Lloyd’s Chairman Nelson on Reinsurance Market, Coverholders, Future Expansion

Lloyd’s Chairman John Nelson is pleased with the current state of the Lloyd’s market. Shortly after Nelson was interviewed at the Reinsurance Rendezvous in Monte Carlo, Lloyd’s announced a $1.67 billion [$2.72 billion] profit for the first half of 2014.

“There are few times in Lloyd’s history, when it has been in a stronger position,” he said.

Since he took over form Lord Peter Levine in 2011, however, Nelson has been intent on enlarging the scope of Lloyd’s business. “Being a global hub for insurance and reinsurance, we’ve got challenges,” he said.

Lloyd’s faces the current state of the reinsurance industry along with everybody else. Low interest rates, coupled with the entrance of alternative capital into the reinsurance market, have put “pressure on premium rates,” and, despite a benign hurricane season, have lowered profit margins. “Therefore, maintaining underwriting discipline is very important,” Nelson said.

The need to expand the Lloyd’s market globally is also a challenge Nelson has faced. 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.

“If you look at the progress we’re making in South America, in Eastern Europe and the Middle East, in the Far East, in Southeast Asia and China, you will see that we are pursuing our plans with great energy.”

Lloyd’s recent receipt of a license to operate an additional office in Beijing, along with its Shanghai office, evinces this progress.

Lloyd’s syndicates are participating in the use of alternative capital and are expanding geographically. Nelson estimated that the current “addressable reinsurance market for Lloyd’s is around $600 billion;” however he estimated that within the next 15 years that would rise to $2 trillion.

“As a result we are going to need more capital; while at the moment that capital has arrived a bit early,” he said. He’s confident, however, that, as an insurance market Lloyd’s is in a good position “to harness that capital.”

He described the growth of alternative capital from long term investors as the beginning of interest in the insurance market, as signaling the establishment of a “new asset class,” similar to the evolution of investments in real estate as an asset class. “This capital, properly harnessed, will help the industry in the long term,” he said.

Nelson repeated his conviction that Lloyd’s is, and will remain, a broker market, and that the “global reach” of the broker market gives Lloyd’s an advantage. There are currently 200 brokers actively engaged in the Lloyd’s market, and Nelson sees that increasing, as “we expand our footprint in other parts of the world. On the other hand I think inevitably, as there always is, there will be some consolidation as well. ”

Turning to the subject of coverholders, whereby Lloyd’s syndicates give approval to certain brokers to underwrite coverage in their name, Nelson said it is a system that works “extremely” well.

“It’s something that Lloyd’s has developed over many years and the reason that it’s effective is: one – it’s very efficient, as coverholders deal directly with the insureds, who have the power to commit,” he said.

Secondly, coverholder status is “properly regulated and properly monitored, and that’s what Lloyd’s does. Coverholders have to be approved and their performance is monitored, and we’ve had a very good success with that, and we have come through some difficult patches in the market with coverholders, but, I think, it has shown the resilience of the model.”

Using coverholders has been so successful that they are active in many parts of the world beyond the U.S.

Nelson stressed Lloyd’s long standing role in “innovating new kinds of cover for new emerging risks” — a position he is dedicated to maintaining. From his position from outside the insurance industry [he spent most of his career in banking], Nelson said the “risks and the level of risk management in big business,” both in the developed world and in emerging markets, “the degree of risk management has increased dramatically, so businesses are much better at it.”

But he said the top risks facing business have obviously changed, citing cyber risks as a prime example. There are, however, other intangible risks, such as damage to business reputation and supply chain disruption, which present a challenge for the industry in general and for Lloyd’s to create policies that cater to these risks.

“And, I would say at the moment – to be slightly controversial – that the gap between the risks that big businesses are facing and the insurance products that the insurance industry is offering is slightly too wide, and the insurance industry has go to get itself into a position where it’s even more relevant for the risk management functions of these big companies. A lot of industry leaders talk about that, and their right to [do so], because we need to do that,” he said.

In order to achieve that goal, the underwriters and the management at Lloyd’s need “to work very closely with the brokers. I think it’s a question of making sure that you exchange ideas – you’re all the time thinking outside the box as to how you can do this.

In addition, as Lloyd’s spells out in its Vision 2025 plan, it’s important to “attract a greater diversity of capital from around the world.” The presence of China Re, Brazil’s BTG Pactual and Sompo Japan coming on to the Lloyd’s platform seems to show that it’s been successful in pursuing this goal, as it means we’re ‘diversifying the capital, they’re bringing business franchise into the Lloyd’s market that we otherwise wouldn’t get.”

Most importantly, Nelson said, is the fact that they bring new people into Lloyd’s. “If we can create a much more diverse nationality ‘pot’ within the underwriting community, then inevitably we are going to see more ideas and more solutions coming up for different risks around the world. It’s a long term thing, but it’s getting the culture I the right place to do that.”

Nelson agrees with other industry leaders that finding and keeping “good people” is really the key to managing a successful business – a fact that the re/insurance industry has somewhat belatedly recognized as imperative. “The insurance industry is in a better place that t used to be,” he said. “Going back 10 or 20 years wasn’t particularly popular for young people – young bright people – coming into commerce or industry. I think now it’s seen as much more attractive.” This could be due in part to the fact that other industries – notably banking – have “become somewhat less popular,” according to Nelson.

The principal reason for the renewed interest in the industry, however, is that “insurance is now seen to be absolutely fundamental to the sustainability and growth of worldwide economies. People understand that this is a socially useful industry,” and it’s interesting because it’s global, as well as “the way in which risks are covered are becoming more interesting, more challenging,” that is attracting more people.

For Lloyd’s it is especially important, as 80 percent of its business is outside of London, outside the UK, that Lloyd’s attract a “more diversified nationality base into the Lloyd’s market.”