Lloyd's strengthens ties with the U.S. market
And also improves its relationship with insurance agents and brokers
By Michael J. Moody, MBA, ARM
Lloyd's of London is widely credited as being the home of modern day insurance. Some 323 years ago, business took place at Edward Lloyd's coffee house. From the beginning it was a meeting place where ship owners could come to find people with capital to insure their vessels and cargos. And while Lloyd's has moved far beyond its original marine heritage—it has become the world's leading market for specialized property and casualty insurance coverage—one aspect that continues today is conducting business face-to-face.
Structurally, Lloyd's remains different from other insurers. At its most basic, Lloyd's operates as an insurance market rather than an insurance company. True to its origins, it has remained a facility that enables those with something to sell (i.e. underwriters providing insurance coverage) to make contact with those who want to buy (i.e. brokers, working on behalf of their clients who are seeking insurance). Recent years have seen an increased emphasis on improving relationships with the agents and brokers—particularly middle market agents and brokers, whom Lloyd's relies on for global distribution.
Operationally, Lloyd's transacts its business on behalf of its members, who are organized into syndicates. As of December 31, 2010, Lloyd's had 85 syndicates that provide underwriting expertise in their area of specialization. For the most part, the syndicates are managed and operated day-to-day by managing agents who are responsible for raising capital and developing the overall business strategies. Today, there are 52 managing agents, who manage one or more of the syndicates.
Lloyd's business in the U.S. encompasses all lines of coverage except life insurance and financial guarantees. The actual operation is unique in the world of insurance. One of the most significant differences is the relationship between the syndicates. Routinely, the syndicates are competing with each other for business. But once the deal is completed, these very same syndicate members depend on the competing syndicates to complete the line slip and provide the client with a viable insurance product. There is plenty of competition but at the end of the day, they act as one market.
Many people recognize Lloyd's for insuring the "one-of-a-kind" type risks that they underwrite periodically. An example of these distinctive programs is one they put together recently for Proctor & Gamble's Head and Shoulders shampoo to insure the Pittsburgh Steelers safety Troy Polamalu's famous hair for $1 million. This is just one of the novel risks that also have included the fingers of legendary Rolling Stones guitarist Keith Richards and the legs of iconic star Betty Grable.
At the opposite end of the spectrum are the high hazard/low frequency risks that are generally associated with catastrophic exposures such as wind and hurricane on the coasts of the United States. Lloyd's has historically been a viable market for both extremes of the risk spectrum.
However, it is not these unique exposures alone that make up Lloyd's business. In fact, it is also about middle market type accounts. These types of risks would include such things as directors and officers liability coverage for both public and privately held companies. They also have an extensive book of errors and omissions and professional liability business for a wide variety of professions such as architects and engineers, lawyers, real estate agents, insurance agents and brokers, and medical professionals. The vast majority of these accounts are middle market businesses.
North American concerns
The North American market, and the United States in particular, represents a significant portion of Lloyd's overall business (U.S. is 37%, Canada is 6%). In order to effectively serve this North American segment, Lloyd's established a local advocate within the market. According to Hank Watkins, president of Lloyd's America (LA), his organization is responsible for U.S. business. Watkins, who took over the reins of LA in 2009, points out that it has two very broad objectives:
• The critical task of ensuring compliance within the many regulatory jurisdictions Lloyd's operates. He points out that it "is important that the regulators fully understand Lloyd's operations." And he notes, "With over 20 new state insurance regulators coming into office as a result of the last election, it requires significant involvement by our legal team in New York and licensed platform colleagues in Illinois, Kentucky, and the U.S. Virgin Islands."
• Provide "outreach" services to the retail insurance agent and broker community. Watkins states that in recent years, "this has been expanded to include mid-sized agents and brokers." He also points out that in addition to agents and brokers, his group interfaces with other key stakeholders such as "reinsurance and wholesale brokers, risk managers, managing general agents (MGAs), insurance buyers, insurance companies, and even universities that have insurance programs" in order to develop and maintain good relationships.
Watkins states that these relationships are extremely important "since we are unique within the insurance community. Our educational efforts are needed to ensure a better understanding of our overall operation." One of the key concepts deals with several core insurance functions, Watkins says. He indicates that LA "does not underwrite any risk, nor do we pay any claims." For the U.S. market, these functions can be done only in London or by one of 900+ U.S. "coverholders" (MGAs) with Lloyd's binding authorities, he points out.
Any discussion of Lloyd's ultimately gravitates to the financial problems that occurred in the early 1990s. During this troubling time, the overall financial well-being of Lloyd's was questioned by many in the global insurance community. Watkins notes that things got so bad that many feared for the financial future of Lloyd's, but he notes "we came back from the brink to become one of the strongest insurance organizations in the world." Despite this, many agents and brokers are "understandably concerned about this aspect of Lloyd's history," he says. Added to this is the fact that "since we are a surplus lines underwriter, there is no recourse from the state guarantee funds, should there be financial problems."
Lloyd's has been aware of this concern and has worked to alleviate it by establishing a $4 billion Central Fund which can be used only to pay the claims of an insolvent syndicate. All Lloyd's managing agents contribute to the Central Fund on an annual basis. The Central Fund is a layer of policyholder protection, in addition to the mutual and several assets held in trust by Lloyd's. Taken in total, these assets are commonly referred to as the "Chain of Security." In addition, Watkins says, Lloyd's implemented major structural enhancements, including establishment of the Performance Management Directorate (PMD), to ensure that syndicate business plans are adhered to following approval by the pmd.
Over the past few years, Lloyd's has taken stock of how it transacts its business and more specifically, how it safeguards its policyholders. Key to the financial security are three links in the "chain" that include syndicate level assets, and member funds, in addition to the Central Fund. Today, Watkins notes that Lloyd's has earned an A.M. Best rating of A (excellent) and A+ ratings from both Standard and Poor's, and Fitch.
Improved relations with brokers
Another area that needed to be addressed was Lloyd's relationship with its brokerage partners, Watkins points out. This need was borne out of a growing acknowledgement of the broker's role as a key market participant. As recently as the 2008 Lloyd's Strategy document, there was minimal reference to the role brokers play on the global distribution platform of the market. There has been a 180-degree turn on this issue, says Watkins, over the past few years.
More that 80% of the 300+ London brokers that participated in a recent study indicated that they were "very positive" about doing business at Lloyd's, which is a significant increase over the 2008 figures that showed a 67% "very positive" rating. It was even more impressive when considering reinsurance brokers had a 91% "very positive" response rate in the current study. This illustrates just how well Lloyd's brokers are embracing the market's continuous improvement process, notes Watkins.
Despite all of the issues of the past, Lloyd's remains one of the premier insurance markets in the world. Watkins indicates that today Lloyd's is taking advantage of its strong capital position, its unique brand, and improving systems and processes to continue to expand its global position. Additionally, they have made a significant commitment to the agent and broker community and continue to educate and inform them about the current Lloyd's market.
He points out that "we have always been known for our creative and flexible solutions, and we believe that this will be the key going forward." Certainly, the soft market has taken its toll on many insurance organizations; and "standard markets have had to encroach on the surplus lines market just to maintain their top line." But, he notes, "Once the insurance market hardens, these companies will quickly abandon the surplus lines arena."
He adds, "The current soft insurance market has expanded brokers' carrier options, and in the process, diminished awareness of surplus lines alternatives such as the Lloyd's market." However, when the market does change, many of the admitted carriers will begin to look for opportunities elsewher. Then, Watkins says, "As long as brokers are familiar with the opportunities available within the Lloyd's market, we'll be well placed to take up the slack." Over the past few years, he says, "our brand has stayed strong and we are in a great position to move forward." In the meantime, it may be advantageous for mid-sized agents and brokers to get to know more about the current Lloyd's insurance market and their creative approach to the insurance business.