Lloyd’s of London is one of the City’s great financial institutions, but over the past two decades, this storied insurance market has suffered a slow decline in relevance, driven by a lack of desire or willingness to change.
To give the market’s stakeholders their credit, they’ve known Lloyd’s needed to change for some time. An attempt was made in 2001 with the London Market Principles, a set of reform propositions officially called LMP 2001, but this initiative fell by the wayside when a so-called hard market – higher premiums and tighter policy wording – set in the early 2000s and lasted well into the 2010s.
Since the first agreements between merchants and shipowners were inked in Edward Lloyd’s coffee house in 1698, the market has relied on paper-heavy face-to-face trading. That’s always meant Lloyd’s has been a bureaucratic place to do business. Still, for all the bureaucracy, it had a reputation for being able to deal with complex risks efficiently and pay claims quickly.
However, over the past two decades, that edge has slowly disappeared. As an executive of a Bermuda-based reinsurer told City A.M. recently, business has been moving away from Lloyd’s because it’s “just too slow, too expensive and bureaucratic.”
That has been a problem for the market, the City and the UK economy. Lloyd’s sits at the heart of the City’s insurance industry, which makes up 24 per cent of the City of London’s GDP and accounts for four per cent of the UK’s total economic output, based on data from the ONS and City of London Corporation.
So, as John Neal, chief executive of Lloyd’s told City A.M. last week, the market “had to change.” And change is coming. The first stage of its Blueprint Two transformation programme, which “designed to reduce friction, cost and complexity in our marketplace,” according to Neal, will be rolled out in October of this year.
The market has also been improving its edge over competitors: the capital structure. Lloyd’s capital structure has three elements. The first link is the members’ working capital at the syndicate level – all underwriting is conducted through the syndicates located within the Lloyd’s market.
Behind this stands the Funds at Lloyd’s, or members’ capital deposited at Lloyd’s and finally, the third link is Lloyd’s central assets, which include the Central Fund. The Central Fund stands ready to fill any gaps in the capital structure.
Wealthy individuals with unlimited liability, known as Names, were the market’s main capital providers until the market opened to corporate bodies in the mid-1990s. Today, these private capital providers (although now most Names have converted to limited liability vehicles) account for less than 10 per cent of the capital in the market, but they are vital components of the second link of the capital structure.
The market is looking to leverage this advantage. At the end of March, the Fidelis Partnership announced that Lloyd’s has granted “in principle” approval for the launch of Syndicate 3123 in collaboration with Fidelis Insurance Holdings Limited.
This marked a return to Lloyd’s of London by Fidelis’s founder and CEO, Richard Brindle, after 26 years. Syndicate 3123 will be backed by Fidelis and private capital via Hampden Agencies, the largest provider of private capital to Lloyd’s.
Brindle worked in the Lloyd’s market until he sold his business in 1998 and later established Lancashire Insurance in 2005. When he left the now FTSE 250 company in 2014, he took home £80m.
Despite his history in Lloyd’s, Brindle avoided the market over the past decade. “Lloyd’s had become more and more bureaucratic and a harder and harder place to do business,” he told City A.M.
He added: “We put a toe in the water, we looked to set up a syndicate six or seven years ago, and we gave up. It was such a dismal process.” But the latest attempt, which began last year, started to move forward “within days.”
For Brindle, the private capital providers for Lloyd’s of London have always been its leading edge. Despite the hand-wringing about a lack of risk-taking in the City, those within Lloyd’s are still very happy to back new initiatives.
“Institutions need access to liquidity. If they don’t have it, things can turn sour very quickly. The private capital providers don’t need access to liquidity per se. That’s not their business model. It’s a lot more flexible. I think it’s [the presence of private capital in the market] a leading point. If we can make a success of this, it could be a real example of a path for others to follow,” Brindle added.
With this capital structure, Lloyd’s can drive innovation and has “the ability to move quickly into areas of dislocation,” he added.
John Francis, head of research at Hampden Agencies, the largest provider of private capital to Lloyd’s, said: “The common endeavour of private capital is the “glue which binds Lloyd’s together”. He added that private capital can be raised cheaply and easily without the underwriting fees paid to banks on a new issue or rights issue.
Fidelis isn’t the only group coming back into the market. At the beginning of March, Aviva returned to Lloyd’s after more than 20 years when it agreed to buy specialist Probitas for £242m. At the beginning of the year, six new syndicates were in the works, underwriting everything from carbon credit insurance to renewable energy projects and cyber security reinsurance.
Just this week, Africa Specialty Risks (ASR), the pan-African focused (re)insurance group, launched ASR Syndicate 2454 focused on underwriting business across Africa- the first African-focused syndicate underwriting business at Lloyd’s.
The range of new and old players coming to the market show the market has changed. Brindle agreed saying: “They’ve completely changed. They want to get the brightest and the best into Lloyd’s to regain the market’s status as a price-leading, thought-leading, policy-leading market, all of which have been overlooked in the past few years.”