Lloyd's Reforms Won't Kill Entrepreneurs

International Editor

London

The point of reforms at Lloyds is to stop the gambler, not theentrepreneurial underwriter, according to the chairman of theLloyds Market Association, Stephen Catlin.

Mr. Catlin was commenting about the recently released Lloydsconsultation document, which lays out a radical program of changethat includes a proposed move to a franchise structure.

The franchise structure is designed to “create a disciplinedmarketplace of distinct, independent businesses, and will placeclear obligations on the franchiser to promote the overallprofitability of the market,” according to the document developedby the Chairmans Strategy Group. (See NU, July 15, page 6,and July 22, page 6 for related articles.)

A properly run business is not going to feel any serious impactarising from the franchise contract, Mr. Catlin told theNational Underwriter.

The franchise proposal wont kill the entrepreneurial flair atLloyds, he said. “It wont stop entrepreneurial people; it will stopthe gambler,” according to Mr. Catlin, who is also chairman ofCatlin Underwriting Agencies Ltd., a London-based Lloyds managingagency.

“This franchise concept is going to be a challenge for everybusiness in Lloyds, as it should be in my view, because we need toraise the standards and we need to get to prospective qualitycontrol, not retrospective quality control, which is what weve hadheretofore,” he said.

“As a business in Lloyds, and one which has raised quite a lotof capital in the last few weeks, Im not interested in staying inthe Lloyds marketplace if Im going to have competitors whoover-trade, so that when it goes wrong I have to pay for theirmistakes,” he explained, noting that Catlin would rather leaveLloyd's and trade outside of the market than let history repeatitself.

Since beginning operations in 1985, Mr. Catlins agency has mademoney, he said. And he emphasized that he doesnt want people tothink that he wants or plans to exit the market.

“I happen to think that the Lloyds platform is a wonderfultrading platform to work from,” he said. “Its a great place towrite global specialty risks, but we no longer can sit around andallow the weaker brethren to trade on the back of essentially ourcapital, take giant profit commissions when its going well, andleave us to pick up the pieces when it goes wrong.”

He said the World Trade Center losses demonstrate clearly whathe is saying. “Ive looked at some of the line structures thatpeople had in terms of WTC exposures,” he said. “I just cannotbelieve the extent to which some syndicates have over-traded. Theiraggregate gross exposure was far too high, as was their netexposure and their exposure to individual lines. Some syndicatestook on risks that were in excess of what their capital base couldsustain, which therefore means if it goes wrong, it falls straighton to the Central Fund,” which covers for those who can't payclaims.

Most of the losses at Lloyds over the last three years have beencaused by syndicates that were “absolutely appallingly managed,”according to Mr. Catlin, noting that this became clear to him whenhe was elected chairman of the LMA two-and-a-half years ago.

From the 1997 to the 2000 year of account, the market lost about4.5 billion ($7.2 billion, at current exchange rates), excludingthe World Trade Center losses, he noted. (Some WTC losses might endup being registered in Lloyd's 2000 year of account, if that wasthe inception year of the affected policies. WTC losses for allyears of account at Lloyd's are estimated to be slightly under 2billion, or some $3.2 billion.)

“My personal view is that if were going to maintain the brandname of Lloyds, if were going to maintain a rating that is of valuefor the marketplace, we cannot afford to lose that kind of money inthe next soft market,” he said.

Mr. Catlin explained that the franchise initiative will assurethat managing agencies have proper business planning process,underwriting controls, actuarial analysis of back-year numbers,rating models and premium level adequacy–mechanisms that manyloss-making syndicates had failed to institute.

Another consistent theme for loss-making syndicates is that theylost money not just in one year, but in three years. While peoplein the market were aware that these syndicates were not in verygood shape, “nothing was done about it until there were three yearsof bad underwriting,” he said. “One year of bad underwriting isquite enough.”

The franchise initiative will enable immediate action to betaken, with the possibility that a managing agency could lose itslicense if corrections are not made to underwriting behaviors. “Thefranchise creates the structure for a strong Lloyds specialtymarket,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 5, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.