David's Blog

Lloyd’s USP

12th March, 2015

In Vision 2025 Lloyd's Chairman, John Nelson, places a good deal of emphasis on building Lloyd's exposure to insurance in economies from which the market currently generates little or no business. These economies include the likes of China, India and Brazil whose influence on world trade is most likely to continue to increase in importance and to become even more vital components of economic activity. Insurance premiums written as a percentage of total GDP in such countries are modest compared with, for example, the US, Western Europe and Australia. These premiums are certain to grow apace as the need for insurance becomes ever more essential.

We at NFP thought it would be a useful exercise to examine the reasons why different groups are interested in, or involved with, Lloyd's. The most valuable method seemed to us to be a re-appraisal of Lloyd's Unique Selling Proposition (USP). During the course of this exercise we discovered that Lloyd's itself is much engaged in the same process, albeit with much broader and deeper analysis.

We approached a number of underwriters, managing agents, capital providers, brokers and specialist insurance analysts. A summary of their responses is listed in the table below and it is worthwhile elaborating on the simple expression of sometimes very deep commentaries.

Newton Follis Lloyd's USP SurveyFrequency of Responses
Market Place full of Talent13
Capital Flexibility & Efficiency13
Innovation, Complexity Solutions13
Central Fund, Stability & Regulation7
Speed of response6
Dealing with decision maker6
Network of Licences6
Subscription market6
Location & Language4

There are, in our view, three distinct USPs. One relates to Capital Providers, a second to the ultimate buyers of Lloyd's policies and the third specifically to Lloyd's Brokers. As Lloyd's Names perhaps we do not always appreciate the importance (and risk) attached to the leverage which maximises the efficient use of our capital. With the benefit of allowance for spreading our exposures across a number of managing agents and business activity plus the overriding Central Fund umbrella, our minimum Funds at Lloyd's requirement is 40% of our allocated syndicate capacity.

This percentage varies quite considerably according to the mix of our exposures and to the perceived risk of the trading environment as represented by managing agents’ calculations of their own syndicates’ capital requirements. Nevertheless, even a boosted FAL percentage will invariably be a substantially lower capital percentage than, for example, Bermudian based insurers are required to lodge.

There is no doubt that capital efficiency is a key attraction to companies interested in setting up syndicate operations at Lloyd's and to trade and other investors wishing to commit funds to underwriting at Lloyd's. In order to maintain the capital attraction it is vital for Lloyd's to preserve its standing with the rating agencies whose influence remains of extreme importance. Thus, the size and management of the Central Fund are critical, as are the controls imposed by the Performance Management Directorate on syndicate operations.

Lloyd's has enjoyed a remarkable period of profitability following the World Trade Center disaster in September 2001 and some commentators ally this performance to the introduction of the franchise system in 2003. There is no doubt that, although the controls which have been introduced and extended since then have made, and will continue to make, a valuable contribution to market discipline, it should never be forgotten that underwriting is a risk business. The role of the Performance Management Directorate is to manage but not to eliminate that risk. There is always the risk of loss and we have seen several major examples in the past dozen years not least in Equity Motor 218, a business which might have been thought to be at the lowest end of Lloyd's risk profile.

To summarise then, the USP for capital providers is represented by capital flexibility and the standing and reputation of Lloyd's within the broad investment community.

Let’s turn to the ultimate buyer of a Lloyd's policy. We know that China is now the world’s largest market for Rolls Royce cars. This reflects the reputation of the marque and the desire of the Chinese community to be seen to possess the best. If it is not already the case, it must become so that having a Lloyd's policy is an equal marque of reputation. It might now reasonably be said that buyers of Lloyd's policies know that they can either directly or through their brokers deal with the principals who determine the level of risk which the business is prepared to undertake and the wording behind that risk. It is the owner dealing with the underwriter himself who has real authority. That is the USP for the buyer.

As for the broker, the USP of Lloyd's includes the knowledge that the underwriter is part of a market place which is full of talent. Lloyd's is rather like the Silicon Valley of the technology business. It’s not just the underwriter, it includes claims management, assessors and legal expertise, all of which are so heavily represented in the London market.

The broker likes the willingness and interest of the underwriter in tackling new and complex risks. He expects there to be an intelligent debate which is likely to contribute to problem solving and so to reduce the underlying business risk. He likes the subscription market which enables him to check and re-check opinions and to spread coverage so that his client is not dependent on one source for his insurance. And he likes London, the location of Lloyd's and the language of insurance.

For the future it is critical that Lloyd's is able to export its USPs into local markets. To some extent this is already achieved through the hugely important binder/cover holder business which contributes a growing percentage of Lloyd's premiums. Here the underwriter is taking Lloyd's into the local market represented by managing general agents (MGAs) who do not have the resources or time to visit London to obtain insurance coverage. The Lloyd's underwriters who wish to build their business network in growing economies will need to develop the same kind of relationships as has typified their long-standing connections with established MGAs.

There is plenty of scope for ambitious and adventurous Lloyd's underwriters to build new connections. Part of that process should involve self-reminders of why Lloyd's is what it is today.

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