Lloyd’s of London Faces Challenge from Overseas Rivals and Digital Disrupters

Elsewhere at the Richard Rogers-designed Lloyd's building in London's Lime Street, tradition still holds fast. Insurance brokers queue up to sit on stools at the underwriters' desks to discuss policies. Much of the work is still done on paper, sometimes with a rubber stamp. Ship sinkings are recorded in a ledger with a quill pen.

But this quintessentially British approach to a $1tn global industry increasingly strikes some of the companies that pay large sums to trade as verging on obsolete, with business shifting quickly to digital platforms and cutting out highly paid middle men.

With competition mounting from overseas markets, insurance executives are asking if Lloyd's will continue to be the centre of their market in coming years, let alone the decades and centuries that it has lived through. "Lloyd's is at a crossroads," said one insurance executive. Lloyd's still has prestige and an impressive range of global licences, he added, but this came with very high costs. Those costs are slowly pushing his company to increase the amount of business it does elsewhere.

Lloyd's has started to heed calls for more radical change. Inga Beale, who became its first female chief executive in 2014, has made her mark promoting modernisation and diversity in a market that has long been seen as overwhelmingly old-fashioned, male and white.

When she joined the market as an underwriter in the early 1980s, she saw first hand the pressure to "drink 12 pints in The Lamb with the boys". Women were not even allowed in until 1972.

Her efforts have ruffled feathers among traditionalists, but people who work in and around Lloyd's say that bigger reform is needed if it is to survive in the digital age.

The market is facing challenges on all sides. Last year was tough. A £2.1bn profit in 2016 became a loss of a similar size in 2017 as, like its rivals, Lloyd's paid out for a series of natural catastrophes. Parts of the market not exposed to catastrophes - such as motor and aviation - also did badly. About 85 member underwriting syndicates use Lloyd's as a marketplace to pool and spread risk, but business is increasingly gravitating towards larger groups with their own capital and global offices that do not necessarily need the security of Lloyd's or its international licences.

Lloyd's says it is pushing hard to improve performance. Ms Beale said: "We are encouraging people to look at the bottom 10 per cent of poorly performing lines, and to take action. We are getting the whole market to tackle the underlying performance."

For many who work in the market, the issues go much deeper than a single year's results. While Lloyd's used to be the only name in town for some types of specialist insurance, buyers now have a lot more choice as centres such as Singapore, Hong Kong and Dubai have grown.

"Business is staying within countries and regions, and it is not something we are connecting with," said Steve Hearn, chief executive of London-based insurance broker Ed. "330 years ago marine insurance was where Lloyd's started. Now marine risks from Asia, for example, don't need to come to London at all."

A report compiled by the London Market Group, a trade association, and Boston Consulting last year looked at how well the city's specialist commercial insurance industry - including Lloyd's and the businesses that operate in and around it - was performing.

It found that London was doing well in traditional markets such as the US and Europe, but losing ground in fast-growing emerging markets such as Asia and South America.

In response, Lloyd's has set up offices in emerging markets including India, Dubai, China and Mexico. "We've set the footprint ready to tap into the emerging markets. There's business staying locally so we've got to be local," said Ms Beale. "Perhaps it is a little bit late with some of them, but we can easily catch up."

Costs remain a problem. In a report last year, rating agency A.M. Best noted that Lloyd's expense ratio - its costs as a proportion of premiums - had risen from 35 per cent in 2012 to 40 per cent in 2016.

According to UBS, that ratio is 10 percentage points higher than rival markets. People who work in the market point to two main reasons for the higher costs.

The first is the way that the market operates, with brokers and underwriters meeting face to face in a room just yards away from where many of them have permanent offices.

People who work in the market point to two main reasons for the higher costs. The first is the way that the market operates, with brokers and underwriters meeting face to face in a room just yards away from where many of them have permanent offices.

"The operating model is inefficient," said Mr Hearn. "People are going up and down Lime Street with leather cases to stand in queues . . . we need people focused on things where they can add value."

There are also complaints about the cost of getting business to Lloyd's, with multiple levels of brokers and insurance companies dealing with the same risks. According to A.M. Best, Lloyd's acquisition costs have been rising at about 6 per cent a year, well ahead of the growth in premiums.

Ms Beale said Lloyd's is working hard to improve efficiency, cutting its own costs and giving more brokers the ability to bring their business directly.

It is also modernising many of the market's processes, most notably by bringing in a new electronic trading system called PPL. The system was introduced voluntarily two years ago but initial take-up was disappointing.

Earlier this year, Ms Beale said that she would force the market to use it. Lloyd's now wants 80 per cent of its business to be done electronically by the end of next year.

"PPL is the start, but we are also working on structured data capture, and automatic premiums and claims processing," said Ms Beale. "Once you've built the whole piece, that's when you get all the savings."

But many people in the market think there needs to be a wider debate about how Lloyd's operates. The current initiatives, they complain, merely digitise an outmoded structure and way of working.

One frequent target is Lloyd's role as a regulator. Michael Wade, an insurance industry veteran said: "It must be worth examining whether Lloyd's should cease acting as a regulator - and focus purely on promoting the market, protecting the central fund, managing and expanding its trading licences."

Others would like to see Lloyd's focus on unusual and complex risks such as cyber insurance and let the cheaper, more commoditised business be done elsewhere.

Most of all though, there are calls for more rapid change. "They need to get on with it," said one person who works in the market. "There's a sense of frustration among those of us who care."