Lloyd's Record Profits For 2009 May Be Tough To Top As Cats Loom

Lord Levene added that "as you know very well, this industry is not one where you can have a steady growth progression, because you're always at the mercy of disasters–which is what we're there for."

John Eltham, head of North American brokerage business for Miller Insurance Services Ltd. in London, said that in viewing competition from domestic markets, London is in a strong reinsurance position.

With cover-holder business, underwriters have to be selective and monitor trending in terms of price, "but that can be done. It's largely the open-market business, which is the large risks, where global competition, particularly from domestic markets, has increased."

Another key, he said, is in the area of claims. In terms of the claims process, London, particularly Lloyd's–which accounts for 65 percent of the London market–has for a long time had a reputation for being slow in terms of policy documentation. Because of this, some claims can take a period of time to get settled, he said.

On the policy documentation side as well, Mr. Eltham said, the contract certainty approach has been hard for brokers to deal with. Now, however, due to a huge initiative in London, "the job is done, so issues such as the World Trade Center [coverage]–multiple policies, different wordings–the opportunity for that type of situation to occur, where the policy has not been issued at the time of loss, or wording agreed upon, is dramatically reduced."

He added that "London can be very proud of that position. That's a key part of the value proposition."

Mr. Eltham also pointed out the value of the London broker. "If you position the London broker against the U.S. broker in terms of how the claims are handled, the London broker remains hands-on." He described this as "a massive difference."

He said this is critical in light of the fact that while 75 percent of Lloyd's claims are for $150,000 or less, those claims represent only 5 percent of the total aggregate that gets paid out.

"So from a process standpoint, you can see where if you focus on that"–by streamlining, understanding the components, staying involved and managing it through–"the other 95 percent can get a lot more attention."

Mr. Eltham emphasized London's value proposition for the buyer. "There is more than just premium, and that's service," he said. "The only reason insurance exists is a promise to pay."

He said following an economic crisis that "hopefully everyone has come out of, a payment in advance–'Let's argue about the details afterward, but, yes, you've got a valid claim. We'll get to the final settlement figure, but here is payment on account'–keeps people moving."

Darren Doherty, managing director with BMS Direct & Facultative in London, noted that Lloyd's overall result for 2009 has been "fantastic." He observed that a number of the syndicates within Lloyd's also have issued very positive results for 2009.

"It was a benign cat year, and Lloyd's is a very heavy catastrophe-exposed market. Obviously, if there's a benign cat year, those results flow through into the bottom line," Mr. Doherty said.

He noted that Lloyd's has significantly increased its capacity, which is the largest it's ever been, at about ?26 billion ($39.7 billion).

There also are "a host of new applicants to join the [Lloyd's] Society and underwrite within it," he said. "The results are showing that it's an efficient place to do business and a safe place for insureds to put their business. With that inherent spread within that marketplace, when risk managers really understand the market, they see the benefits of that."

Since the beginning of 2010, he said, markets on the property side are softening in the United States and London.

"So far, orders are being maintained, but the market is moving downward," he noted. "The only twist is that there are a number of large carriers in the U.S. that are re-addressing their aggregates in the catastrophe-exposed areas. That is presenting additional opportunities for Lloyd's."

A number of the larger managing agents, as well as syndicates within Lloyd's, have redomiciled offshore, predominately due to fiscal benefits, he observed. "That's not a result of any of the recent changes in the world economy," he said. "It's just that certain platforms around the world are more beneficial, depending on the structure of the company."

While effectively this is redomiciling of the holding company, the underwriting and the transactional base still is retained within London in most circumstances, he noted.

"The predominant move has been to Bermuda, but I don't think that's a negative," Mr. Doherty added. "From a security perspective of the actual underwriting that's done within Lloyd's, it has no impact."

He also said the London market is still seeing risk managers and other commercial insurance buyers from the United States shopping in London. He believes there are a number of drivers, the predominant one being the more syndicated approach to where their business exposures lie.

There were a number of risk managers who were heavily reliant on some of the large carriers, domestically or overseas, he noted. "In light of the fallout of the financial crisis, there's been much more scrutiny on how much of any given risk they give any one carrier," he said, making the Lloyd's co-insurance approach much more popular from a risk management perspective.

The Lloyd's market itself, he observed, takes a syndicated approach, with a number of different businesses operating under the Lloyd's banner–with a Central Fund to protect policyholders. "So by coming into London, risk managers were keen to get London participation alongside their domestic markets to spread that risk," he said. "So that drive is a result of that and we are continuing to see that."

Risk managers who have historically spread their risk weathered the financial storm better, rather than being solely reliant on any particular carrier, he said. "It's generally a more sophisticated buy from a risk manager's perspective," Mr. Doherty explained, adding that while this is not a new phenomenon, "it's definitely more of a focus."

Mr. Doherty noted that London also is seeing more risk managers taking business to London in the middle-market segment. Historically it was the larger risks "that were into that kind of play, but now we're seeing it moving down the chain and the mid-market business also is looking for that kind of approach."

"Predominately I think they've seen the downside on being too reliant on one large carrier…," he said. "So it's a combination of having seen that this reliance isn't the most risk-averse approach and a general move into more of a co-insurance market."

Meanwhile, he said, governance issues and "the thought of having to report to a board that you've lost $100 million of your capacity in a large program would be difficult. But I think generally within boards of the type of companies that have risk management, they're looking at reliance on any financial institution within their businesses, and risk management spreading the risk on the insurance side is part of that."

Organizations are focusing more on insurance, predominately because of cost, with incomes strained because of the global financial crisis. "There's much more focus on the cost of everything, and insurance is one part of that," he said.

A positive outcome of the current soft market, he said, is maintenance of catastrophe limits. "One of the things that often happens in financial-pressure scenarios is that people tend to buy less catastrophe limit because cat purchases are one of the most expensive," he explained.

However, he added, "so far, because the costs [of coverage] are falling, people are maintaining the limits in those catastrophe-prone areas."

Although last year was benign in terms of catastrophe losses, he said that in recent years there have been a number of significant events, "so people in recent history are aware of the need to keep those limits at the level they're at."

Luke Savage, director of finance, risk management and operations at Lloyd's, said that from his market's perspective, "it's not just the results that we're pleased with. We think we're in great shape, generally. We've got a very strong balance sheet–probably the strongest it's ever been. We talk about positioning ourselves as the market of choice for specialist business, and from the number of people that are trying to join the Lloyd's market, we think we've been very successful in achieving that position."

He noted that Lloyd's has a much stronger focus on underwriting discipline now "than we used to in the days of old. We have an entire team of people working here at the center, to look at the underwriting plans of each of the businesses and make sure they are sensible."

He added that "if you went back 10 years, anyone could try and underwrite anything here. However, now they have to have a business plan they're comfortable with, it has to be inherently profitable, and we have to be comfortable with the amount of capital they want to put up to support that plan."

That discipline, he said, is paying off, noting that Lloyd's credit ratings have once again been reaffirmed, while the comments the rating agencies are making are another indicator "that we are in very good shape–and at a time when many of our peers are seeing credit downgrades or seeing themselves put on negative outlook.