Lloyd’s and its Syndicates 2015 – Adapting to Changing Times

If one word could describe Lloyd’s of London, it would be “change.” There are very few business enterprises that have stayed in business as long as Lloyd’s – 327 years. It has survived wars, plagues and famines. It has seen the age of sail become the age of steam, rail transport, the automobile, aviation and finally the age of space exploration. It’s seen communications develop from a postal system into telephones, radio, television, and now the internet and smart phones.

Lloyd’s ability to react and adapt to new situations has been an integral part of its culture since its founding. It’s still doing so – now more than ever. Lloyd’s Chairman John Nelson gave an overall view of his vision for the future of the Lloyd’s market in an interview at last year’s Reinsurance Rendezvous in Monte Carlo.

In addition to handling the changing nature of the reinsurance industry Nelson also singled out the need to expand the Lloyd’s market globally. At the very beginning of his tenure as chairman he put forward a plan to deal with it – Vision 2025 – which he said, “is now in the execution phase, where we’ve made extremely good progress.” (www.insurancejournal.com)

Changes happen fast in this technology driven age, so Nelson’s comments are somewhat prophetic. Lloyd’s released an interim progress report on Vision 2025, which set forth the “strategic priorities” for 2015-2017, separated into eight sections.

Syndicates, as Nelson pointed out, play a central role in bringing the changes of Vision 2025 to fruition. Their role has been crucial in recognizing new risks, such as cyber and terrorism. Reinsurance syndicates at Lloyd’s have helped make insurance linked securities (ILS) part of the process. They have taken advantage of Lloyd’s many worldwide licenses to expand the market geographically. And slowly, but surely, they are making greater use of modern technology.

Reinsurance

Although reinsurance is in somewhat of a crisis, the sector has the potential for significant growth. A year ago Nelson estimated that the current addressable reinsurance market for Lloyd’s is around $600 billion; however, he expects that to rise to $2 trillion within the next 15 years. “As a result we are going to need more capital,” he said. “While at the moment that capital has arrived a bit early,” he expressed confidence that as an insurance and reinsurance market Lloyd’s is in a good position “to harness that capital.”

Doing so will require changes in the way Lloyd’s syndicates do business and where they do it, whether in geographical terms or by line of business. Lloyd’s began in a coffee house where paleo-brokers or ship owners met paleo-underwriters, who represented wealthy individuals that were willing to take a risk by insuring the success of a voyage that could often take more than two years to complete.

The need for capital to underwrite the risks is now more important than ever. “Maintaining the attractiveness of Lloyd’s to a range of capital providers will underpin the market’s future success,” said the strategic priorities report. Lloyd’s has been there before. In 21 years it has gone from reliance on individual “Names” to fund its syndicates to being increasingly reliant on large and generally publicly owned re/insurance corporations – probably the most important change in its 300-plus years.

Lloyd’s acceptance of corporate capital to back its syndicates ushered in the modern era. The change to corporate capital providers has also coincided with changing regulations. Lloyd’s ceased to be a self-regulating body under the Lloyd’s Act in 2001, when it became subject to the supervision of the U.K.’s Financial Services Authority (FSA), which has since morphed into the Financial Conduct Authority (FCA). New, more stringent rules were applied to the UK’s insurance industry, which is also subject to the often delayed insurance regulatory provisions of the European Union’s Solvency II.

The fact that public corporations are required to file financial reports, which are heavily scrutinized by lawyers and accountants, is perhaps even more important than the official regulations, as misstatements can result in costly lawsuits, especially in the U.S. Nonetheless, if Lloyd’s hadn’t made the change, there probably wouldn’t be a Lloyd’s today.

Lloyd’s also completely overhauled its governing systems and procedures. It replaced its former structure with a Franchise Board in 2002, whose principle mandate is to oversee the Syndicate’s business plans. Under Director of Performance Management Tom Bolt it has been instrumental in helping Lloyd’s through the financial crisis, and achieving the best results in its long history.

Lloyd’s annual report for 2014 states that as of Dec. 31 its 94 syndicates, managed by 59 managing agents, had posted a collective net profit of £3.2 billion [$5.05 billion], a combined ratio of 88.1 percent and a return on capital of 14.7 percent.

Over 300 syndicates were once active at Lloyd’s, but they were mostly small in comparison to the ones operating today. That is in keeping with the ongoing trend in many industries, especially in the financial sector, towards forming ever larger enterprises. It’s also the result of the requirements for managing corporate capital, and most recently by regulatory initiatives, which require more risk management, and in most cases additional capital.

Lloyd’s Vision 2025 is attuned to having to increase capital and to diversify its sources. The strategic priorities report notes that “Lloyd’s will retain its unrivalled diversity of capital, through growth in all types of capital participating at Lloyd’s (private, trade, institutional and other). The geographic diversity of the Lloyd’s capital base will significantly increase, subject to this capital bringing new business and people.”

This enlarged focus on capital and its management has produced consequences for Lloyd’s syndicates, and has led to further consolidation in the re/insurance industry through mergers and acquisitions (M&A). It is gradually reshaping the Lloyd’s market as the larger syndicates continue to grow, and new players are attracted to the market.

The biggest consolidation so far this year has been XL’s taking over the Catlin Group. In terms of gross written premiums in 2014 Catlin’s Lloyd’s Syndicate 2003 was the largest at Lloyd’s with GWP of £1.975 billion [$3.1075 billion].The group also managed several smaller syndicates. Combined with XL’s Syndicate 1209 – 2014 GWP £302 million [$475.3 million] – the potential capacity is over $3.5 billion.

Tokio Marine acquired a significant stake in Lloyd’s Syndicate 510, managed by RJ Kiln & Co. in September of 2014, and in November combined Kiln with its other operations. The Syndicates GWP for 2014 was £1.097 billion [$1.727 billion], which, when combined with other syndicates managed by Tokio Marine Kiln Syndicates Ltd. brings the total potential capacity to close to £1.291 billion [app. $ 2.02 billion].

Both ACE Limited and Chubb Corp. operate Lloyd’s Syndicates. Their merger potentially combines ACE’s Syndicate 2488 (2014 GWP £375 million [$590 million] and Chubb’s Syndicate 1882 (2014 GWP £88 million [$138 million].

By acquiring Montpelier Re, Endurance is also acquiring its Lloyd’s Syndicate 5151 (2014 GWP £172 million [$270 million]. Fairfax Financial acquired Brit’s Lloyd’s Syndicate 2987 (2014 GWP £1.303 billion [$2.045 billion], making Prem Watsa’s company among the five largest operators of a Lloyd’s syndicate. Hamilton Insurance Group added Sportscover’s Syndicate 3334 [2014 GWP £56 million [$88 million] to its operations.

Will the trend continue? Two of Lloyd’s biggest syndicate managers, Amlin, which manages Syndicate 2001 (2014 GWP £1.538 billion [$2.415 billion]) and Hiscox, which manages Syndicates 0033, 3624 and 6104 (combined GWP in 2014 £1.205 billion [$1.892 billion]) have said they aren’t interested in being bought out. At the end of August Amlin’s CEO Charles Philipps reiterated a previous statement that the company is not looking for a buyer.

All businesses have to change and adapt if they are going to survive, from the largest – see Kodak – to the smallest. Lloyd’s, as a specialty insurance and reinsurance market, has originated a significant number of the coverages that are now standard. It has maintained its position in the industry and has survived by doing so. It looks set to continue down that road.

Topics Legislation Excess Surplus Reinsurance Market Lloyd's