1 September 2012Re/insurance

Bermuda and Lloyd's: enduring relations

In 2012 Lloyd’s launched its Vision 2025 project, a document that outlines its strategic goals over the coming decade, with further expansion of the market and the creation of a number of powerful regional hubs forming two pillars of its new plan. Bermuda players with syndicates at Lloyd’s—and there are a fair number of them—can hope to benefi t from these ambitions, with those elements that have made Lloyd’s an attractive market—its global licences and access to international business, its proximity to the European market and the reputation of its brand—all set to be enhanced by the emerging strategic vision.

In recent years the Bermuda and London markets have become increasingly intertwined, with interest in new platforms apparent on both sides of the Atlantic. Charles Dupplin, CEO of Hiscox, Bermuda spoke of a “symbiotic relationship” between the two markets, and the notion of shared intellectual capital. Chris Harris, president CEO of Montpelier Re, concurred, indicating that close links between Bermuda and London had been mutually beneficial, with both markets increasing their international standing as a result of close interaction. As Harris explained, “companies are thinking increasingly globally and, recognising that there are advantages to both platforms, are optimising where they write their global business”.

Today just under half of Bermuda’s Class 4 re/insurers have operations at Lloyd’s, with operations in London providing Island players with a “broader distribution network and access to a wider variety of lines of business”, said Harris. Tatsuhiko Hoshina, CEO of Tokio Millennium Re, spoke of the strength of the London brokers’ network, which provides invaluable access to placements and indications of “where the market is heading and what products reinsurers should be considering”. It seems that Lloyd’s is both an invaluable point of access to international business and a barometer of reinsurance’s direction.

Harris said that Montpelier Re’s decision to establish a Lloyd’s presence back in 2007 was in part motivated by what he termed the “sticky business” of risk—ie, that business likes to stay close to its home market. As he explained, “just by being in Lloyd’s, you see more passing business”. Dupplin concurred, arguing that in terms of markets for reinsurance, there really is no competition for Bermuda and Lloyd’s. “If you want good people to look at your risk, there really are only two markets to consider.” It is this combination of passing business—and a significant amountof international business beats a path to Lloyd’s’ door—and the strength of intellectual capital in the market, that makes London an unparalleled partner for Bermuda reinsurers.

As Dupplin highlighted, the ability to access human capital at Lloyd’s—something Bermuda players can draw upon to complement their bench of expertise on the Island—is a major draw for those considering a syndicate in the market. “In London, you simply have an amazing pool of talent,” he said. Harris agreed, adding that in a business that relies on a relatively small number of employees “being able to access talent through both platforms has been a significant incentive for us”.

Centrifugal force

This notion of sticky business ties in well with a ‘boots on the ground’ philosophy that has permeated re/insurance circles of late, with Zurich, Switzerland, being perhaps the most obvious recent example. A number of players have established a presence in the Alpine state—much as has been done at Lloyd’s—although for some their presence has been more of a conduit for business than an underwriting hub. As Dupplin indicated, there are “quite a few brass plaques on the wall in Zurich, but it hasn’t really taken off as a market”.

Montpelier Re itself has opened an office in Switzerland and applies just such an approach to its presence, Harris arguing that “in terms of underwriting, we want to have short lines of communication and a central underwriting philosophy”—one that necessarily requires business to be underwritten in Hamilton or London. Nevertheless, a Swiss presence has enabled the firm to access greater levels of ‘sticky’ European business. The development of Switzerland as a conduit for business provides some indication of the reasoning behind Lloyd’s push to establish regional hubs in emerging regions such as Asia and Latin America, as outlined in its Vision 2025 document.

However, not all firms see a local office simply as a conduit for business. Tokio Millennium Re’s strategy is to underwrite business locally, in offices such as those it runs in London, Sydney and Zurich. “If you are closer to the client, the market and the brokers, you are able to have a better understanding of the characteristics of risk and better positioned to write the business,” said Hoshina. “Unless you are on board locally you will simply not be able to get that level of market intelligence.” He said that from a headquarters point of view it is necessary to “monitor aggregations across the whole group, and ensure that underwriting conforms to group risk appetite and that the underwriting technique and approach is consistent among all group companies”, but indicated that as long as these are met, this was really more of an “ERM than an operational function”. He added that such questions will become more pressing as companies expand into new regional hubs, but was clear that Tokio Millennium Re’s approach will continue to emphasise local underwriting.

For Lloyd’s, a market with international pedigree and the licences to project its capabilities globally, the creation of a number of powerful regional hubs makes a lot of sense. As Harris indicated “they help to increase the optionality and value of a Lloyd’s platform and will ultimately facilitate greater access to markets— both geographically and by line of business—without significantly increasing infrastructure costs”. The regional hub approach will also enable firms to project the strengths of the London market internationally. “It’s about the ability to leverage the existing platform—the scale, the Solvency II framework, the regulatory strength and capital efficiency,” said Harris.

"It's much simpler to have all your complex and big risks underwritten in a small number of places, such as London and Bermuda, because you can ensure the quality is maintained."

The hope is that regional offices will help market the Lloyd’s brand, while directing business towards a centralised London underwriting market, he said. Dupplin indicated that he doubted that Lloyd’s’ intention was to create competing underwriting rooms in emerging geographies; rather it was to create “clear and efficient pipelines that will bring business to Lloyd’s”. Noises emanating from Lloyd’s appear to support this notion. As Sue Langley, head of market development at Lloyd’s, made clear in recent press statements: “We want to attract business into London—not away from it—through varied broker networks. Where markets demand, we will have a small number of overseas, locally focused centres, but the overall emphasis will be on bringing business through EC3.”

The success of such a hub and spoke approach will be integral to Lloyd’s ongoing significance, said Michael Graham of insurance software specialists, Sequel. “Markets depend on concentration, and Lloyd’s is no different,” he said. Dupplin concurred, indicating that “it is very difficult to run businesses where you are accepting complex global risks in various locations—it’s much simpler to have all your complex and big risks underwritten in a small number of places, such as London and Bermuda, because you can ensure the quality is maintained and that appropriate management systems are in place so that you aren’t going to get into difficulty”. He added that unpleasant lessons had been learnt about the quality of local underwriting following the Thai floods, highlighting the danger of underwriting globally. “Lloyd’s has been immensely successful by concentrating underwriting in one place,” said Dupplin, warning that any dilution of this capability by locating underwriting rooms around the world would not play to the market’s strengths.

Dupplin suggested the market would be best served leveraging the capabilities of the brokers to access new business, rather than through new—and potentially costly—regional hubs. As he explained, “the pipelines of our business are really the brokers, and the best of these are very good at sourcing this business”. He said that they would act as perhaps the strongest conduit, inevitably choosing a market that they consider to “be efficient and full of strong players”. Lloyd’s happily fits that particular billing.

Hoshina, for his part, argued that Lloyd’s hubs could well attract company markets to new and emerging geographies, with firms carrying out underwriting in situ, rather than acting as a conduit. Regional hubs established by Lloyd’s could therefore act as beachheads for those wanting to diversify by geography. The regional hub approach therefore has the opportunity to act both as a conduit and a potential underwriting home for firms exploring emerging geographies. Boots on the ground in key emerging markets such as Asia and Latin America would certainly help drive a greater concentration of business to Lloyd’s, but could at the same time be the start of a local company market underwriting hub.

It remains to be seen whether reinsurers will follow in Lloyd’s footsteps, but the opportunity to do so is evidently there. As Hoshina made clear, the “strongest characteristic of Lloyd’s is its worldwide licences” and the ability to leverage this capability— locally or through London—remains mightily attractive. Hoshina concluded that the hub approach will also help Lloyd’s identify opportunities in emerging markets and give the market the opportunity to pursue such business before others. Those with a Lloyd’s presence can hope to take advantage of this ability and the access it affords.

Integrity as strength

Further helping matters will be the strength of Lloyd’s reputation. A significant component of this reputation is the trust instilled by the prudent oversight provided by Tom Bolt’s office of performance management. Bolt “has been obliged to walk a fine line as his analysis can occasionally reveal items which can be difficult for the market to face up to,” said Harris. “Integrity is one of the key strengths of the market. Our industry has done a lousy job of managing capital through previous underwriting cycles and anything that helps to add a little more discipline to the underwriting process and places a bit more pressure on the weaker underwriting players in our space, is generally a good thing.”

Dupplin also approved of Bolt’s work, indicating that far from the proscriptive imposition of edicts, his office has taken a cooperative approach to the market. “Tom Bolt sits in the same building, so if the market has a problem with a particular measure, there’ll be a queue outside his door.” He added that Bolt is a “sensible fellow who commands immense respect”, and is not someone to impose unnecessarily burdensome regulation upon the market. “It’s not going to stop his office every now and then putting out an edict the market disagrees upon, but it does mean that being in the same building we can work through issues without disadvantaging policy holders,” said Dupplin. Graham added that “Lloyd’s will want to continue to regulate in an evidence-based way”, even if at times this might prove tough for the market. But as Graham made clear, Lloyd’s is “right to be self-interested and to manage risk in a prudent way—this is not to stifle entrepreneurship or prevent people bringing large risks to the market”, but to protect the market from the potential fallout of accumulated losses.

A touch of Forth

While the Lloyd’s market has, over an extended period of time, proven its worth, there is never time for complacency, and a number of threats to the market persist. London remains a vibrant centre for re/insurance, but continued development and innovation will be key to Lloyd’s ongoing success. As Dupplin indicated, Lloyd’s has had to develop from a “300-year-old market employing people who sat on tall stools equipped with quill pens” to one that must necessarily employ “greater use of technology to make the transacting of insurance simpler”. As Dupplin indicated, such projects are “like painting the Forth Railway Bridge—they are never over”. Unless the market continues to develop its technological capabilities and innovate, it faces the danger of being left behind, he said.

Hoshina likewise indicated that Lloyd’s needs to keep an eye on technology developments, adding that company markets in general have the edge on the market when it comes to the deployment of technology. He warned against the market falling behind. Dupplin also highlighted the dangers posed by Solvency II, with the regulatory framework having the potential to make “Lloyd’s a less attractive place to deal with”. He said that the final shape of the regulatory regime would soon be established, but added that he hoped it would “allow businesses to operate in a sensible way without being completely overburdened by regulation”.

"There really is no competition for Bermuda and Lloyd's. If you want good people to look at your risk, there really are only two markets to consider."

Harris, for his part, highlighted three areas of improvement for the market. The first is the “opportunity to drive more cost out of the system. Capital efficiency at Lloyd’s is high, but from an operational efficiency standpoint, there are more costs that could come out ofthe market to make it more competitive”. Lloyd’s indicated in its Vision 2025 document that it intends to improve capital efficiency in the market. One would hope that this will extend to operational areas as well. Harris said that the second area of improvement for the market would be “better use of data in aggregate—what has driven underwriting results over time, what lines have been more profitable, understanding the customers more and where potential growth might come from”. He said that the market boasts a real wealth of data, but that its participants and their businesses would benefit from greater access to such information.

Finally, Harris mentioned improving responsiveness to changes in the market—echoing Dupplin’s concerns. “You are starting to see shorter cycles and certainly greater capital flexibility in the market and you have to be responsive to partner with, and access, that capital. The business planning process needs to become more dynamic in the London market, but without undermining its integrity,” he said.

A Lloyd’s presence continues to be viewed as a significant benefit by reinsurers pursuing international business. Its global licences and international ambitions suggest its influence will continue, although whether as a conduit or as the front-runner for regional markets remains to be seen. Regardless of how Lloyd’s’ market projection plays out, a London syndicate continues to be of significant benefit to Bermuda reinsurers. As Hoshina outlined “cedants distinguish their panel of reinsurers not only on an individual company basis, but also by market. They will examine what percentage of their reinsurance is placed with Lloyd’s, Bermuda, European and US reinsurers and being able to have a platform in both Lloyd’s and Bermuda enables firms to access quality business in both locations”. And as they are the two leading reinsurance markets, it makes perfect sense that the partnership should continue.