The Lloyd’s of London building designed by Richard Rogers was the tallest in the insurance district for a long time after being completed in the 1980s. These days, the 14-storey tower is dwarfed by others, including Lord Rogers’ Cheesegrater, which are filled with big insurance groups.
It is not the only way in which Lloyd’s has been overshadowed. It suffered a £2bn loss for 2017 and has changed chief executives. Its brokers and underwriters, including the wealthy individuals known as Names who once personified the market, have lost business to Switzerland and Bermuda. A traditional institution is at risk of becoming an anachronism.
Lloyd’s has a future. If had not been founded in a coffee house in 1688, no one would now invent it. Yet hidden by elaborate traditions — the stools on which brokers sit and the Lutine bell rung on special occasions — is a modern concept. Lloyd’s is not one company but an exchange, or what the technology industry calls a platform.
If it uses technology cleverly, instead of relying wholly on expensive brokers to bring in new business, and it taps the world’s capital markets intelligently, it can haul itself into the 21st century. Its members have to choose between their past and the future and do so quickly.
History suffuses Lloyd’s. When I visited last week, a tail-coated assistant known as a “waiter” was recording the fate of an Indian container ship in the casualty book with a quill pen. Its marine underwriting floor is the heart of London’s specialist insurance market, which employs 52,000 people and contributes a quarter of the City of London’s gross domestic product.
History gives it an origin story and a global brand, but holds it back. Many of its brokers still transact deals on paper, rejecting the technology that Inga Beale, chief executive until this month, tried to introduce voluntarily. She then had to start imposing it on the market.
That tells a deeper story. Lloyd’s is an obstinate place, ruled by its underwriters and brokers. They still stroll on to the underwriting floors from nearby offices in the mid-morning to strike bespoke contracts on unusual things, from yachts to footballers’ legs, the actor Will Smith’s bungee jump into the Grand Canyon, and cyber attacks.
Stock exchanges got around the problem of being controlled by their insiders with vested interests by demutualising and going public and many have thrived as a result. But it would be hard to demutualise a unique insurance market. John Neal, the new chief executive, must cajole the insiders instead.
The first problem for Lloyd’s is its cost of doing business. It is still attractive for insurance companies to write contracts through Lloyd’s, taking advantage of its brand, the central fund that stands behind losses and the pool of business within a short walk. But it comes at a price and the market’s ratio of expenses to income is too high.
That is largely because of its old-fashioned method of distribution. A US customer seeking insurance at Lloyd’s may go to a retail broker, which passes the business through to a wholesale broker, which calls a Lloyd’s specialist, who then places the contract. Everyone takes a cut, making it more expensive than simply going to a big insurer.
These layers were all needed in the pre-digital age and traditionalists claim gamely that Lloyd’s contracts are so unusual that it cannot cut out brokers and go direct. It could not do so fully, but technology could link the underwriting brains at its heart to a global distribution network more efficiently than its brokers care to admit.
The second problem lies with the underwriters. Lloyd’s was once a market of individuals putting up wealth in syndicates to take on risk, but that faded with the institution-threatening asbestosis crisis of the 1980s. There are 290 individual Names compared with the nearly 34,000 who settled then to cap losses from unlimited liability.
Many of what are still called Lloyd’s syndicates are really vehicles for large insurance companies
Many of what are still called Lloyd’s syndicates are really vehicles for large insurance companies that both participate in the market and compete with it for insurance business. Lloyd’s was essential for Names but is ultimately dispensable for such groups — they have their own brands and licences if the institution ceases to be convenient.
Lloyd’s has plenty of capacity for now, but it needs to diversify to guarantee its future as a thriving market. One route is to permit more Lloyd’s insurance to be funded with insurance-linked securities and catastrophe bonds, rather than all of it being held by syndicates. Some $90bn of the world’s $600bn reinsurance is backed by bonds, and that market is growing rapidly.
Turkeys do not vote for Christmas and many Names and syndicates do not warm to the idea of competing with capital markets. But the UK government last year reformed the tax regime to attract issuers of insurance-linked securities to London and Lloyd’s has a decision to make. Does it want to remain as a cosy club or change with the times?
In a decade, Lloyd’s could be an open market for underwriting, with contracts sold directly on a global platform and brokers involved only when they add expertise, rather than simply expenses. Or it could stick with bells, quills and fees. The answer is clear.
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