Lloyd's Looks To Shake Up The Status Quo
A year ago, skeptics in the insurance industry voiced concern about the viability of the Lloyd's market going forward. Now the tables have been turned.
Lloyd's launched an ambitious modernization program this year designed to screen out potential problem players before they have a chance to do any damage to the market's reputation and financial standing.
The biggest move was the establishment of a Franchise Board, which will review business plans, monitor each franchisees performance, and ensure that new underwriting and service guidelines are followed. An annual accounting system was introduced to make the market more comparable to the industry's financial reporting standards.
This comes on top of the rapid evolution of the market from one based on investments by individual members with unlimited liability, to one dominated by limited liability corporate capital.
Lloyd's also named a new chairman late this year–Lord Levene–to take the place of the retiring Saxon Riley, who oversaw the market's reform campaign.
Meanwhile, money continues to pour into the Lloyd's market to take advantage of soaring rates. Indeed, Lloyds capacity for 2003 is expected to hit a record of 14.25 billion ($22.5 billion at current exchange rates), compared to the 12.3 billion ($19.4 billion) this year, which was substantially higher than 2001.
The new capacity record is "a demonstration of [the market's] powerful commercial and financial strength, in defiance of the predictions of a number of pessimistic observers," declared Lloyds Chief Executive Officer Nick Prettejohn.
In addition, in a number of public forums Lloyd's has been calling for an end to the cycle mentality. "Collectively, we no longer have the luxury of a solid financial cushion to ignore changes and commit financial suicide," said Julian James, director of worldwide markets at Lloyd's, speaking before the National Association of Independent Insurers.
Mr. James called on the industry to "challenge the very notion of the insurance cycle itself," and declared that every underwriting manager must "make a sustainable underwriting profit year-on-year. If you can't do that, get out of the game. You're not needed."
The Bottom Line: Flush with new capital, and with solid quality controls and a more transparent accounting system in place, Lloyd's should thrive in 2003 and beyond. However, it's a lot easier to manage for profitability in a hard market than in a soft one.
The true test of the new franchise system will come way down the road when the market inevitably turns soft. Will the market's players, or the broader industry, follow the advice of Lloyd's leaders on the evils of the cycle mentality? Will they keep underwriting profitability their overriding objective, come what may? Luckily for sellers, the temptation to cut prices is unlikely to arise for a year or two, at least.
Was The WTC Loss One Or Two Insured Events?
Was the Sept. 11, 2001, destruction of the Twin Towers of New York's World Trade Center by terrorists one event or two? That's the $3.5 billion question still being argued in court.
The leaseholders argue that there were two planes involved that hit two towers at two different points in time–therefore the claim represents two separate events, each of which carries a $3.5 billion limit. Insurers, however, argue that the terrorists launched a single, coordinated attack against the WTC complex that represent a single event with a $3.5 billion per-occurrence limit.
There is a lot of money and emotion at stake in this case, which recently moved to the 2nd U.S. Circuit Court of Appeals.
The Bottom Line: The leaseholders have little to lose and much to gain by pursuing this claim in the courts. The odds are that the courts will uphold the insurers' position of one occurrence. However, don't be surprised if a comprehensive settlement is reached to avoid the uncertainty of our unpredictable and anything-but-insurer-friendly judicial system.
Republicans Take Over Senate
The fact that Republicans reclaimed a majority in the U.S. Senate, giving them effective control of both The White House and Capitol Hill, is great news for insurers and risk managers. We doubt you'll hear much talk about new ergonomic standards (unless they are voluntary or experimental), substantial new patients rights, or additional health insurance mandates.
Meanwhile, insurers and risk managers might finally get some of the tort reforms they have been begging for–especially when it comes to limiting asbestos claims for those with no apparent injuries. Reforms of class actions and punitive damages could also be forthcoming, much to the industry's delight.
The Bottom Line: It won't be a slam dunk, but look for the new Congress to finally pop what AIG's chairman and CEO Maurice Greenberg called the "liability bubble" that has sent jury awards and insurance premiums soaring. However, the industry could get slapped with new, expensive mandates by Republican champions of the privacy cause.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 30, 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.
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