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Analysis: Lloyd's Looks to Change Product Mix

Source: Reactions


Posted on 16 Feb 2010

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Lloyd's of London's decision to broaden its product range as part of its recently released three year strategic plan, which followed the most extensive review of its business in a decade, will not harm the market's position in its core lines, Sean McGovern, Lloyd's general council, has told Reactions.

The move will see Lloyd's target more small to medium-sized (SME) specialist insurance risks in an effort to counter a shift in recent years towards a greater proportion of catastrophe risks.

McGovern said Lloyd’s would be looking at less volatile and lower margin risks.

“We want to ensure we have an environment that is attractive to higher volume business, but not high street business,” McGovern said, although he conceded that in the end it is “up to them [Lloyd’s managing agents] what they write”.

Last year, Reactions reported that Lloyd’s was growing concerned with the amount of catastrophe aggregate residing in the market after firms bulked up on cat business following price rises in the wake of hurricanes Gustav and Ike.

McGovern denied that a move towards SME business would mean forcing managing agents into making cuts in other areas.

“We are not necessarily looking for cuts,” McGovern said. “We expect pricing [for catastrophe business] to deteriorate and that managing agents will scale back in those lines of business. We don’t expect a dramatic shift in portfolios.”

Lloyd’s will also look to diversify its risk base by encouraging foreign sales outside of London and the US while strengthening its relationship with local brokers.

McGovern said that while the largest three brokers Aon, Marsh and Willis continue to be important to Lloyd’s, time and resources will be invested in attracting smaller brokers.

“We have a very strong emphasis on the importance of brokers and London as a distribution center, but where we can do more is by working with local brokers to get the market’s message out to local brokers whose understanding of Lloyd’s is very limited,” McGovern said.

In particular Lloyd’s is looking at winning more business in China, Mexico and India. In India, Lloyd’s will continue lobbying for regulatory recognition and the ability to write onshore reinsurance, while it will assess the business case for opening representative offices in China and Mexico.

“Mexico is the largest Latin American market in terms of premium income. We write a lot of Mexican business in London,” McGovern said. “We are considering whether the market should do more on the ground.”

McGovern said the same applies for Russia but that whether Lloyd’s will do anything will “rely on the market”.

Continental growth

Lloyd’s also wants to increase its market share among insurance buyers in continental Europe. At a press briefing in New York in January, Lord Peter Levene, chairman of Lloyd’s, said Lloyd’s should be writing more business in Europe.

“Compared to the business we do in the US, our business in continental Europe is very, very small beer. And that is what we have to work on,” Levene said at the press briefing.

Levene says the challenge for Lloyd’s is convincing buyers to break the habit of relying mostly on their domestic carriers for coverage.

“I think that fundamentally major European corporates have historically insured with their national carriers. So you had German corporates insuring with German insurers, the French with the French, Italians with the Italians and so on. To break in from outside has not been easy.

“They are in their comfort zone. Everything is in the same language and they like to have a large insurer who is going to cover a very large chunk of their insurance needs, whereas Lloyd’s is more picky and choosy about where it wants to be. Somehow we have to bridge that gap and it is a hard slog.”

Levene is looking to build on his achievements abroad in recent years, including progress in getting licences for Lloyd’s in China and Brazil. He said his goal is to “consolidate what we have done and build on it”.

He continued: “In China we have opened up there, which is good. It is very small beer at the moment but China is the second biggest economy in the world.”

Levene said progress in Brazil has come a lot quicker. Its reinsurance market was opened to foreign reinsurers in 2008. However, one area where progress has not been as positive is India.

“India is still stuck in the doldrums because we can’t get a license to operate there,” says Levene. “After the recent Indian elections we were told it was all going to happen. Well, we were delighted to hear it, but are still waiting patiently.”

Competitive threats

The three year strategic plan also highlighted regulation as a challenge that could harm London’s status as a leading financial hub.

McGovern said that preparation for Solvency II, the new European solvency directive due to be implemented in 2012, will require a lot of effort on the part of Lloyd’s and its managing agents, and that Lloyd’s will continue to lobby at the European level on behalf of the market to ensure the final regulations are appropriate to Lloyd’s operations.

“Insurers need to guard against being burdened with inappropriate and potentially damaging regulation primarily aimed at the banking sector,” Lloyd’s said in the report.

Some in the market have raised concerns that increased capital requirements as a result of the directive could put the future of some syndicates in risk. Smaller firms will not have the resources to build their own capital models forcing them to rely on using the more onerous standard model.

McGovern dismisses the threat.

“I wouldn’t agree that small syndicates will not be able to cope. We are pretty comfortable that the market is engaging in the right way,” he said.

“This is the most significant regulatory change facing the market in 30 years. While it presents some threats, it also presents some opportunities if we get the implementation right.”

Organizational restructure

In light of the strategic plan, Lloyd’s reviewed its organizational structure to ensure the successful delivery of the plan over the next three years.

As part of the changes, McGovern will take responsibility for Lloyd’s North America, allowing Sue Langley to focus on market modernization. In addition, Langley will become responsible for all market facing initiatives in the corporation including the claims infrastructure review and the co-ordination of coverholder projects. North America’s operational projects will remain within the market operations team.

The Franchise Performance Directorate will be renamed Performance Management Directorate to reflect the strategy’s resolute focus on performance management. Tom Bolt, who replaced Rolf Tolle earlier this year, has been named director, performance management.

Broker relations will move into the international markets directorate. Europe will be split into three regions: UK and Ireland; Northern Europe (Germany, France and the Nordic Region); and Southern & Eastern Europe, Africa.

Asia will also be split into two regions: Australia & New Zealand and Asia. All these regions will have a dedicated regional manager who will report to Jose Ribeiro.

In an email that was sent to the market, Richard Ward, CEO of Lloyd’s, said the changes “will help us to implement the strategy, become more consistent in our dealings with the market and external stakeholders, and to achieve our ultimate goal – to maintain the attractiveness of the Lloyd’s market”.

However, Lloyd’s faces the potential of a new competitor in its biggest market, the US. The New York state insurance department is looking into the possibility of setting up an insurance exchange that would operate in a similar way to Lloyd’s.

A New York insurance exchange was set up in the 1980s but closed after seven years and heavy losses. The state’s insurance department has held preliminary discussions with various insurance executives to assess the feasibility of a new exchange.

Levene sees a potential exchange as more of a complement than a competitor.

“The lions’ share of Lloyd’s business is in the US, so if there is going to be an insurance exchange here we want to be part of it,” said Levene at the press briefing in New York. “We will help and give advice as we can and if it does take place we want to be part of it.

“We are very proud of the size of our business in the US and in New York in particular, and we have a very good relationship with the authorities here. So if they are looking at something like this and they ask us to work with them, then we will do so. I can’t tell you whether it will work or not. It is very early days.”

Levene adds of the market’s US business: “We are obviously very proud of the fact that we have such a huge marketplace in the US and of course we want it to grow. But percentage wise I would like it to shrink because I would like to see other markets coming in and becoming much more important and much closer to home.”


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