Lloyd's Report Examines Markets' Future, Global Influences

Lloyd's CEO Richard Ward said in an overview of the strategy that the corporation's role in overseeing the performance of market participants, a fundamental part of Lloyd's success over recent years, will remain a top priority for 2010-2012.

"But it is also time to take a more outward view, and this plan examines the external pressures which will influence our continued future success," he said.

"In the shorter term, the global financial climate continues to present real challenges to the market. We will also need to manage the implementation of Solvency II [European Union regulatory requirements], which will have a major impact on us and the whole industry," Mr. Ward remarked.

In the longer term, he said, Lloyd's needs to position itself to ensure that it "remains the market of choice for specialist property and casualty risks." This includes working to promote the competitiveness of London as a financial services center, Mr. Ward said.

According to the report, the global economy "appears to be beginning its nervous recovery from the recent economic downturn. However, the path of this recovery is uncertain, with few commentators agreeing on its likely speed and smoothness."

The report said it is unclear when governments and central banks will pull back from their interventions into world markets and how and when significant fiscal deficits will be addressed. But the approach to these issues will impact the speed of recovery, the likely course of inflation and the availability of investment returns over the coming years.

In general, the availability of liquidity and credit is improving, the report said, adding that such options are likely to be available only to quality businesses. Others will be constrained and their costs most likely will be higher. This will make businesses with strong underlying performance and capital strength well positioned to face the uncertainty which will continue to dominate the global economy in 2010 and beyond.

The report noted that the non-life insurance industry is emerging relatively unscathed from the turmoil in the wider financial services market, both in terms of financial and reputational impact.

The fundamental differences between the non-life insurance and banking business models have meant that the sector has been resilient and has functioned normally.

Non-life insurers are focused on managing risk and tend to adopt prudent investment strategies, according to Lloyd's. This, combined with a lack of significant balance sheet leverage, means that the vast majority of businesses have withstood the market turmoil.

Uncertainty around the economic recovery, however, will present non-life insurers with challenges in trying to maximize investment returns and manage the impact of inflation on the claims environment, the report said. It noted that the regulatory landscape for financial services businesses is being heavily scrutinized and policymakers and governments are reviewing ways to address the systemic failures in the banking sector.

The financial crisis and recessionary pressures have led to changes in the behavior of non-life insurance buyers, the report said. Risk managers seeking to spread risk are diversifying business across a range of insurers and are also under pressure to reduce the cost of insurance cover–for example, through increased retentions. This could result in lower demand for non-life insurance, which would also lead to lower growth or even a contraction in the reinsurance market, according to the Lloyd's report.

The report warned that insurers need to guard against being burdened with inappropriate and potentially damaging regulation primarily aimed at the banking sector.

Lloyd's said priorities this year are:

o Increasing the adoption and use of The Exchange

o Transforming the way the Lloyd's market handles claims

o Improving access to business through working with brokers and coverholders.