Global events and economics have created
big changes in the U.K. insurance market
By Phil Zinkewicz
The changes that have taken place in the London insurance marketplace--a barometer for monitoring global insurance trends that are affecting all insurance buyers from the Fortune 500 companies to the small mom-and-pop businesses--have been dramatic and have taken place in a relatively short period of time. Even as recently as 15 years ago, Lloyd's of London virtually dominated the worldwide insurance arena. It was in strong competition with and aggressive towards London's non-Lloyd's companies such as The Royal (now Royal Sun Alliance) and Commercial Union (now Commercial General Union). However, today, one might say that Lloyd's and non-Lloyd's companies are almost partners, albeit still competitors.
The International Underwriting Association (IUA) was set up in the late 1990s by London's non-Lloyd's companies to have a central marketplace in London just down the street from Lloyd's to compete with Lloyd's more efficiently. In fact, the story goes that the non-Lloyd's companies set up the IUA because they were miffed at Lloyd's for not letting them into the new Lloyd's building. Today, however, The IUA and Lloyd's have set up a joint vehicle, an exchange, where the two markets share business with each other, while competing with each other at the same time in the open market. It's a kind of "best of enemies" situation.
In addition, the changes that have taken place at Lloyd's of London itself also have been dramatic. Plagued by a spate of lawsuits in the early part of the last decade, Lloyd's admitted corporate capital into the marketplace in the mid-'90s for the first time in its 300-plus year history. Traditionally, Lloyd's capital came from individual "Names"--rich individuals who pledged their entire wealth to back insurance risks on the market. Today, however, while Names still far outnumber Lloyd's corporate members, they represent a minority of the market's capital base. In many respects, Names are now a dying breed at Lloyd's.
A few months ago, Lloyd's recommended a series of reforms to bring the marketplace more in line with global insurance developments. Reeling from $3.13 billion in losses from the World Trade Center attacks, Lloyd's is intent upon scrapping what many perceive as "arcane" practices that have hampered growth in the face of competition from insurance centers such as Bermuda. For one thing, Lloyd's proposals will attempt to attract additional capital by developing a range of investment schemes, including equity and bond investments in "special purpose companies" that support Lloyd's.
Brian A. King is managing director of Arthur J. Gallagher (U.K.) Ltd.
"Agents and brokers in the U.S. don't want to go through the expense of becoming Lloyd's brokers, so we are seeing more business coming in to our company."
--Brian A. King
These reforms would offer participation in the Lloyd's market without having to experience the expense of becoming a member. Other reform plans include scrapping the market's traditional three-year accounting system in favor of internationally used yearly accounts. This will require a change in a private act of Parliament, which governs Lloyd's. Lloyd's also wants to set up a franchise board to raise underwriting standards. Many believe that poor underwriting at Lloyd's has dragged down the market's results in recent years, so the market plans to appoint a "franchise performance director" to improve performance.
Lloyd's has gathered capital to write £12.2 billion of insurance risks this year, but critics say it might have attracted more capital were it not for its poor performance and complex structure that puts off investors. A recent report by Sigma, the research arm of Swiss Re, said nearly half of the 86 businesses currently operating at Lloyd's may close after suffering big losses. Therefore, it is unlikely that the new reforms planned at Lloyd's will meet serious resistance.
So much for the infrastructure of the London insurance market. As for outside influences affecting the London insurance marketplace these days, one has only to look across the Atlantic towards the United States. In interviews at their London offices, Brian A. King and David J.R. Sibree, managing director and assistant managing director, respectively, of the Lloyd's broker, Arthur J. Gallagher (U.K.) Ltd., it became clear that the World Trade Center disaster and the recent corporate problems of Enron, WorldCom, ImClone, Xerox and other major business interests in the United States are playing havoc with the London insurance arena.
"As part of the impact of September 11, many of the large, non-Lloyd's insurance companies in London began drastically reducing their underwriting in regional offices in the U.S.," says King. "Most of the business they write is now coming direct through to London. Agents and brokers in the U.S. don't want to go through the expense of becoming Lloyd's brokers, so we are seeing more business coming into our company. In fact, about 85% of the business we do is non-Gallagher business. In other words, it is business that other agents and brokers have had on their books that they can't place anywhere except in the London market, so they are coming to us.
"In addition," continues King, "we're seeing underwriters both at Lloyd's and in the non-Lloyd's London insurance market reducing the limits they are willing to write and increasing prices considerably. Rate increases range from 25% to 500% depending on the class of business. Of course, rate increases depend on the client or exposure. If a company has had a long-standing relationship with a client, then rates might not increase that much, but it's all in the hands of the underwriters."
King and Sibree agree that the biggest problem in the worldwide insurance arena today is capacity. "Companies that, in the past, were offering up to $50 million in capacity are now offering only $2 million or
$5 million" explains Sibree. "Six hundred and fifty million dollars worth of coverage can now cost up to $100 million in premiums."
One of the most difficult lines these days, according to King and Sibree, is professional liability, particularly directors and officers coverages. "D&O in the United States is almost impossible to place," said King. "It's not just the Enron and WorldCom situations. They have exacerbated a problem that really began with the fall of the dot-com companies. The shareholders in that market took a real beating. It will take a long time before the claims will be paid on the lawsuits coming from that situation. And who knows what claims will come from the Enron and WorldCom scenarios."
Sibree concurs with that assessment. He explains that the market for D&O insurance in the U.K. has just "drizzled away." He says it was happening long before the current Enron and WorldCom scandals. "Capacity has just disappeared. There is additional capacity coming in from Bermuda, but they are tightening up their policy wording and charging much higher prices."
For that matter, add King and Sibree, the claims from the World Trade Center have a long way to go before being resolved. "We have our preliminary estimates in, but preliminary estimates always come out to be more," says King.
On the D&O issue, at least, London is considering steps to exercise more control over the appointments of boards of directors. Recently, Patricia Hewitt, secretary of state for trade and industry in the U.K., called for a shake-up of the relationship between auditors and company directors. She has suggested that company executives should be barred from appointing auditors under plans for U.K. accounting reform, in the wake of Enron and WorldCom scandals. "Maybe we should look at the way auditors are appointed," she said in a speech before a conference on law at Cambridge University in England. "Current checks and balances just aren't enough. Maybe we should give an enhanced role to the audit committee."
Hewitt also suggested that the U.K. government is seriously considering the rotation of audit firms and audit partners. She suggested that company auditing firms should be changed every three years, rather than every seven years under the current system.
The asbestos situation is also troublesome to London underwriters, according to King and Sibree. Asbestos litigation in the United States almost brought down Lloyd's of London, and now more asbestos litigation in the United States is in the offing, plus England has its own share of problems. Recently, asbestos litigants took on the insurance industry in the U.K. Although two lower courts ruled that asbestos victims could not collect from insurance companies for past exposure to asbestos, the House of Lords overturned those rulings; and now the insurance industry in London is on the hook for billions of pounds. "One problem is that many claimants have not even manifested any diseases related to asbestos, but merely because they worked with or near the substance, they are filing," says King.
In the United States, there is the concept of joint and several liability in cases such as asbestos or tobacco manufacturers, but in the U.K. the concept doesn't exist. "I hope we don't get to that point, but in the asbestos situation, there may be no other way to sort out claims payments without the sharing of responsibility on the part of asbestos companies. The problem is that the exposure to asbestos, in most cases, took place many years ago when the product was looked upon as a wonderful miracle."
So these are the problems, then, challenging the London insurance marketplace. At a time when Lloyd's of London is in the process of undergoing a major metamorphosis, and when non-Lloyd's companies are working with Lloyd's to recapture for London the lion's share of the world's insurance premiums, London underwriters also must grapple with political terrorists who are threatening the United States on a physical assault front and fiscal terrorists who are threatening the underpinnings of the corporate world. King and Sibree, however, believe that London is up to the challenges. *