HEAD bowed, Sir David Rowland quickly left the court, an assistant in tow. Behind the ex-chairman of Lloyd’s was a gruelling day of cross-examination by Simon Goldblatt, a barrister representing more than 200 “names”, the wealthy individuals who once provided Lloyd’s capital. The names allege that Lloyd’s committee duped them by concealing the extent of potential losses from claims related to asbestos-linked diseases. Sir David had two standard responses: he either didn’t know or he didn’t remember. But he denied a top-level conspiracy. The Lloyd’s committee was a “particularly anachronistic and inefficient forum for discussion and decision-making.” It did not plot to ruin new members.
With names suing, and now large losses looming once again, Lloyd’s is not well. Investors might be forgiven a sense of déjà vu. But the insurance market was supposed to have reinvented itself. If its new incarnation is failing its first test, does it have a future at all, and if so, in what form?
The trial is, admittedly, a hangover from the past that can hardly do more damage to Lloyd’s already fragile reputation. Far more worrying are the losses forecast for its most recent accounting period. Lloyd’s clings to an archaic three-year accounting system, dating back to days when ships took years to finish their voyages. Moody’s, a credit-rating agency, forecasts losses of about £2 billion ($3 billion) for the period 1997-99. Lloyd’s underwriting capacity is £10 billion a year.
These losses are much worse than those of most of Lloyd’s British and American rivals. David Wharrier of A.M. Best, an agency that rates insurance companies, says this is mainly due to poor investment returns. Lloyd’s is conservative in its investments, sticking to low-risk bonds. This is partly because of its idiosyncratic “annual-venture” system, in which, once a year, syndicates dissolve and reconstitute themselves. This discourages syndicate managers from making risky investments.
Lloyd’s has changed so much in recent years that already it bears only a faint resemblance to the elitist club that existed for three centuries. The overhaul was forced on it by the biggest losses in Britain’s corporate history: Lloyd’s lost £8 billion in five years to the end of 1992, thanks to payouts on claims ranging from pollution damage to natural disasters. These losses ruined more than 1,500 of the 34,000 names, who had pledged all their personal wealth for the risks they underwrote. They in turn sued their agents and underwriters for negligence. This all led to a “reconstruction and renewal plan” in 1996. Its key element was a settlement offer to the names, through the establishment of Equitas, a Lloyd’s-owned “bad bank” that is working its way through Lloyd’s pre-1993 liabilities. Most names accepted the offer.
To attract fresh capital and to underwrite new business, Lloyd’s had to transmogrify into a very different institution. Some elements of its commercial structure remain in place. Lloyd’s is still not a publicly quoted company. Its underwriters, employed by managing agencies for 123 competing syndicates, continue to sit in their boxes at the Lloyd’s building, a futuristic glass construction. Brokers pop by and propose risks that the underwriter accepts by scribbling the share he wants on the broker’s slip.
Yet despite such ancient rituals, much has changed. Companies now provide around three-quarters of Lloyd’s capital, with limited liability. In the past, all of Lloyd’s capital was provided by unlimited-liability names. Today even private individuals can opt for limited liability. Next, the arrival of a new type of insurer has also reshaped the market. These are Integrated Lloyd’s Vehicles (ILVs), holding companies that combine the provision of capital by a corporate investor with ownership of a managing agency that runs underwriting syndicates. Thanks to this combination, ILVs resemble conventional insurers. But they differ in the use of Lloyd’s local licences in jurisdictions all over the world, and in their participation in Lloyd’s “mutuality”. Lloyd’s is mutually owned by all its members, who pay into a central fund that guarantees all claims against any syndicates.
Herein lies one of Lloyd’s strengths. “The security of Lloyd’s policies is paramount to us,” says Roy Butler at Kiln, a managing agent for four syndicates. So is its international reach: Lloyd’s is licensed to do business in 60 countries. Its brand name is well known (not always for good reasons). And Lloyd’s can write exotic risks. Its members are reputed to be the “first insurers of the last resort”. Lloyd’s defenders say this is down to Lloyd’s underwriting expertise. Critics claim it dangerously undercuts others’ prices.
Given its new series of losses, a first check on post-reinvention Lloyd’s is hardly encouraging. It is still saddled with antiquated technology. And its central operating costs are high: members have to pay a subscription fee for services such as the “maintenance of the Lloyd’s brand”, as well as making contributions to the central fund, and to the repayment of loans taken out as part of the reconstruction plan. And Lloyd’s faces tough competition, especially from reinsurers such as Munich Re and Swiss Re, and from tax-advantaged insurers based in Bermuda. After a long period of decline, Lloyd’s once dominant share of the world insurance market has been only about 2% for some years now.
Lloyd’s defenders blame the latest losses on the insurance cycle. According to Swiss Re, last year was the second-most catastrophic in recent insurance history, after 1992, the year of Hurricane Andrew. Premium rates have been falling, but they may now have hit bottom. Rates may rise in 2001, when they will reflect last year’s disasters, such as the storms in Europe.
Lloyd’s results tend to be volatile because of the nature of its business. “Big ticket” catastrophic risks, for example, are lucrative in calm weather, but devastating when hurricanes happen. “In good times, Lloyd’s outperforms all its competitors; when it’s bad, it is very bad,” says Christopher Hitchings, an analyst at Commerzbank.
Considering what it has been through, Lloyd’s has proved surprisingly resilient. But it remains vulnerable. New losses could make corporate investors think of taking their business elsewhere. Nick Prettejohn, a new chief executive enthroned 12 months ago, launched himself into his new job with a reforming zeal. He is planning drastic measures, including an emphasis on e-commerce, and the reduction of his current workforce—about 2,000 people—by 75%. But reducing the headcount may only serve to strengthen the impression that Lloyd’s of London is destined to be an ever-dwindling force in world insurance.
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