Concerns Raised About Lloyd's Reforms

However, Mr. Shipley expressed concern that the guidelines are too detailed and could act to "box in" the franchise board and the franchise performance director.

"We think the guidelines are broadly reasonable, but we certainly believe that the franchise board ought to have the ability to come to these issues fresh, and to take other issues into consideration if it feels that a particular syndicates business plan presents unnecessary exposure to the Central Fund or the ratings," he said.

Mr. Shipley said he remains concerned that detailed reporting might become a substitute for high-level critical analysis of the logic of business plans.

"Several syndicates that have recently caused concern to [Lloyds] regulators have had problems which could have been identified by high-level analysis of their business plans, but would have been opaque to people studying their loss development," he said.

A business plan demonstrates whether a syndicate is too dependent on a single line of business or on businesses where the likelihood of losses are related, he said.

As an example, he pointed to the problems experienced by a syndicate managed by Cottrell and Maquire, which is now in run-off. The Cottrell syndicate wrote big-ticket errors and omissions insurance as well as directors and officers, he said.

"However, the lawyers, the accountants, and the directors and officers all can get sued in the same cases," Mr. Shipley said.

"The same set of market circumstances–i.e., stock market boom and bust–generated losses across many of their lines of business," and left the whole syndicate exposed to the same general set of market circumstances, which is something that can be determined with an analysis of the business plan, he continued. "Correlation of risk is not purely a mathematical exercise. It is somewhat subjective, but its demonstrable."

As a result, he was concerned that detailed reporting required under the franchise proposals might create data overload.

"The data they will get will be so voluminous that it will be very hard for them to draw serious conclusions from it as early as theyd like," he said.

He recommended combining an analysis of the logic of the business plan with a view on the conditions in the market, along with gossip from the street. "Then the statistical information youve collected can support a due process if you have to take drastic steps with people," he said.

The Fitch ratings agency said in late July that it welcomed the intended annual business plan review and quarterly monitoring of each syndicates performance against plan.

However, Fitch said that such a program could place a strain on the Corporation of Lloyds resources. "Conflicts of opinion on business plans will undoubtedly arise and need to be resolved quickly if the administrative burden on all parties is to be kept to a minimum," said Fitch in London.

"As Lloyds proposals recognize, the recruitment of highly skilled insurance professionals is needed to enhance the probability of success of the franchisor/franchisee concept," Fitch said.

Fitch said it believes the introduction of the franchise board should, over the longer term, improve the performance of the market as a whole.

Fitch further said that the reforms will address "most of the structural weaknesses that currently exist at Lloyds."

"The move to annual accounting (from three-year accounting) will be a major step towards greater transparency for investors, both current and potential," Fitch said. "The agency believes that the majority of fresh capital entering the global insurance market in [the fourth quarter of 2001] headed for other markets, partly due to the complexity and costs associated with membership at Lloyds." (Capital continues to pour into Lloyd's this year. See page 22.)

Stephen Catlin, chairman of the Lloyds Market Association, said all change takes time to get used to, especially if Lloyds underwriters feel the reforms give them less control of their businesses.

"Is any business in Lloyds going to be over the moon about every single aspect of the franchise? No, theyre not. Am I going to be over the moon, personally, for my own business? No," said Mr. Catlin, who is also chairman of Catlin Underwriting Agencies Ltd., a London-based Lloyds managing agency.

"This franchise concept is going to be a challenge for every business in Lloyds, as it should be, in my view because we need to raise the standards and we need to get to prospective quality control, not retrospective quality control, which is what weve had heretofore," he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 12, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.