While the rest of the industry has been challenged by a difficult economy, Lloyd’s is at the top of its game. Stephen Ross considers the reasons why

In a world where the old order is changing, it is perhaps the oldest insurer of all, Lloyd’s of London, that is going from strength to strength. While the global credit crisis has clearly hit the banking industry hardest, the insurance sector has not been without its problems.

Be it the rating downgrades that many insurers have faced, including some of the biggest names in the industry, or the much-publicised problems of AIG, the industry has recently had much bad news to cope with this. But none of this appears to extend to Lloyd’s, which has never been as popular as it currently finds itself.

Lloyd’s has missed many of the pitfalls that have recently dogged the sector. For example, Lloyd’s requires its participants to have a “vanilla” investment policy, meaning that it has not suffered the significant investment losses that have been seen elsewhere. The Lloyd’s market does not underwrite financial guarantee business and therefore has avoided the losses that a number of the monolines incurred.

Critically during these challenging times, Lloyd’s through the Franchise Performance Directorate (FPD) has continued to work in partnership with the market to maintain the focus on underwriting discipline.

In the past three years, there have been around 25 new entrants to the Lloyd’s market through new start-ups and acquisitions of existing agencies. This is not the whole story, as the list of parties that have sought membership has been much longer. Lloyd’s has apparently had to turn a number of interested parties away because they did not meet the standards required.

Why is Lloyd’s so attractive?

Many of the historical benefits of Lloyd’s remain the same today, namely:

• the ratings are stable and have some head room;

• Lloyd’s licences are attractive to those industry players seeking to write global business;

• the capital regime is efficient because of the mutuality that sits behind the market and the ability to use letters of credit as a form of capital; and

• most importantly perhaps, the Lloyd’s market provides access to business that many overseas players, including those based in Bermuda, just do not see.

But these benefits have been here for many years, so why the heightened interest now? In my mind, there are four reasons:

1) The FPD, set up in 2002 to monitor and improve the performance of Lloyd’s syndicates, has proved itself to be effective in its focus on underwriting discipline and, importantly, it has been seen to “have teeth”.

2) The Equitas Part VII transfer to Berkshire Hathaway means that Lloyd’s no longer has the legacy hanging over it.

3) The credit crisis has led businesses to focus on counterparty risk. This has meant an expansion of the subscription market as large corporate entities and insurers seek to diversify the risk on their insurance and reinsurance programmes. Lloyd’s is likely to be a major beneficiary of a return to subscription-based business.

4) The weakness of some of its traditional competitors has led to opportunities for Lloyd’s. This is perhaps most notable in the US excess and surplus lines market, where Lloyd’s has historically been the second-largest player behind Lexington (an AIG subsidiary that is likely to IPO in the near future).

Lloyd’s has always been a strong player in the global insurance markets, but its current position is as strong now as it has ever been. As a brand, Lloyd’s is once again something the UK insurance industry can be proud of. It remains a broker market and it is those brokers bringing business to Lloyd’s in ever increasing quantities that are at the heart of the resurgence of Lloyd’s. IT

Stephen Ross is an insurance partner at Deloitte