With its square mile of talent and changing attitude to reform, could London – and Lloyd’s in particular – be the main beneficiary of the Solvency II era?
A few years ago many were writing off Lloyd’s and the London market. Efforts to reform the business and introduce much-needed automation were stagnating, businesses were relocating to lower-tax domiciles like Bermuda, and the market was reeling from major catastrophes and growing legacy issues.
Fast forward to today and Lloyd’s is the place everybody wants to be. It may be a softening market, with companies continuing to grapple with low investment returns and impending regulatory requirements from Solvency II, but at Lloyd’s it’s all they can do to keep the hungry hordes out.
Recent entrants into the market have come from Europe – including turnkey operators Scor, Skuld and Chubb – although the steady trickle of Bermuda firms has also continued, including Allied World and hotly-tipped White Mountains, which is looking to establish a syndicate for a 2011 start, according to reports.
Among London’s frequently discussed features are its concentration of talent and industry expertise. Today, most company market players also have a box at Lloyd’s. Lloyd’s 320-year history at the centre of the city has helped to establish one of the best infrastructures for re/insurance business anywhere in the world. This is something Lloyd’s director of performance management Tom Bolt drew attention to during a debate on domiciles at the Baden-Baden Symposium in October.
“Domicile is increasingly a short-term decision that changes according to fiscal fashions,” he said. “What’s important in the long haul is market access and that is what London offers. We may or may not be the domicile of choice, but London is still the home of insurance. London has the largest international insurance market in the world with a gross written premium of £245bn. We have something which our nearest competitors, New York and Tokyo, can’t match – which is intimacy.”
“If you stand at the top of the Lloyd’s and you throw a coin, you could hit the offices of the top 20 reinsurance firms,” he continued. “In our patch of the Square Mile there are 50,000 insurance professionals – brokers, underwriters and ancillary services. When Willis chose an office based in London they picked a spot right opposite Lloyd’s.”
Nevertheless, the market has its demons, including failed technology initiatives and a lack of overall discipline. The turning point for Lloyd’s came four years ago. A £3.8bn deal with Berkshire Hathaway in October 2006 saw the resolution of Equitas, the organisation formed to handle the market’s 1992 and prior-year liabilities. The deal, along with the market’s business process reform efforts and Central Fund strengthening, saw Lloyd’s upgraded to “A+” by Standard & Poor’s in April 2007.
“Lloyd’s to my mind is the market of choice,” says Lloyd’s insurer Antares managing director, Stephen Redmond. “The genuine benefit it has are its security ratings, its global licences, the way and the ease in how business is transacted even if there remains a traditional nature to it because of the face-to-face aspect. The knowledge and expertise within the marketplace is unrivalled. It is unique and it’s been very successful. The market discipline witnessed in the last eight years in particular, through very expensive global natural catastrophes, has demonstrated the robustness of the Lloyd’s model.”
We don’t have that luxury
The market’s earlier success with contract certainty and more recent endeavours with technology, including the Lloyd’s Exchange and endorsement pilot, which went live in September, have helped it to shrug off past failures. This includes the £7m Kinnect technology platform that was shelved in 2006.
Redmond also notes efforts to improve the claims process. “I hope the legacy challenges or technological failures of the past are put to one side, and that people look forward as opposed to looking back. We’ve got the greatest opportunity to take this market forward.”
He says: “London could have been fairly criticised in the past for moving at the speed of the slowest when it comes to reform and change. Quite frankly we don’t have that luxury any more because there are other markets in other jurisdictions that are very willing but not necessarily able to pick up the pieces of any lack of progress in London.”
It is clear the market cannot afford to rest on its laurels. There is concern that the UK’s corporate tax regime is putting many off at a time when London could be a key contender for international re/insurers undergoing group restructuring ahead of Solvency II. “We’ve had a number of companies move their headquarters away from London,” says PwC tax partner Colin Graham.
“Three to four years ago a whole wave moved to Bermuda, Ireland, and the Netherlands to compete more effectively with Bermuda-based groups and to achieve more effective tax rates,” he says. “More recently London has missed out because groups have been restructuring and moving to single companies with branch structures, and the UK has not really featured on that short list of territories.”
The industry has worked hard with the government to bring down the rate of tax and it seems this approach is starting to pay off. In its 2010 Budget, the coalition government announced it would lower the rate of corporation tax from 28% to 24%. The chancellor George Osborne told MPs the low rates would act as adverts for the countries that introduce them.
But Graham thinks there are still plenty of challenges ahead. “Although reductions in headline corporation tax rates are interesting, we’ve got some significant tax reform taking place in how we tax international company profits, and that will cause another 12-18 months of uncertainty. Until we get through that, I don’t think we’ll get any companies moving back to the UK.”
Competition from other reinsurance domiciles, in particular Bermuda, New York and Singapore, could draw capital from the market. If the mooted New York Insurance Exchange goes ahead, Redmond thinks it would inevitably be a competitor for Lloyd’s. “But one mustn’t forget there was a New York Insurance Exchange many years ago and Lloyd’s ranked alongside that. Lloyd’s has continued and the insurance exchange didn’t, and that’s part of being in a competitive environment.”
Despite competition from overseas, Lloyd’s access to other markets is what makes it attractive to many. In Baden-Baden, Bolt highlighted the fact that the market has licences in more than 80 territories. “If you have a super-complicated risk in a far-out part of the world, somebody in the underwriting room will know about that place and will probably have worked on that kind of risk before,” he said. “This kind of bespoke policy and the ability to syndicate the risk is going to get more and more important in the global era, irrespective of where your domicile is.”
But changing distribution channels means re/insurance is a fast-moving game. Big risks are increasingly retained locally and that requires a presence on the ground in order to access the business. The platform Lloyd’s has set up in Singapore has 16 syndicates in operation. “The London market and Lloyd’s doesn’t have a unique right to see every part of the insurance business that is placed on a global basis,” says Redmond. “So we need to make sure we have access to these markets, and an attractive place to conduct business for our client base.”
Capital and capacity
Despite this competition from abroad, he thinks London’s biggest challenge at present is market conditions. Ironically, the continued interest in Lloyd’s has the potential to exacerbate prevailing market conditions. “It will chase premiums down,” says Deloitte insurance partner Ian Clark, “which is why, if you look at Lloyd’s stated strategy, what it’s looking for is new capacity to bring something new to the game.
“The days of the traditional Bermudan carrier coming to Lloyd’s to write a traditional Lloyd’s-based account just to add more capacity chasing the same business is now very difficult for Lloyd’s to accept,” he continues. “But if someone comes into Lloyd’s from the Far East bringing business from South East Asia that works very well. Or if another player comes in and transfers in an existing book of European business not written in Lloyd’s – that also works well.”
?? Redmond thinks it is good for Lloyd’s to continue to attract new capital and capacity, particularly if it brings something new to the table. Antares, for instance, is a relative newcomer to the market: it took on the London market portfolio of WürttUK after being capitalised by private equity money and an investment from Chaucer.
“I wouldn’t wish Lloyd’s to put the barriers up and say, ‘No more entrants into the Lloyd’s market’, he says. “It is a signal of a good market when you get this regeneration coming through.”
Clark predicts Lloyd’s is set to benefit from Solvency II. This is despite the uncertainty over the UK corporate tax rate. Its main strength lies in its unique capital structure at a time when organisations around Europe are contemplating increased capital requirements under the new regime. Lloyd’s posts additional capital above that provided by each syndicate in order to maintain its ratings and high solvency standards.
“If, as we all believe when we go into a Solvency II world, the industry will need to hold more capital … more capital means it’s increasingly more efficient to be in Lloyd’s,” says Clark. “What we’re beginning to see are these big pan-European businesses recognising it may be more capital-efficient for them to write their existing book of business inside rather than outside of Lloyd’s.”
Ramifications for insurers
Despite the potential benefits of Solvency II for Lloyd’s, the market continues to be concerned about the gold-plating of regulation. While the insurance industry came through the downturn with balance sheets largely intact, there is a concern that a knee-jerk reaction to the banking crisis by regulators could have ramifications for insurers. “The fear is that the FSA will take the rule book and put something in place that is more difficult than in other jurisdictions,” says Clark.
Despite the challenges, for now it appears that London is the place to be – with most companies seeking to have a presence in the Lloyd’s market. The streets around Leadenhall Market may appear to be much the same as they have always been, bustling with pinstripe suits, and paper files still very much in evidence. But the market is moving with the times, broadening its horizons, attracting new players and accepting, if not embracing, change to how the business is transacted and processed.
Alterra Reinsurance chief executive John Berger, speaking in Baden-Baden, provides a fitting summary. “If you look at the story of Lloyd’s, not that long ago people were ready to turn the light off and hand the keys back in. Leadership came in. If I had to start an insurance entity today, Lloyd’s would be my number-one pick.”