Lloyd's is trying to make its business practices as sleek as its building. But will that be at the expense of the characteristics that make the market so distinctive?

“IF YOU had to invent an insurance market, you'd never invent Lloyd's,” it is often said of the 316-year-old London-based institution. Lloyd's is most famous for almost going bust in the 1990s at the expense of the individual “names” who used to provide its capital. Lately, however, it is showing signs of having made a remarkable recovery. It reported profits of £1.9 billion ($3.1 billion), more than double the previous year. And its reputation is riding high. Not only did it willingly pay huge claims after September 11th, but also it expects to have no trouble riding out the succession of hurricane-related claims currently battering the insurance market. Its final payout for hurricane Charley, for instance, was a modest £300m or so, hardly enough to dent a market that has annual underwriting capacity of £15 billion, almost half of which is directed to the reinsurance business.

Lloyd's new-found health is galvanising its bosses, who think the market can do even better if only it will shed some of its quirkier characteristics and embrace modern technology and business practices. Nick Prettejohn, chief executive since 1999, talks of changing the behaviour of the whole enterprise: “We're trying to make up for an awful lot of lost time.”

A brief walk round the market suggests he is right. Despite its modern setting, Lloyd's is replete with traditions. Brokers still march around with bulging folders of documents as they seek to place business. Encouraging them and underwriters to make better use of electronics is only one of several big changes Mr Prettejohn has in store. He rattles off eight priorities, ranging from the adoption of annual accounting (Lloyd's has traditionally reported results with a delay of three years) to obtaining more licences for doing business round the world and getting easier treatment on reinsurance from regulators in America. The most important of all, however, involves improving the performance of the 66 underwriting syndicates that inhabit Lloyd's. “People should be able to demonstrate a well-argued business plan,” he insists.

If that seems an unremarkable goal, then consider that Lloyd's is not a company, but a highly unusual market. Its syndicates are mostly backed by big insurers, which have their own chief executives and announce their own results. Despite competing against each other, the syndicates also report to the centre, which pools some of their risk. In this sense they form a unique structure—a “voluntary, mutual, capitalist society”, in the words of Graham McKean, chairman of Ballantyne, McKean & Sullivan, a firm of brokers.

Indeed, Lloyd's barely squeaked into the modern era. Between 1988 and 1992 it lost £8 billion as claims poured in from litigation in America about asbestos and pollution cases, as well as from a string of disasters. The names who provided the market's capital had unlimited exposure to Lloyd's risks. More than 1,500 of these (out of 34,000) were financially ruined. They sued for negligence, which had indeed appeared rampant. To save itself, Lloyd's embarked on a huge actuarial exercise. In 1996 it hived off all of the pre-1993 liabilities into a new reinsurance vehicle called “Equitas” and managed them separately from the ongoing business. The enraged names were offered a settlement, which most accepted.

Lloyd's breathed another day and began to change its ways. In 1994 new rules allowed companies to invest in Lloyd's syndicates for the first time. They have since largely replaced names, who now account for less than 20% of Lloyd's capital base. Many big insurers, such as America's AIG or Bermuda's XL Capital, back Lloyd's syndicates. In turn, Lloyd's has internationalised, with America providing more than one-third of premium income and Asia marked for future growth. The theory behind the switch to corporate capital was that companies could bear losses better than individuals. But premium rates stayed low in the late 1990s, and some companies considered pulling out.

Stress tested

Then came September 11th. Paradoxically, the attacks helped to resuscitate Lloyd's. The syndicates' collective bill (before receiving reinsurance payouts) ended up at around £5 billion, or one-quarter of the total for the World Trade Centre. But Lloyd's paid up and did not collapse as many feared—indeed, the market resumed writing terrorism cover within 48 hours of the disaster. The huge losses from the attacks, combined with deep confusion about which insurers were bound to which policies, helped to spur the internal agenda for change. “That tragedy concentrated people's minds,” says Mr Prettejohn.

September 11th also ushered in a long bull market for insurance. Lloyd's has taken advantage and its own financial health has improved. In August it even received a long-sought upgrade from A.M. Best, a credit-rating agency. “Lloyd's is stronger than at any time in its history,” says Robert Hiscox, chairman of an insurer that runs one of Lloyd's biggest syndicates.

Still, Lloyd's faces lots of challenges. After three strong years, rates for many types of insurance have recently begun to fall. Capital flooded into the industry after September 11th. Competition from Bermuda and elsewhere is intense. The question that preoccupies every underwriter and broker is this: will Lloyd's be able to maintain its new regime of discipline when the market turns?

To put Lloyd's ambitions in context, consider the following: few insurers have ever broken, or much moderated, the dramatic swings of the industry's fortunes. Insurers unfailingly pay lip service to “breaking the cycle”; then they proceed to slash rates and write slacker policies in order to hang on to market share. Restraint is all the harder because, unlike in other businesses, insurers only find out years later, when claims are settled, just how inaccurate was their pricing of risk.

If only everybody would slash capacity rather than rates—ie, write less business at higher rates when times get hard—then returns would be steadier. Or so the theory goes. But of course insurers cannot act as an oligopoly. Even within the Lloyd's marketplace, syndicates regularly steal each other's business by cutting rates.

Papers, papers everywhere

As if all this were not ambitious enough, Lloyd's has also embarked on a costly effort to modernise the way it handles business. Although Lloyd's is known for proffering coverage speedily, its systems for processing policies are typical of the insurance industry: they are a mess. It has sometimes taken five or six months to finalise a policy on a complicated risk. Worse, negotiations can take place even after coverage has started.

Lloyd's is trying to streamline its own processes and make sure underwriters and brokers know exactly what they are signing up to. For starters, it has ordered the market to use a standard form (called a ‘slip') that states basic information about the underlying policy (the names of the client and broker, how much they are insured for and over what period, etc). Most have complied, albeit grudgingly.

Far more controversial is an ongoing overhaul of Lloyd's IT systems that would change the way brokers and underwriters interact. At the moment, brokers often shop for coverage in the vast underwriting room with hard copies of the risk they are trying to place; later they finalise the policies with the underwriters by e-mail (very old policies, of course, are on paper only).

E-mail has drawbacks. First, it is not secure. Second, it is inefficient, since data are not stored in a standard way. Far better, says Lloyd's, to create a single system that everyone can access from their desks. This would make it faster and more secure to hammer out policies. It would also help companies crunch numbers and thus understand their exposures better. Banks built such systems long ago. A year ago Lloyd's hired Iain Saville, who has run such projects at the Bank of England and elsewhere, to head its IT efforts.

Lloyd's new system, called Kinnect, is not much liked or understood. It has cost £50m, but only a paltry number of transactions go through it. Everyone seems to have a different idea for a better and cheaper system. A few even worry that the technology will supersede the face-to-face exchanges between brokers and underwriters—the very essence of the Lloyd's market—though this seems unlikely, especially for complicated risks.

As Lloyd's pours money into Kinnect and into the salaries of managers who peddle its brand and preach the virtues of market discipline, somebody has to pay for it all. To date, Mr Prettejohn has managed costs well. He has got rid of hundreds of staff jobs and outsourced services such as claims processing. Better technology should bring more savings—eventually.

But Lloyd's is not a cheap place to do business. This is plain in an industry whose margins have fallen in recent decades. Syndicates contribute 0.5% of their premium capacity towards annual operating costs of around £170m. Lloyd's bizarre capital structure creates still more costs. To the annoyance of some syndicate managers, the remaining names are allowed to shift their investments around every year in an auction. This forces syndicates to re-form, and capital to be re-raised, annually. Administrative costs pile up.

 

CASE STUDY:

Shop Around for the Best Car Insurance

Shopping around for motor insurance really pays. You might find a quote for half your present premium if you just took time to make a few telephone calls.

Research by Telesure, one of the new telephone-based insurance brokers, found differences in premiums of more than 100 per cent in some cases, and 30 or 40 per cent in many. That can easily mean a saving of 100 or more. «I think that rating, overall, is very random», says Simon Ward, Telesure's chief executive.

Insurers set their rates in line with their own claim's experience. So, if your insurer has had a lot of these from drivers with your model of car, or living in your area, your premiums could rise. Another insurer with far fewer claims would offer you a much better rate.

But if your renewal is due next month, and you start to shop around now, you cannot rely on getting the same rate in a few weeks. Premiums can change significantly from month to month, let alone year to year or between companies.

There are many loyal (or lazy) customers who renew every year with the same company assuming that, if their premiums are rising, other companies will be raising rates in the same way.

Unfortunately that is not necessarily the case: your insurer will have no compunction about bumping up rates for existing customers, while a rival might be keen to attract new business and would make you a much better offer. Most insurers will accept transferred no-claims bonuses, so you do not have to fell tied.

The motor insurance market is just emerging from a period of steep price rises - more than 20 per cent a year - to compensate for horrendous claim rates due to crime and the recession. The industry is also changing shape as the arrival of Direct Line, the cost-cutting, telephone-based direct insurer, and its imitators force the old giants of the insurance world to re-think their strategies.

Some sections of the motor insurance industry are now murmuring about a price war. That could be exaggerated, but companies moving into the direct insurance market need to grab a big enough share of the market to justify the huge investment in computer systems, staff training and so on.

The easiest way to build up market share is to offer low premiums, even if that means making a loss for the first few years. And if direct writers are lowering premiums, the rest of the industry will fight back.

So, consumers could benefit, at least in the short term. Indeed, things are looking better for car owners than they have for some time.

If insurers want to avoid a price war, they may start trying to compete on other factors, such as service - promising to offer smoother claims procedures, for example. This appears to be the direction being taken by the latest entrant to the direct market, Guardian Direct.

It is, however, far less easy for consumers to shop around for good service than for low prices. The proof of good service really comes when you claim -which, with any luck, will be long after you have your choice.

There can be some confusion between direct insurers and telephone brokers, especially as both tend to advertise widely with cheap insurance offers.

Direct insurers are those which sell only their own policies, and only directly to the consumer over the telephone. They cut out third parties, which reduces administrative costs, and should allow them to charge less.

Telephone brokers have access to quotes from many different insurers, and use a computer to find the lowest for you. Some of them deal with a select panel of a dozen insurers, while others quote for more than 100.

VOCABULARY:

motor insurance - страхование средств транспорта

rating - зд. уровень тарифа, ставки

claims experience - зд. предыдущая убыточность, прежние убытки

no-claims bonus - скидка за безубыточность, т.е. скидка для страхователя, который не предъявлял претензий по предыдущим полисам

direct writers - прямые страховщики

claims procedure - процедура урегулирования претензий

service- зд. условия страхования