More flexible capital rules, cost cutting and greater efficiency are among the priorities identified by Lloyd’s as crucial to the insurance market’s long-term survival.
In a 40-page report entitled Building the Optimal Platform, released this week, Lloyd’s tacitly acknowledges that much work needs to be done if the market is to avoid being overtaken by Bermuda as the international insurance and reinsurance centre of choice.
More than $7 billion in capital has been raised by nine new companies that have set up on Bermuda since Hurricane Katrina struck. No new companies have been established in Lloyd’s during the same period. Several Lloyd’s companies, however, including Amlin and Hiscox, have recently set up operations in Bermuda.
The blueprint for the future of Lloyd’s highlights a number of areas that the corporation, as franchiser, needs to improve to help Lloyd’s companies – its franchisees – maintain their competitive edge and therefore retain their involvement in the market.
One of the areas is capital rules. Lloyd’s has a mutual structure – in other words all syndicates operating in Lloyd’s have to pay into the Central Fund, a pool of money that pays syndicates’ losses if they are unable to do so. The report says that the market needs a more flexible capital framework to ensure that the benefits of mutuality are not outweighed by the costs.
In future, a franchisee’s performance record and capability will be particularly relevant to capital setting, the report says. “The approach may be extended to the setting of Central Fund contributions. The risk posed by each business is different so this will involve a more business-specific approach,” Lloyd’s says in the report.
Another important change detailed in the report relates to a re-think of the Lloyd’s annual venture system, whereby Lloyd’s insurers are obliged to raise fresh capital every year. The new Lloyd’s plan says a wide operational review will be carried out to examine the efficiency of the annual venture, including the annual timetable.
A capital setting process that reflects risks posed by each syndicate, recognising the individual characteristics of franchisees, will be in place by the end of 2006, as will improved profit release arrangements, the report promises.
The plan also acknowledges that it needs to make it easier for corporate clients to buy insurance from Lloyd’s. It says there needs to be a fundamental review of “current access issues”.
Linked to that, the report says that business processes have to be improved and that a contract certainty target of 85% must be achieved by the end of this year. Contract certainty is concerned with ensuring that policy wordings are agreed on and finalised before the coverage period of the policy starts.
Lloyd’s has come under severe criticism for its lack of progress in improving processes and service standards. In a speech to the Insurance Institute of London on Jan. 11, Charles Philipps, chief executive of Amlin, said that there had been some major disappointments. “These include the failure, after four years and tens of millions of pounds of franchisees’ money, to deliver the electronic data transfer system, Kinnect. Also a failure to move into the modern world by replacing paper with electronic messaging under the accounting and settlement project.”