David's Blog


26th November, 2014

The views expressed in this blog are those of David Newton and not necessarily those of the Newton Follis Partnership Limited.

I am completely absorbed by Max Hastings “Catastrophe: Europe goes to War 1914”. There is an exceptionally good review of this book (in my case audio version) by Max Boot which appeared in the New York Times on October 25 last year. You can find this on the net and it is well worth reading.

One particular point is emphasised and frequently re-emphasised relating to the incompetence and lack of leadership skills attributed to most of the Generals and Field Commanders, with Sir John French being especially singled out. The clearest messages which come through are the appalling lack of communication, the frequent disregard of orders and the mutual lack of confidence between so-called allies, in particular between the British and the French.

It is not difficult to draw analogies and consequently conclusions relevant to business practice. This is why Sun Tzu’s “Art of War” is so frequently recommended to aspiring executives. I want to bring it closer to home and relate it to Lloyd's.

I joined the Dugdale Group in 1975. I regret to say that this does not represent good provenance. An example of Mr Dugdale’s ‘leadership skills’ came from a conversation with Ted King, the underwriter of the Hermes Motor syndicate 508. “I have been talking to various people in the room and it appears that most motor underwriters are reducing their premium income but, Ted, you are increasing ours.” “Oh, Mr Dugdale, if you have lost confidence in me, you only need to say so and I will give you my resignation.” “Oh no, Ted, you know you are a member of the family.” It is perhaps therefore not surprising that syndicate 508 produced losses of more than 50% in each of the accounts 1983 and 1984.

One other dramatic example will suffice. Rather belatedly I identified that the Group had some serious image problems in the market. I took it upon myself to talk to various senior members of the community who were kind enough to make time available for someone they did not know and did not really need to meet. Two of these meetings took place with David Coleridge who was Chairman of the Sturge Group. The second meeting was clearly regarded as somewhat of an imposition and after 30 minutes of David getting redder and redder in the face with anger he finally said “Let me put it this way, there are over 300 f...ing agencies in the Lloyd's market and yours is the last f...ing agency I would do business with.” It may be argued that this was an example of clear communication!

Moving a little further on, after we had bought out the Dugdale family, Nigel Rogers and I were appointed joint Chief Executives. When I look back to the years when he and I worked together I think about our respective styles of communication with our underwriting colleagues. It should be noted that at that time, and arguably well into the 1990s, there was a frequent feeling of ‘them and us’ reflecting the role of management which was generally not well regarded by underwriters. We were seen as parasites. I know that my own form of communication tended to be by the written word whereas Nigel proved himself to be a good personal communicator. I concluded that while I tried to lead from the front (which did not seem to work with our underwriters) he led from behind, in other words he took soundings from those underwriters before any decision was made.

It might be said that there was also a strong disconnect between managing agencies and the Centre of Lloyd's in those days. I believe this continued pretty much until the introduction of the Franchise in 2003, apart from the period when the Centre took the lead in bringing about Reconstruction & Renewal without which Lloyd's would certainly have collapsed. I have often described Lloyd's as a market which grew from the branches inwards rather than from the tree trunk outwards. This is because underwriters were in place before the Centre was established. The Centre was established originally to create an environment in which the professionals could operate without being disturbed by all and sundry who frequented Edward Lloyd's Coffee House and subsequently had access to the Royal Exchange.

I believe that it might fairly be said that most, if not all, of Lloyd's financial problems were caused by a mixture of fraud going back to the 1920s, misdemeanours verging on fraud in the 1970s and 1980s and sheer underwriting incompetence. This incompetence possibly started to emerge as early as the 1940s but was not recognised until the late 1980s when Lloyd's faced the twin disasters of spiral reinsurance and asbestos and pollution claims emerging from the woodwork. I recall that Marine syndicate 89 which was jointly managed by Dugdale and Brooks & Dooley (in practice managed by the latter firm) wrote one run-off contract for the Forbes syndicate. Raymond Brooks, the underwriter of syndicate 89, seemed to have been impressed by Dick Outhwaite’s underwriting of a number of run-off contracts and since the marine market was under pressure he was persuaded that following suit might not be a bad idea.

The Forbes contract seemed attractive. The syndicate had ceased trading, I think, in 1974. Brooks wrote the run-off contract in 1981. By that time the outstanding liabilities had been reduced from about $2 million to about $400,000. Syndicate 89 charged Forbes $500,000 to take on the run-off. This sum was paid upfront and so was available for investment purposes while the outstanding claims were being settled. Soon after taking on the run-off the syndicate was faced with claims presented by brokers who could identify Forbes as having participated in ‘incidental non-marine liability risks’ which being incidental the underwriter had not recorded! $20 million later...

As an aside, I had got to know Rosa Monckton who had acquired the Tiffany franchise in London. At some point she expanded the operation and was looking for new employees. I put forward my daughter, Miranda. After about three months I asked Rosa how Miranda was getting on. Her reply was that Miranda was just beginning to overcome the terrible mixture of arrogance and ignorance.

Unfortunately this description could only too readily be applied to many Lloyd's underwriters at the end of the 1980s. It is really not surprising that this most unattractive personality combination, alongside some really appalling underwriting plus the legacies of the past, nearly led to Lloyd's undoing. Now we can wind the clock forwards more than 20 years.

We have seen a most remarkable renaissance of an institution which can only be described as being in disarray at the beginning of the 1990s with a further near collision with disaster consequent upon the World Trade Center catastrophe in 2001. This last came at the tail end of a terrible bear market for insurers which started to emerge in 1997 and reached its depths in 1999/2000. There was a long period when admitting that one was a member of Lloyd's was met with a mixture of sympathy and disapproval. Even now in certain circles Lloyd's is not a suitable subject for discussion.

It’s very good news that so much has changed in the past decade. I believe these changes emerged when Lloyd's Centre decided to exercise leadership. Thus, instead of having virtually no effective regulatory powers, as was the case up to the end of the 1980s (when such powers had to be exercised virtually in open forum), after Reconstruction & Renewal was completed in 1996 a form of reactive regulation was introduced. This gave Lloyd's the power to act but really only in response to problems rather than anticipating them. This could hardly be described as leadership.

It was the Chairman of Lloyd's, Max Taylor, at the beginning of the 21st Century who was the pioneer of the Franchise system. As it happens, I personally would like to take some credit for this concept: my report “Lloyd’s.com” published in May 2001, includes the following recommendation “Lloyd's.com is the franchisor for the Lloyd's name and licences. As the franchisor it insists on high standards from existing and potential insurance practitioners (franchisees) but does not ‘deflavour or reflavour the beef’ to try to achieve a uniformity of business approach. As David Gilchrist (the former underwriter of Kiln 510) wrote ‘diversity of opinion and talent are vital attributes.’”

I went on to suggest that franchisees do not have to operate from the Lloyd's market or even in the UK. Why should there not be franchisees in Kentucky, Singapore, Beijing and Johannesburg? There’s a lot more to this section of Lloyd's.com which I will replay over time.

The nub of this blog is about leadership. What has happened at Lloyd's with the creation of the Franchise is leadership from the front. No doubt there have been underwriters worried that the beef would be deflavoured and so David Gilchrist’s guidelines would be forgotten in striving for some levels of uniformity. That has not happened. Unfortunately all of us everywhere are faced with ever more intrusive regulation but that just calls for even stronger leadership.

We, as advisors to Names and other capital in future, put a great deal of emphasis on the quality of management and the interplay between managers and underwriting teams. We will not support a syndicate where we do not identify these qualities. This is especially the case when we are faced with extreme competition and so everyone is put under great pressure to deliver results which mirror the remarkable achievements of the past decade at a time when such expectations are unrealistic. Leadership, combined with underwriting discipline and patience, is absolutely at the core of future success.

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