect was not going to be the right solution. But I think that it's easy to criticise," Sperryn says.

So what next for the market?

Sperryn says: "A new CEO is always a good opportunity for things to go forward. He's someone who has pulled off the trick of moving from a physical market to an electronic market ... but I think there has to be a compromise - there has to be a market solution."

Sperryn adds that, given the nature of global property and casualty lines these days, people have to be realistic about what can be achieved. As he points out, it's no good coming up with some sort of system that ignores the way in which business is placed, or one that is regarded as too parochial.

"The broking houses will maintain power over the market, and underwriters want a solution which they can apply elsewhere internationally," he says.

And it's the brokers, after all, who are key to the success of any technological developments that Lloyd's wants to make - and not merely the big beasts.

Paul Tasker, managing director of niche Lloyd's broker Maestro Tasker, is sceptical that a market-wide single system for electronic trading is possible given the level of investment that individual businesses have made in recent years in developing bespoke systems.

Tasker says: "Lots of brokers have done their own thing but along similar lines, and we have had a system written for us. So as far as Kinnect was concerned, it did seem highly improbable, as brokers are by nature competitors on something like this. But I do think that not all brokers are as up-to-date as they could be, and a lot of firms are behind the times when it comes to technology."

Technology aside, Lloyd's has equally pressing difficulties that its new chief executive must come to grips with in the form of global competitors. Most notable is Bermuda, which it appears to be losing out to in terms of market share.

Yet for some observers, the Bermuda threat shouldn't be overplayed. Robert Smith, vice president and senior analyst for financial institutions at rating agency Moody's, says the island doesn't compare to what London has to offer. "Bermuda is an issue, but ultimately it doesn't have the infrastructure that London has, nor the franchise or concentration of underwriting expertise that Lloyd's has."

But surely things are changing, with some of the most high profile and successful underwriters in Lime Street in recent memory - one only has to think of Charman or Childs - transferring their allegiance to Bermuda? Isn't the danger that sooner or later the cream of the crop will have realised that, pound for pound, Bermuda simply makes more sense?

"You've got to look at who's going out from Lloyd's to Bermuda, and some entities won't be big enough to transfer out there," Smith says.

According to one London market broker, however, the world doesn't owe Lloyd's a living, and if the price is right for a given placement, then Bermuda will win.

History has demonstrated that the market is decidedly unsentimental when it comes to placing business. And if the cost of doing business at Lloyd's means that the bottom line of return for syndicates isn't as good as for their international competitors, they aren't going to hang around while Lloyd's tinkers with suggestions about lower costs of mutuality.

Setting the standards

Given that the FSA has removed the corporation's role as the market's regulator, many are asking what its point is nowadays.

Sperryn is clear: cost reduction must be at the core of what the corporation has to offer. "We have a well thought-out strategy which focuses on competitiveness and flexibility, and the role of Lloyd's in future will be to set the standards," he says.

"What I have in mind when I talk about such a strategic role is looking at the cost of doing business within and outside of Lloyd's. So the cost of claims here is an important item, as is the cost of commissions to brokers."

The problem here is that much of this has been said before.

With the cost of Lloyd's that much higher for its members than its competitors, Richard Ward needs to stop the rot soon or else wake up one day to a trading floor whose underwriters have decamped elsewhere.