Parts Of Lloyd's Concept Could Be Adopted In The U.S.: Conning

He highlighted three takeaways from the study relating to:

• The emphasis on underwriting at Lloyd's.
• The importance of reforms.
• The partially mutualized structure of the Lloyd's.

"First, underwriting is the business at Lloyd's," he explained, emphasizing the word "the."

"In U.S. property and casualty companies, it is often a business–it is a department, a process, a function along with other departments, processes and functions.

"At Lloyd's it is front and center."

Because of this, underwriting is responsible for generating the overall results. This is in contrast to the United States, he said, "where in the property and casualty industry in the past 30 years, there were combined ratios under 100 percent only three times."

This was possible, he said, because investments have historically been supporting the results of U.S. insurers. "If you look at the percentage of net premium that investments produced for U.S. insurers in the past 10 years, it's over 12 percent," he said. "So that explains why U.S. companies can get away with combined ratios of over 100 percent."

By contrast, with Lloyd's, he said, the contribution of investments of the syndicate and central fund assets is several points lower–"an important difference. This means their focus has to be on underwriting to generate the results," he said.

Mr. Theodorou pointed out the historical origins, from the days when individual names were putting up the capital. While it is now more corporate capital, "when you had wealthy individuals putting up their personal wealth, they could have invested in the stock market, but they invested in Lloyd's because of the underwriting risk," he said. "As a result, the investment philosophy was very conservative and that has not changed."

In the United States, investments are necessary for producing a satisfactory result, he said, adding that U.S. companies can learn from Lloyd's and find out how central underwriting is to their organization.

Second, he said, is the reform process that has taken place at Lloyd's, and which "has worked." He noted, "This is interesting because many U.S. companies have had reform efforts–restructuring, reengineering efforts over the years–and they often don't work.

At Lloyd's, which has had a series of reform waves, the process has worked. "The consensus is that it is a vastly different institution than it was prior to the reforms, the latest being in 2002," he said.

In 2002 a study was done, Mr. Theodorou said. Members voted on reforms, which were then implemented in 2003. As a result, the Performance Management Director was installed.

"Relating to underwriting, you must have discipline–especially with Lloyd's philosophy of underwriting, which is a high severity, low frequency approach to business," he said. "So they engage in big risks with low frequency–catastrophe, reinsurance, property catastrophe, political risk and offshore energy. These risks call for well-controlled selection, monitoring of pricing and tracking of accumulations," Mr. Theodorou said.

When Lloyd's introduced the Performance Management Director, he noted, it also began to introduce rate monitoring, catastrophe modeling and business plans that have to be accepted, giving Lloyd's more overview. With its high severity, low frequency philosophy, "you have to have that kind of discipline, especially when you have 87 syndicates," he said. "People in London say it's like herding cats, but they're doing it."

The third point, he noted, is its structure. Lloyd's being a market, not a company, explains a lot of the dynamics. "Eighty-seven syndicates are competing, but at the same time. They're cooperating, which you don't have when you look at U.S. companies," Mr. Theodorou said, adding that U.S. companies are competing with one another.

Because Lloyd's market is partially mutualized through the backstop of the central fund, if one syndicate does poorly, everybody may suffer, he said, which makes it "in the interest of each of the players to be prudent and to do things in the interest of the overall market."

He observed, "You have a delicate interplay of cooperation and competition, which keeps people sharp, smart and disciplined. And when it's done well, everybody benefits."

It's also easier for brokers to place a big risk, "because they can just navigate the room," he added.

The other interesting aspect of this, he said, is the human dynamic–when you have hundreds of underwriters in one room you have exchange of information, he said. "Like in a marketplace, you hear things, you share information, there's talk. So you learn things, you hear market news, you hear about losses. So it makes people sharp, being in a flow of information."

He said, too, that underwriters see a lot more business in the Lloyd's environment than "sitting in the office of an insurance company in some city."

This environment also has promoted underwriters' education, "meaning that underwriter training can be done in a much more concentrated way," he said.

"I've spoken to Americans who spent time in London and sat at a box. They said it was incredible, wonderful. You could see this flow of risks."

Mr. Theodorou added, "I sat at a box while I was over there for a few hours and the underwriter would see a couple of dozen things in a day–of complex commercial accounts. So it's a different structure and it's a healthy one."

The Conning study, he said, looked at the number of graduates of the Insurance Institute in London on a proportional basis, "and there appears to be more focus on formal training in that environment," he said. "This is a change, too," he added. "It wasn't the case 20 years ago in London."

He's been told, he said, that "young people coming into the [Lloyd's] market can't expect to rise very high unless they have certain credentials."

If the United States can't replicate the Lloyd's market, it can examine the results Lloyd's has produced, he said. Through training and education, Lloyd's underwriters have learned skills, developed maturity, judgment and expertise.

What can a U.S. company learn?

There are other ways to approach education and training, including industry courses, Chartered Property Casualty Underwriter training and other meetings.

"So they may not be able to copy what Lloyd's did by creating a Performance Management Directorate, but through their own processes they can have rate monitoring and other disciplines."

The bottom line, he said, is it's possible to get some of Lloyd's positive attributes, "but in a different way."

A good place to start, he added, is underwriting. "Because now what are the returns companies are getting on investments?" he asked. "They're no longer getting 6 to 7 percent. They're closer to four," he said.

"Many American companies say that underwriting is important, but do they behave that way?"

"Now there's much more importance for doing that, especially because of the soft market conditions. So underwriting is king," Mr. Theodorou said.