Lloyd’s may have started the year with record capacity, but that doesn’t mean its new underwriting performance director faces an easy first few months. We find out why
There’s a new cop in town. Tom Bolt has taken on the formidable job of following Rolf Tolle as Lloyd’s second-ever underwriting performance director. With responsibility for approving every business plan in the market and steering it through choppy economic waters against the backdrop of softening rates and ever-increasing international competition, he’s prepared to be tough.
Bolt met Insurance Times three weeks into 2010. Since 1 January, he has been running the market single-handedly, having enjoyed a three-month transition working alongside Tolle. “I learned a lot things by hanging out with him,” he drawls in his laconic northwestern accent. He already has strong ideas, on underwriting performance, the balance between regional and Lloyd’s business for cross-platform insurers, mergers and acquisitions, and regulation.
But how tough can he really be given that Lloyd’s has started 2010 with record capacity – believed to be in the region of £23bn, a 30% rise on 2009? “You can’t beat the optimism,” he laughs. “There’s a lot of things that go into deciding that level of premium. Our guys would like to have headroom to make sure they don’t run afoul of the guidelines for realistic disaster scenarios.
“The other thing is the timing of when it gets set. A lot of the business plans came in before the end of the wind season, so there was still some expectation there would be a wind event – in which case that would change the way the market worked and you would need that premium capacity.”
Business plan reviews
Bolt adds that the market may not write as much capacity as it has the power to do – and he would be willing to step in if necessary. In fact, he plans to meet with every managing agent over the last two weeks of February to review business plans against the current market conditions.
“I expect the business planning to be a dynamic process,” he says. “Those numbers were based on a set of assumptions … if your assumptions turn out to be wrong, or the market is different, we expect the business plan to be responsive to that. To that end we are seeing everyone to say, OK, give me what you are really getting – what’s your new business plan?”
How tough is he willing to be? “Would we stop individual guys from writing more business if it was sensible to write it? No. If it’s not very sensible to write it, then you’re going to start questioning the loss ratios, the capital adequacy and therefore they might have to put up more capital if they want to continue down that avenue.”
Two new entrants for 2010
Meanwhile, entry to the market remains strictly controlled, with just two new entrants this year writing £200m of business, which is, as he says, “a very small percentage of the overall mix”.
Despite the huge growth in company capital in the market, Names continue to write roughly 20%, something Bolt does not see changing. “It has historically been the best form of surge capital,” he says. “I’m happy to have any kind of capital that wants to take risk in a sensible way.”
There are some things he won’t stand for, though; among them insurers dumping bad risks in Lloyd’s and writing the better risks on their company paper. He accepts that a number of the big Lloyd’s carriers have significant and growing presences outside the market, but insists that there should be a clear delineation between what business is written where.
“I don’t want the society to be taken advantage of in terms of what business to put in and what business to put elsewhere,” he says. “If you have a significant operation outside Lloyd’s, we ask that you have a very clear protocol over what you write inside versus what you write outside, identified in writing and auditable.”
Bolt, who has an impressive pedigree in insurance and reinsurance, acknowledges that following Tolle is a big job. But then, he worked for Warren Buffett at Berkshire Hathaway for years in several stints, so must be used to big personalities. His most recent was in Lloyd’s itself, running Flagstone Re’s Marlborough Managing Agency. Did Tolle have any special words of wisdom for him? “Well, I better hold on to that because he’ll probably sell it for a book one day!” he laughs, characteristically reticent. “It could be called, Things I Told Tom.” He’s not giving away any more than that.
Bolt is more willing to talk about market trends. Take M&A, for example. “For a long time, you would have thought there would be more mergers, particularly in Bermuda,” he says.
“But if everyone is trading at 80% of book, you’re unlikely to get shareholders to be happy about merging. It’s also less expensive to acquire business through a merger than it is to go out and generate it. But in a world with over-capacity and softening rates, how excited are you about the business you are acquiring anyway?”
The road ahead
This situation may change, he cautions, in the light of Solvency II – a directive for which he reserves some harsh words. “The system was built and designed by big companies in Europe for big companies in Europe,” he says. “We have a lot of small to intermediate-sized companies in Lloyd’s. If each has to have its own Solvency II model, then there is a big burden on those guys.”
Companies must develop their own models, he says, or use less sophisticated mechanical calculations, which would set their capital requirements at unrealistic levels. The time and money that goes into this could force consolidation. “The problem is, we are going to have this really well documented, risk-managed, money-losing set of businesses – people need to focus on the business itself, while doing all the positive things that Solvency II brings you.”
And his forecast for the market in the year ahead? “Rates are down,” he admits, fresh from the 1 January renewals. “There’s a lot of pressure from fully reloaded capital in the market, there are more players going after the business in the same space, and our world economy is still smaller … therefore less insurance is needed. You have all these guys going after a smaller pie – that’s a pretty good recipe for a soft market.” Maintaining underwriting discipline in this climate will be hard work, but it’s a challenge Bolt is ready for. IT