The London market looks beyond Lloyd’s

Lloyd’s insurers have broadened their horizons considerably over the last few years. The major London-based players–Amlin, Beazley, Catlin, Hiscox, Kiln and Wellington are commonly known as the “Group (or ‘Gang’) of Six.” The reasons behind their expansion initiatives are deceptively simple. “London’s a great place, but why should we only do business here?” said Jim Buercke, Catlin’s media head.

His boss, Stephen Catlin, was one of the first of a younger generation to realize that expansion beyond Lloyd’s offered additional opportunities. The Group relocated its primary financial operations to Bermuda in 2002, and its divisions operate as part of the Bermuda Company. “We’re basically there because it makes financial sense,” said Buercke. “We have three main operations, Bermuda, Lloyd’s and the U.K.”

The Group recently announced that Richard Banas, former XL senior vice president, has been appointed as president and CEO of Catlin Inc., the Group’s new U.S. subsidiary in Texas. “Each company does certain kinds of business,” Buercke continued, “property cat in Bermuda, professional liability in the U.K., Lloyd’s business and so on. We’re flexible.”

The question inevitably arises as to whether or not this expansion represents a threat to Lloyd’s–is it complementary, or competitive?

Robert Hiscox, the outspoken chairman of the company that bears his name, would seem to come down on the competitive side. Many others in EC3–an insurance rich postal zone in London–however, see it as a logical and desirable expansion of public companies, who are seeking to profit from their increased capital and their reservoir of skilled underwriters.

Hiscox’s main complaint is that Lloyd’s is too inefficient and costly, and has failed to adopt modern practices to correct the situation. He feels that Bermuda represents the wave of the future, and took the occasion in the group’s 2005 earnings report to say so. “Bermuda is the focus of much attention at the moment as it has now outgrown the London Market in reinsurance,” Hiscox noted. “It resembles the Lloyd’s of old in its entrepreneurial spirit, speed of reaction and swift and sensible regulation.” Hiscox remains pessimistic about the chances of improving the situation, and as a result is equally pessimistic about Lloyd’s chances of remaining competitive in a global market.

However, Nick Furlonge, Beazley’s director of risk management and the co-founder of the firm with Andrew Beazley in 1986, takes a different view.

“Lloyd’s remains our distribution hub, but there is a lot of business that’s simply below the radar,” Furlonge said. He sees ample room in the global insurance industry for both markets–each serving the needs of the its clients in different ways. As a result Beazley continues its strong support for the Lloyd’s market, while aggressively building up its Connecticut-based U.S. business, which it acquired last year from Mutual of Omaha. It recently added two senior underwriters to the operation. “However, we have no plans to establish operations in Bermuda,” Furlonge said.

“Lloyd’s may not provide all the solutions,” said Dane Douetil, Group CEO of Brit Insurance, who also heads Lloyd’s Market Reform Group, “but there are definite benefits. The Central Fund [an emergency fund into which all Lloyd’s members contribute. As of October 2005 it was worth $2.006 billion] backs all Lloyd’s business.” Lloyd’s companies can therefore offer their clients the added financial security the Fund’s reserves provide, as well as their own capital. The rating agencies also consider the Fund’s reserves in assessing a Syndicate’s credit worthiness.

The Lloyd’s brand name and licensing system offer another benefit. “The cost of establishing and maintaining independent operations in a number of countries wouldn’t be justified,” Douetil explained. “But through Lloyd’s licenses, we have access to markets worldwide.”

Fears that the Gang of Six–not to mention AIG, Berkshire Hathaway, QBE, ACE, XL and other companies who write through Lloyd’s–might reduce their capital commitments there in order to increase their business elsewhere have so far proven unfounded. Last fall’s hurricanes showed quite the opposite. “We were in the process of reducing our capacity for 2006,” said Steven Haasz, Lloyd’s director of change management and human resources, “as we saw the market softening in most areas. But after the hurricanes we actually increased what we’d planned on by two billion pounds (almost $3.5 billion] up to �14.7 billion [$25.7 billion].” He also noted that despite claims of nearly $5 billion from the hurricanes, there had been no need to tap the Central Fund.

A relatively new organization, the Lloyd’s Franchise Board, also ensures the “safety” of Lloyd’s capacity. Rolf Tolle, director of Franchise Performance, oversees–and approves or disapproves–the business plans submitted by the Syndicates. In contrast to the chairman’s power to implement change, Tolle, the former chief underwriting officer and a board member of Faraday Group, has real power to say “No,” and as Haasz indicated, “he’s not afraid to use it.”

Addressing the charge that Lloyd’s is too costly, Haasz pointed out that only 35 to 40 percent of the full capacity is actually fully required to be paid in. “In Bermuda, as efficient as it is, they frequently require one-to-one allocation of capital,” he said, “and sometimes even more than 100 percent for property cat risks.” The presence of the Central Fund and Lloyd’s system of cash calls assures there will be enough money to meet claims. As a result, Lloyd’s insurers with, for example, a capacity of $1 billion have actually tied up between $350 and $400 million of their own capital, and can invest the rest elsewhere–even in Bermuda.