John Nelson, chairman of Lloyd's, and Hank Watkins, president ofLloyd's America Inc., sat down with National Underwriterand PC360 at RIMS on April 28 to explain challenges associated withthe Lloyd's model, the state of the E&S industry, what emergingrisks and markets Lloyd's is targeting, why insurance leadersshould take on social responsibility and their plans to recruit thenext generation.

Q:  Have you had any challenges explaining theLloyd's model to underwriters and brokers in the U.S.?

John Nelson: It depends on who you are talkingto. Lloyds is the No. 1 E&S lines writer in the States, so thebroking community knows Lloyd's on the whole pretty well.Explaining Lloyd's is something we do energetically through Hankand the team in the States—at events like RIMS and others. We haveregular "Meet the Market" events around the country. Most recentlyin Chicago and soon in Atlanta. Lloyd's always sounds complicated,but in essence it isn't. It's relatively easy, I find, to explain.A lot of people come through, visit the Lloyd's room, see thebuilding. When you see it physically in operation, it helps withthe explanation.

Hank Watkins: We have 32 people across theU.S.—20 on licensed platforms— who, generally speaking, are therefor compliance purposes, to answer broker and underwriterquestions. We also have a full-time person in Boston, one inAtlanta, and one in L.A.— who go to the conferences, broker officesand give presentations. It's a relatively small platform of peoplewho are facing the brokers, coverholders, and the risk managersevery single day. We'll use any number of venues, any industryconference – AAMGA, NAPSLO, PLUS, PCI, Target Markets, RIMS, CIAB.Those are just the big ones. We are closely tired with the surpluslines associations in the individual states.

The universities are great platforms for us—The University ofAlabama, for example, on their insurance day, their "I" day, theynot only have students, but hundreds of brokers, wholesalers, etc.,who are also their risk managers, so we can talk to an audience of300 people and cover a wide range of our stakeholders inone show. We do webinars. There are a lot of ways we do this.

Nelson: We also have a direct effort with therisk managers, here at RIMS, but also around the world in terms ofthe insureds understanding what Lloyd's does. Given that we arespecialist insurance, it tends to be high risk, high toxicity ifyou like. Business-to-business catastrophes. The major insurersknow Lloyd's very well. We are trying to extend the knowledge base.I don't want to sound complacent, but I think we do a good job. Ifyou look at our brand recognition, we score very, very high.

Watkins: We have over 1,200 coverholders, thoseare MGAs with binding authority with Lloyds throughout the country.They are our biggest cheerleaders. The footprint of Lloyd'scorporation may seem small, but through our binding authoritynetwork throughout the country it's massive. They wear the Lloyd'sbrand very proudly on their sleeves. And there are a lot of brokerstoo, who push Lloyd's very hard.

Q: How would you characterize the state of the E&Sindustry?

Nelson: In the States, I would sayvery competitive. You can see that there are more people coming in.The market though, I think is growing. But on the other hand,technology is changing all of the time, creating new E&S risk.That's what Lloyd's is there for.

If you look at Lloyd's performance, what's interesting is we arethe No. 1 E&S supplier. Last year our direct business grew by15%. It's partly to do with penetration, and with the market, it'schanging. It's creating more opportunity. We certainly aren'tcomplacent. Outside the U.S. is extremely tough. You have lowinterest rates, driving more capital in. If you look at the Lloyd'smarket itself, average capital is around 15%. Last year we had14.7%, so this is really attractive. It's pulling more and morecapital in. It's increasing the alternative capital particularly inthe reinsurance space and it's driving premium rates down. It'stough, but I think Lloyd's so far has performed very well.

Q: What emerging risks are you seeing?

Nelson: In terms of emerging risks, it's theway in which technology and the ways of doing business arechanging. Something we take seriously is innovation and trying tokeep ahead of developments. If I am being critical, what I wouldsay is that if you went back 20 years and mapped the key risksfacing corporations, and you map those risks against the productthat the insurance community is providing, there is a bigger andbigger gulf. One of the key challenges for the insurance industryis that they will never come together. There are many risks thatare not appropriate to insure, it's got be risk managed.

But on the other hand, we need to close that gap as an industry.And I think the industry understands that. For example, BusinessInterruption risks are absolutely fundamental, Cyber is a very bigthing, but then there are things like autonomous vehicles anddrones. There's no doubt that's a question of when. These willbegin to play a significant role in the economy, and in businesssupply we are creating a whole set of suite of new risks. Andthat's something in which Lloyd's historically has done well. Ifyou look back at things like D&O, satellites, and so on, wehave been at the vanguard of that.

What you need to do is look at what business is actually doing.Take the supply chain. If you have one piece of the chain goingwrong—and we saw that with the Thai floods, where suddenly theJapanese auto industry was brought to a halt. Analyzing emergingrisks requires hard work, hard thinking and hard analysis.

Watkins: Lloyd's has an emerging risks team inLondon. These market underwriters meet once a quarter, and theyshare what they are hearing from brokers, and they will aggregateand talk about it. I sat in on one of their meetings and it'sfascinating to hear about what's bubbling up. The Artic is thawinga bit and that opens up tremendous opportunity for shipping andalso creates risk for anyone who wants to put a deep sea oildrilling platform there or mine for minerals that are now visiblefrom space because the ice caps are melting. Solar storms areanother issue. Obviously Cyber is No. 1.

Nelson: We did a big report on climate change ayear ago, two years ago. What we know is enough evidence andhistory and we can model it. All of our business plans, if we arewriting that type of risk, the climate change model is built intoit.

Q: How do you analyze emerging markets and how quicklythey are moving?

Nelson: A few years ago, we did it more by feelthan demand. Three years ago we decided to launch a long-termstrategy. And we keep this under review. We put a great deal ofeffort into those countries we think are suited to Lloyd's, andthose countries are in South and Latin America—Brazil, Mexico,Columbia, Peru.

And then we are growing well in Eastern Europe—especiallyTurkey. India is a big opportunity, but difficult. Cultural issues there, but the Indian Parliament passedlegislation to let Lloyd's go onshore. Southeast Asia is a naturalmarket for Lloyd's. We have done extremely well there—that's now12% of our business. Our biggest platform outside London is inSingapore. And in China, we have a hub in Shanghai.

We are thinking more carefully about Africa. That brings allsorts of difficulties. We have to worry about political stability,corruption, regulation, bureaucracy. We measure those things verycarefully.

Q: Hank, anything new with IICF? [Ed. note:Watkins sits on the board of the Northeast Division of theInsurance Industry Charitable Foundation]

Watkins: It's the one corporate socialresponsibility mission that Lloyd's has embarked on. It's awell-run and appropriate organization that gives us a platform tospend some of our energies and help make a difference insociety.

In the U.S., the industry itself is viewed as responding after atragedy—a fire, car accident, disaster. Through corporate socialresponsibility, you can let the world know that we are here everysingle day, that we aren't just waiting for claim. Through theIICF, we can band together. There are no stripes in the room. Mycompetitors are across the table from me. But in those moments weare here to participate.  That's huge and you can't put aprice on that. It makes you feel good.

Nelson: It helps the cultureof the organization; it makes people proud of the place they work.They are more loyal.

Watkins: I can't think of an insurer who isn'tinvolved in either IICF or City of Hope [with the NationalInsurance Industry Council]. And we all get it, and I think peoplecoming out of college expect you to get it.

Q: What is your strategy for attracting the youngergeneration to the insurance industry?

Nelson: Overall, the insurance industry,probably going back about 20 years, hasn't done a good job ofgetting across that insurance is an attractive career. Let's behonest, it's not a Google or Apple. I do think over the last fewyears that an insurance career is more on the map—worldwide. Theinsurance industry has done a much better job of explaining whatinsurance does, particularly the kind of insurance that we do,which I would characterize as socially useful. We make a realcontribution to the economic chain. Not just in the States—but thenew New Zealand earthquakes, Thai floods. Insurance is pivotal inthe recovery of economies and communities. More of that is gettingacross. Insurance is something that is global, so opportunities arehuge. Both where you might like to work, what types of businesslines you would like to operate in.

We have big communications programs with the major universitiesaround the world. I have seen three sets of universities while here[at RIMS]. We take that seriously. The quality of young peoplecoming into insurance has improved over the last 20 years. Itcertainly has in London, and I think in other countries as well.It's an attractive business. People are your best ambassadors—youngpeople, bright people—news travels.

Watkins: Lloyd's in London has a well-developedinternship program; it's typically for U.K. citizens. In the U.S.we don't have the facility to hire people out of college. Perhapssomeday, but not currently. We ask them to consider the surpluslines industry in particular, whether through a wholesaler orinsurance company.

Nelson: We encourage nationalities anddiversity. Particularly in underwriting, it's not diverse enough interms of nationality. It's much better now in terms of genderdiversity. But the real challenge is nationality. We have toimprove that. That will improve the quality of business we do. Ifyou have people in the core of the underwriting community comingfrom all of these countries, then they're well trained, theyunderstand the local countries and they can add to assessment ofrisk. We see great benefits.