Starting next year, Lloyd's franchisees will have a new set of standards to meet in order to remain a thriving concern in the world's oldest insurance market. Franchise Performance Director Rolf Tolle described them as the "cornerstone of Lloyd's three-year strategic plan to ensure the market remains at the leading edge of the insurance industry."
"The minimum standards represent the values that are important to us, and by putting them down in black and white in this way, we are creating tangible proof of that," he added.
Essentially, the standards consist of requirements that certain business processes be in place to not only avoid excessive loss, but to ensure a healthy underwriting profit as well.
In terms of underwriting management, franchisees must have an effective process for "challenging the annual business plan, which itself forms part of the long-term plan for each managed syndicate," noted Mr. Tolle, while for risk management, each franchisee is required to have controls in place designed to manage risks to an acceptable level.
Mr. Tolle stressed that the standards are a floor and not a ceiling.
"While most franchisees will already meet the standards, the information we have published will raise the performance of those firms that face more challenges, reducing any negative impact they may have on overall performance," he said.
Achieving the results of the so-called Optimal Platform will be challenging within the time frame set down, according to a Standard & Poor's London-based analyst, Marcus Rivaldi.
As a franchisor, Mr. Rivaldi said, Lloyd's has the authority to sanction and remove from the market those that damage the franchise's brand.
"Yet, because Lloyd's is a market–not a company–there are limits to what the franchisor can direct," he said. "The Optimal Platform's success will therefore ultimately be determined by the support it gains from, in particular, its upper-tier franchisee."
Mr. Tolle also recognizes the balancing act needed to assure the success of the new standards.
"We are not telling firms what to do. How they meet the standards is entirely up to them," he said. "We are just making clear what is expected of them."
Since the standards were developed with the underwriters themselves and the Lloyd's Market Association, they represent a case of–as Mr. Tolle put it–"franchisor and franchisees working side by side to push the standards and build the 'optimal platform.'"
S&P's Mr. Rivaldi said the infrastructure required to supervise standards implementation for businesses that operate within the Lloyd's framework will pose another challenge to successful implementation.
"Franchisor management is also cognizant of this fact," according to Mr. Rivaldi. "It is reflected in Lloyd's original cross-cycle return target of '7 percent return on capital, greater than the risk-free rate.'"
Mr. Rivaldi sees the overall Lloyd's franchisor strategy as logical and credible.
"The successful achievement of the Optimal Platform is increasingly important in order for the market's long-term competitive position to be protected in light of the attractions offered by other international insurance and reinsurance markets–particularly Bermuda," he said.
Indeed, the fact that in the recent past, traditional Lloyd's businesses–such as Amlin PLC and Hiscox PLC–have set up complementary operations in Bemuda should give the Lloyd's market some concern, according to Mr. Rivaldi.
However, Mr. Rivaldi sees other external factors–aside from the new standards–as encouraging operational improvements in Lloyd's this year and next.
For example, British regulators have stepped up their requirements as to capital needs, and thus have forced syndicate management teams to become more aware of the risks they face.
In addition, greater transparency requirements for shareholders, lenders and brokers have led shareholders to demand adequate returns and the return of excess capital, Mr. Rivaldi noted.
Meanwhile, Lloyd's has been active on other fronts in improving the business climate of both its own operations and the London market in general.
"The London market's administrative processes are also a drag on Lloyd's competitive position," noted Mr. Rivaldi.
Progress on implementing reforms called for under the 1999 London Market Principles has been much slower than originally expected, Mr. Rivaldi contended, reflecting the complexity of the issues being tackled, the number of parties involved and the voluntary nature of participation, he said.
Nonetheless, in his six-month report issued earlier this summer, Lloyd's new chief executive officer, Richard Ward, said two of the LMP goals for 2006–an 85 percent level of contract certainty achievement and an operational electronic claims files exchange–appear to be within the realm of the possible.
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