Antony Ireland

Antony Ireland is a London-based financial journalist. He can be reached at riskletters@lrp.com.

Cyber Fraud

The Weakest Link

The new wave of “social engineering” scams by cyber fraudsters is costing corporate America billions. The best defense is education and collaboration.
By: | June 1, 2015 • 10 min read
Mobile money transfer

It’s not easy being responsible for fraud prevention at a major corporation. The methods of attack are multiplying, the tactics ever more sophisticated and Machiavellian. It’s hard to keep up with all the new monikers for these techniques, let alone ensure your organization is impenetrable.

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The infection of systems with malware through spam-like phishing attacks evolved some years back into “spear phishing” of specific individuals, using gathered personal information about them to make the attacks seem more believable. “Whale phishing” or “whaling” is spear phishing but for bigger fish — in other words, CEOs, CFOs and other senior executives with the power to authorize major money transfers or release sensitive data.

One recent scheme attacked the CEOs of 20,000 organizations and succeeded in implanting malware in the systems of 2,000 of them.

Most organizations have caught on to malware-based attacks, and have various layers of software protection in place to identify and block any suspicious activity. But wise to the fact that malware alone might not be good enough, fraudsters are increasingly using human interaction, simulating situations and impersonating individuals, organizations and authorities to get what they want.

IBM researchers have reportedly uncovered a new type of attack they are dubbing “dire wolf,” whereby malware from an attachment sits dormant within an organization’s network until it detects a user is navigating to a bank website. It then creates a fake pop-up frame telling the user the website is having problems and to call a number for help with their banking needs.

At the end of the phone is an English-speaking operator who asks for confidential login details — as soon as this information is given the fraudsters immediately access the user’s bank account and instruct a large wire transfer.

Scams involving thorough background research to inform the invention of false scenarios, websites and companies are known in some quarters as “pretexting.”

Richard Thomas, principal of Ernst & Young’s fraud investigation and dispute services practice refers to the tailoring of these attacks to individual targets as “speartexting.” Don’t be surprised if that term is the next to enter the lexicon.

Greg Bangs, chief underwriting officer of global crime, XL Catlin

Greg Bangs, chief underwriting officer of global crime, XL Catlin

One of the most prevalent “speartexting” scams (see — it’s catching on) is for an individual in the finance department of a company to be sent an email purportedly from the CEO, CFO or senior executive informing them the company is involved in a highly confidential acquisition and the individual will shortly receive communication from a major law firm sending wire transfer instructions — and due to the sensitive nature of the deal, this must be kept secret.

Thanks to the mining of information from personal emails, private servers and publicly available sources, the hackers are able to convincingly portray the executive’s tone and may, for example, know he or she is on first name terms with the finance person — who is likely flattered the CEO has chosen them for this task. The target then receives a call or email from a fake lawyer, providing wire instructions and reiterating the importance of confidentiality. You know the rest.

“These fraudsters prey on human nature — the desire to help clients, solve problems right away and frankly to protect their own jobs. That’s a very effective play,” said Greg Bangs, chief underwriting officer of global crime at XL Catlin.

Industry Impact

The scale of this kind of crime, and its cost to corporate America is unfathomable — literally. There is no reliable data on the monetary value of losses associated with this new wave of sophisticated spearing scams but it undoubtedly runs into billions of dollars. According to sources, individual losses so far have ranged from tens of thousands to, staggeringly, tens of millions.

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It’s safe to assume the gangs perpetrating these crimes — believed primarily to operate in Eastern Europe, Russia, China and other parts of Asia — are now extremely wealthy.

“It’s incredibly lucrative for the fraudsters,” said EY’s Thomas. “The more clients I speak to about this issue, the more I hear of it being successful. And it’s costing companies more than just the loss — there is then the cost associated with investigating the issue and increasing controls to prevent it happening again. Billions of dollars are being spent annually on protecting companies in the U.S.”

The cost of these so-called “socially engineered” schemes is particularly difficult to gauge, not only because the practice is relatively new but also because so many instances go unreported.

“These fraudsters prey on human nature — the desire to help clients, solve problems right away and frankly to protect their own jobs.” — Greg Bangs, chief underwriting officer of global crime, XL Catlin

“Many organizations don’t want their customers thinking there is a failure in their systems or a weakness in their controls so they brush it under the carpet,” said XL Catlin’s Bangs.

“We strongly recommend all attacks be reported to the police. The only way we are going to stop these people is by providing law enforcement with enough information about ongoing scams to help them prevent them before they get worse.”

“Companies need to decide whether they want to stop the fraud and keep it internal or try to control the fraud, get law enforcement involved and hope they’ll be able to one day catch the criminals and possibly recover their money or other people’s lost money,” said Chris Giovino, director of forensic investigation, crime and cyber evaluation risk quantification at Aon Global Risk Consulting, adding, “If you’ve already sent a wire transfer within the last 24 hours the bank has a strong chance of freezing the account and having the money returned before it washes out to another account.”

The latest scams have primarily been aimed at large organizations due to their attractive bounties and array of executives to target. However, anyone can become a victim and the attackers are moving down the food chain.

“Perhaps not ‘mom and pop shops,’ but smaller private companies and nonprofits will be as vulnerable to this as larger organizations going forward,” said Bangs.

Michael Peters, himself a certified hacker (one of the good ones), computer forensic examiner, and IT director for the Risk and Insurance Management Society (RIMS), believes Wi-Fi is the weak spot most likely to be exploited in the next generation of scams.

“The more our world advances towards wireless technology, the more people trust entering their private details over wireless connections. Cars and planes now offer wireless technology, which is going to open up a plethora of vulnerability for hackers to target,” he said.

This is bad news considering the chances of recouping money or catching the criminals in the wake of a successful scam are low, and most traditional insurance policies still don’t cover this kind of loss as they fall in the gap between conventional crime and cyber policies.

“We are not having a lot of success in recovery through crime policies when it comes to social engineering losses,” Giovino said. “It’s a very gray area, but I do know that brokers, on behalf of policyholders, are working with carriers to address this and some carriers are rewriting policies to be more inclusive and bring them up to date.”

Response and Prevention

EY’s Thomas said it is vital companies put response plans in place so they can react quickly if they fall victim to an attack.

“The first priority for businesses is to recover lost data or money — call the bank; stop the payment,” he said, noting that it is not uncommon for companies to get so caught up in establishing how they were duped that they neglect to take this fundamental step.

Companies should immediately change their banking passwords, obtain a list of pending transactions and recent wire transfers, and inform law enforcement, he added.

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“You then need to understand what has happened — the goal of the perpetrator; whether there is an insider threat, either deliberately or inadvertently, from someone in the organization; and whether there are any ‘sleeper mechanisms’ within the network that could be deployed against you at a later date,” Thomas explained. This, of course, requires the expertise of internal or third party IT experts.

Next, companies need to establish how they can control their environment to ensure they don’t become victims again.

“Companies can fight back from a pre-loss position, as this is preventable,” said Giovino, placing the risk manager at the heart of the process.

“The risk manager is pivotal. Although this sounds like a security or finance problem, the risk manager is the person in the company who owns the problem because the loss is potentially insurable and restitution or recovery can only come from insurance.”

The first line of defense is the best and latest software to filter out as much suspicious activity as possible. RIMS’ Peters is responsible for protecting not only his organization but the data of 11,000 member companies, and employs four layers — or “sentries” — of protection and redundancies, from anti-spam and anti-malware programs to desktop client protection.

But the biggest challenge with social engineering is that it preys more on human behavior than system flaws.

“You are only as strong as your weakest link, which is your end user,” admitted Peters. That’s why organizations must implement written protocols and procedures, backed up with staff training to instill awareness — as well giving staff the confidence to question their superiors if they smell a rat.

Indeed, Bangs added, that training must include senior executives too as they are primary targets.

06012015_07_fraud_theft_chart“The protocols in most companies are now adequate — it’s the training portion that can make a big difference,” said Giovino.

“If a company [mandates that] anyone initiating a wire transfer must have secondary approval, it must be inculcated into the mindset of everybody that this policy cannot be overridden — even by the CEO or president.”

“I do believe that with a combination of training and a hard look at technology and processes, companies can mitigate most of this risk,” added Thomas.

Once software, protocols and training have been implemented, the system should then be tested with fake scams to root out potential weaknesses.

The final defense against social engineering is insurance — although not everyone can access it yet.

“The insurance industry has not kept up with the exposure or developed response policies,” said Peters. And that, broadly speaking, is true — traditional commercial crime, funds transfer fraud or computer fraud policies are unlikely to provide cover because these crimes involve individuals or organizations being coerced to act of their own accord; the criminal does not actually steal the property themselves, nor do they use the target company’s computers to do it.

AXIS is one of only a handful of insurers to have already developed a social engineering fraud coverage endorsement as part of its commercial crime insurance product, addressing the risks organizations face when cyber criminals pose as senior executives to manipulate employees into transferring funds.

“Our decision was to be more proactive rather than reactive to this evolving need for coverage,” said Lisa Block, vice president and commercial crime product manager at AXIS. “Social engineering is a hot topic of discussion in the crime insurance sector right now. Instead of remaining silent on this issue as some carriers have, we decided to offer an affirmative statement of coverage for this specific type of loss.”

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And it appears the tide is turning. “The insurance industry is very focused on this,” Thomas said. “Companies are concerned. As dialogue continues, we continue to see changes in the way companies address this risk through insurance and how insurers address this risk in their policies.”

“We feel that crimes of this nature that result in a financial loss for insureds should be legitimately covered going forward,” added Bangs, revealing that XL Catlin will also roll out a product extension later this year covering social engineering fraud, also known as fraudulent impersonation.

But carriers won’t issue coverage without carefully assessing an insured’s ability to protect itself.

Yet more reason to ensure the culture of caution and awareness seeps through every pore of every organization. The cyber criminals are, as ever, one step ahead of corporate America.

Only education, and a willingness by victim organizations to come forward when attacked, can erode their advantage.

Antony Ireland is a London-based financial journalist. He can be reached at riskletters@lrp.com.
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Specialty Brokers

Pros and Cons of Specialty Consolidation

Insurers are increasingly focused on streamlining distribution.
By: | May 6, 2015 • 8 min read
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Merger and acquisition activity is rife in the insurance space and in the specialty brokering market in particular. According to M&A advisory firm MarshBerry, there were 220 acquisitions in the U.S. broker sector in 2014, and 49 of them involved wholesale brokers and managing general agents and underwriters (MGAs and MGUs).

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“Making this surprising is that specialty distributors are significantly outnumbered by retail insurance agencies,” the firm said, noting that there are approximately 1,250 specialty distributors in the U.S. compared to 25,000 retail agencies. In other words, specialty M&A accounted for 22 percent of all broker M&As despite specialty players being outnumbered 20 to 1.

According to Julie Herman, associate director of financial services ratings at Standard & Poor’s, consolidation in the specialty brokering space mirrors M&A activity among insurers, many of whom have been buying specialty teams as a way of managing their underwriting cycle in a low rate environment.

Julie Herman Associate Director of Financial Services Ratings, Standard & Poor's

Julie Herman
Associate Director of
Financial Services Ratings,
Standard & Poor’s

“Brokers follow the trends of insurers, so it makes sense they would follow them into specialty,” she said.

“Cheap debt, low interest rates and private equity capital entering the space, combined with competition driving up multiples, makes a plentiful M&A environment. And there are so many opportunities out there, especially in the U.S. broker markets — there are thousands of brokers and the market is very fragmented.”

Herman added that insurers are increasingly focusing on streamlining the number of distribution partners they do business with, exacerbating the broker consolidation trend.

“It is becoming harder for small brokers to compete against bigger players in a softening market in which there is a need to be more sophisticated. Most small players don’t have the resources to invest in big data and technology, so it often makes sense to sell,” she said.

“The losers are the specialty wholesalers who don’t want to sell but might not to be able to adapt to the marketplace and get left behind.”

RIMS board director Gordon Adams is chief risk officer for Tri-Marine International, a fishing company with specialty marine risks. He said he’s seen little evidence of contraction in the marine broking space, but in other areas such as credit insurance there are very few specialist brokers and there is consolidation.

“That is a concern as there are less competitors and therefore we have less ability to do an RFP. Insurance is a personal relationships industry. Companies may miss out on developing personal relationships with boutique brokers in favor of using the big brokers. The larger brokers try to be all things to all people, and that’s certainly not always successful.”

In September 2014, JLT — the world’s largest specialty brokerage — began a concerted push into the U.S. According to Doug Turk, chief marketing officer for JLT Specialty in the U.S., the broker may consider joining the M&A party.

“We’re very open and interested in seeing what’s out there, but we are going to be very selective to make sure any acquisition target fits within our specialty strategy and also with the culture of JLT,” he said.

Impact on Clients

However, Turk challenged the view that broker consolidation leads to less choice for the client. Large clients have had limited choice for some time, he said, while JLT’s move into the U.S. as a retail specialty broker has helped meet demand for more choice when it comes to specialty risk.

“[Consolidation] doesn’t change the markets we go to or the solutions we offer. Underwriting consolidation is something we have to deal with, but with most consolidations, teams remain largely intact. It’s a good time for clients because they can get more out of their relationships with brokers,” he said.

There is no doubt that if a small broker is bought out by a more sophisticated buyer, its clients should benefit from an array of value-adding services.

“There are always two sides to every coin but right now the positives outweigh the negatives for the insurance buyer, if successful operational and financial execution is in place,” said Herman.

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Scott Burton, a partner with Sutherland, Asbill & Brennan in Atlanta, agreed.

“Ultimately, the effects of consolidation on resulting scale and the continued gains in efficiency and expertise should result in better rates and terms for many clients,” he said.

Larger brokers absorb the specialist expertise of small wholesalers but can then use their superior infrastructure to scale up these operations, bringing specialty capability to a wider audience. The key is of course to ensure the acquired teams are not dismantled, diluted or commoditized by the merger.

Specialist Focus

Companies that don’t sell up must capitalize on their ability to offer bespoke service.

“Smaller brokers can compete by differentiating and having a product,” said Herman.

“If they are able to maintain key relationships and use their niche expertise to design specialty programs, carriers will still want to do business with them.”

05012015_06_specialty_ins_sidebar

Turk agreed that while many of the largest brokers look at business in terms of yield and commodification, specialists use their industry expertise to create unique and innovative products for their chosen client bases. This is, he said, what makes specialty-focused JLT different than the likes of Marsh, Aon and Willis.

“There is an increasing role for true specialty brokers who have industry knowledge — an ability to understand business first and risk second, and the ability to translate that understanding into customized solutions,” he said.

Tri-Marine’s Adams is a strong believer in the value of working with the most specialized brokers out there.

“Having a department that is able to service a specialty area is not the same as specializing in a specialty area,” he said, contending that boutique brokers are more likely to have a closer relationship with the client and offer dedicated, individualized service than broad-brush broking houses.

“We want our broker to have expertise and a predilection to our areas of business. The broker we selected at our last RFP said ‘we are heavily focused on marine, and because of that we don’t offer the same abilities in property/casualty or workers’ compensation, so we’d like to partner with a very strong regional broker who can provide these areas.’ That’s the direction we went in, and together they provide what we need.”

For many companies, choosing a one-stop-shop broker may be equally, if not more appealing than using a patchwork of specialists. One area the large buyers have a clear advantage over their smaller target firms is in their ability to service a rapidly internationalizing corporate sector.

“Globalization is fundamentally changing the expectations of our clients. International clients today demand seamless global coverage,” said Turk. “There’s a growing requirement to comply with local regulations in international locations. The world is becoming so much more complex, and companies demand that the brokers they work with have the knowledge to make sure they are in compliance with local regulations when placing policies.

“I’ve been in the industry 44 years and I’ve seen expansion and contraction a number of times during my career.” — Doug Turk, chief marketing officer, JLT Specialty in the U.S.

“Smaller brokers don’t have a global umbrella capability. The problem for them is that virtually all large clients now require it. Even if you are a very niche specialty broker you have got to have that global capability,” he added.

Adams said that as long as a broker can access major insurance markets, the carriers can take care of the global program.

“We have offices across the globe, and buy insurance on a global basis through our corporate risk management program. What is important is to have a global insurance carrier that can address those needs, and a broker that can access the resources of that carrier,” he said.

“I don’t find it limiting to use a specialty broker with only two or three offices because they deal with the likes of Lloyd’s, ACE and AIG, who have boots on the ground all around the world. One call to the local broker means we can access those boots on the ground pretty much any place we have a need.”

Global brokers are, however, more likely to be able to access increasingly popular alternative risk transfer channels such as insurance-linked securities (ILS), as well as being able to offer far superior analytics than small independents.

According to Turk, “data analysis and insight is increasingly driving how insurance is procured and how companies assess their risk.”

Adams, however, said that there are still pockets of industry for which data is not yet a necessity.

He also said that while consolidation is rife among specialty brokers right now, it’s nothing new.

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“I’ve been in the industry 44 years and I’ve seen expansion and contraction a number of times during my career. Every time there is a consolidation and the big brokers gobble up the specialty brokers, it’s not long before you see people peeling off and starting again, and the cycle starts over.”

For now, according to Herman, specialty M&A is set to continue.

“All the ingredients that made for an active M&A market in 2014 are still there and I don’t see why it would slow,” she said.

“The opportunities are still there and there are so many brokers that are ripe for being acquired.”

This could mean less choice for insurance buyers in an increasingly commoditized market. For those whose glasses are half full, the trend may mean specialty expertise is available to a wider audience.

Antony Ireland is a London-based financial journalist. He can be reached at riskletters@lrp.com.
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Health of Lloyd's

The Fate of London

London must work hard to compete and cannot rest on its substantial history.
By: | February 19, 2015 • 9 min read
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The industry has changed beyond recognition since Edward Lloyd opened the Lloyd’s Coffee House on Tower Street in 1688. But in the centuries that have ensued, one thing has remained constant — London’s status as the insurance capital of the world.

That status has for so long been taken for granted. But in recent years, there’s been a shift.

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A study by PwC released in December found that underwriting confidence in London is on the wane, with respondents assuming an average combined ratio of 97 percent for 2015 and one in five materially reliant on investment returns to make a profit.

In one sense, London is being impacted by factors that are affecting the industry in general.

An abundance of capacity has led to substantial rate declines over the past year, with aviation the only line projected to remain flat in the short term; sound familiar?

Property reinsurance and energy (direct and reinsurance) have seen rate declines of as much as 10 percent, and PwC predicts that mid-sized generalist reinsurers will be under extreme pressure in the current environment. London is also a relatively expensive place in which to operate.

In mid-January, hundreds of London jobs were put in jeopardy when U.S. insurer XL announced cost-cutting plans after acquiring London-based rival Catlin for $4.22 billion, the largest-ever takeover of a Lloyd’s underwriter.

XL pledged to cut at least $200 million in annual costs, and with London the biggest area of staff overlap between the two firms, many London underwriters could be redundant within the year.

Steve Hearn, deputy CEO, Willis, and chairman, LMG

Steve Hearn, deputy CEO, Willis, and chairman, LMG

Meanwhile, London’s share of the global reinsurance market declined by 15 percent between 2010 and 2013.

And in 2014, London fell for the first time in seven years to second place as both a financial services center and insurance market behind New York in the most recent Global Financial Centers Index Report.

London professionals admit that the finance center is facing an unprecedented challenge, with Lloyd’s CEO Inga Beale declaring the market is “at a crossroads.”

The London Market Group (LMG) embarked last summer on an immense soul-searching exercise resulting in a 50-page report on the threats to London’s prosperity.

According to Steve Hearn, deputy CEO of Willis and chairman of LMG, London needs to introspect and redefine its identity. The report found that while London is keeping pace with commercial specialty insurance growth, it is losing 2 to 3 percent of market-share globally in reinsurance and major insurance lines such as energy, while its share of emerging market business shrunk by 20 percent between 2010 and 2013.

“Other centers are growing faster than London and we are losing our position relative to the rest of the world.” — Steve Hearn, deputy CEO, Willis, and chairman, LMG

Asian premiums grew 11 percent from 2013 to 2014 and London’s share of those premiums slipped by 0.5 percent, while Africa grew 5 percent and London’s share fell by 1.3 percent.

“Other centers are growing faster than London and we are losing our position relative to the rest of the world,” said Hearn.

“We need to recognize that 300 years of very important history cannot be our raison d’être. The world is changing, and we need to identify the threats and grab hold of the opportunities that creates for London,” he said.

Largest Specialty Market

It is important to note, however, that despite its challenges, London remains comfortably the largest commercial speciality risk market in the world at around $60 billion, well ahead of Bermuda ($37.78 billion), Switzerland ($28.72 billion) and Singapore ($6.05 billion).

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According to LMG’s report, London’s annual growth rate of 4 percent keeps it well in the hunt with its competitors.

It is also financially stable, with many underwriters currently enjoying some of their most profitable years ever.

It’s clear that London will remain a force in the global insurance space and that its competitive challenge lies not with international carriers or other global hubs, but with the carriers increasingly soaking up business in their own regions.

According to the LMG report, the increasing preference of global insurance buyers to use carriers in their local markets puts $19.65 billion to $27.20 billion (30 to 40 percent) of London premiums at risk.

“People in my region understand my specific risk and company better, so assuming they have the required underwriting expertise I am very happy to place business with them. Only when I can’t do that would I go to a global hub,” one Latin American risk manager was quoted in the report, aptly summarizing London’s predicament.02012015_31_Lloyds_London_Box

As a result, London’s underwriting and broking stalwarts find themselves walking a delicate tightrope. Clearly they must grow their businesses in alignment with global opportunities — their shareholders would expect nothing less — yet there is a palpable loyalty to their home market.

Lloyd’s underwriter Beazley, for example, now writes 60 percent of its business in the United States. However, CEO Andrew Horton is sensitive to the need to keep specialty business flowing into London; Beazley’s U.S. platform concentrates primarily on small risks and any large, complex risks still make their way into the Lloyd’s market.

Ultimately though, profits will always trump brownie points; and for the majority of major players it is more a case of limiting the damage to London’s premium flows than protecting the market at all costs. Indeed, one word keeps cropping up to describe their position on where to win and write business: “agnostic.”

Rupert Atkin, chairman of the Lloyd’s Market Association.

Rupert Atkin, chairman of the Lloyd’s Market Association.

“High growth markets are already mopping up business that historically used to come to London. That is happening in spite of us, not because of us,” said Rupert Atkin, CEO of Lloyd’s underwriter Talbot, deputy chairman of Lloyd’s and chairman of the Lloyd’s Market Association.

“Nowadays, Lloyd’s is one of many markets. Global brokers have lots of choice as to where to place the business so you have to go out and work with them — you write where there is an opportunity to make money.”

The United States still offers huge growth potential, and for companies like Beazley, it is excellent growth in U.S. business that is keeping their balance sheets above water, while London-based broker JLT also made a major push into the States last year.

“There is nowhere on the planet like it — it’s much better having all the underwriters in one place to bounce ideas off each other rather than spreading expertise around.” — Andrew Horton, CEO, Beazley

One prominent broker warns that even firms loyal and committed to London will only continue to be so as long as London can meet the requirements of its clients.

“I certainly aspire for us to always be a London market player, but whether we will or not depends on whether external factors outside our control play out — regulatory regimes; capital gains tax; the ability to attract business into the market,” he said.

Andrew Horton, CEO, Beazley

Andrew Horton, CEO, Beazley

“Protectionism continues just under the surface of many emerging markets around the world, and we continue to see actions that prevent the free flow of capital. All these factors pose threats to London.”

The broker does, however, laud the expertise London possesses. After all, London leads the way when it comes to highly unusual, complex or catastrophic risk, and there is nowhere that can match the City of London for density of talent and specialty capacity (350 market participants within slightly more than 400 yards of Lime Street.)

“We have a strong, capable, powerful specialty business here in London; I need the intellectual capital that resides in London working with our now global distribution and sales teams to create the right outcomes for our clients,” he said.

Beazley’s Horton added that the reputation of Lloyd’s has endured through the recession, and the market continues to have pulling power — most notably attracting its first Chinese syndicate (China Re) as recently as November, as well as seeing interest from American wholesalers.

“It’s quite a buoyant and healthy market,” he said. “There is nowhere on the planet like it — it’s much better having all the underwriters in one place to bounce ideas off each other rather than spreading expertise around. London has got the balance of being a great market for service and an innovative environment.”

Seizing the Day

Lloyd’s CEO Beale said the London insurance market has “real power” — with a commercial and specialty market more than twice the size of Bermuda — $222 billion in paid claims over the last five years and representing 8 percent of London’s GDP. It’s hard to argue.02012015_31_Lloyds_London_Chart

“If that’s not power, I don’t know what is,” she said, before making the stakes clear: It is now or never for London to define itself and prosper in the new world order.

“The London market has the talent, skill and discipline to prosper as the world changes. I know that we will,” she said.

“This is a significant opportunity for us all. It is a unique opportunity, which will come along perhaps just once in the lives of the London brokers and underwriters. We can underwrite the digital revolution, just as we did the industrial revolution.The London market is, I believe, on the edge of a golden era.”

Ultimately, with the global insurance market currently awash with surplus property & casualty capacity and rates continuing to soften, the best way London can capitalize on this golden opportunity is to carve out a niche — by reinforcing its reputation as the home of specialty underwriting.

“Talent and intellectual property is at the heart of all of this,” said Hearn.
“The growth for us is in specialty classes that require intellectual property and sophistication in pricing, placing, product design and structuring. Specialist insurance and reinsurance and complex large account business is what we do, and we do it better than anywhere else in the world. We need to continue to protect and grow that capability.”

Or as one European risk manager quoted in the LMG report put it: “London’s role in the commercial specialty market is contingent upon innovation and flexibility; it is advantaged when there are products which no one else can offer.”

The prominent broker agrees, but believes innovation has stalled and London has a long way to go. Even Hearn admits the likes of Zurich, Munich and even some emerging markets are more innovative than London right now.

“I worry about the lack of innovation,” said the broker, who questions whether U.K. lawmakers and the Franchise Board of Lloyd’s are “truly enabling our industry to innovate.”

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“London was always the place innovation would start, but now I see it more offshore and in the U.S.,” he said.

“If we don’t innovate, London will become less relevant, and the LMG report shows that to already be the case. We do have extraordinary intellectual capital residing in various businesses in London which enables us to be the market leader in insurance. Can we maintain that? It’s questionable. We need all the right ingredients to make that work, and I’m less positive than I ought to be.”

According to Horton, London players need to be more proactive in the way they promote the market, including opening up to issuing documents in local languages.

“To do this we need to change culturally,” he said.

“We need to do as much as we can to market the benefits of coming to Lloyd’s — offensively rather than defensively — so that Brazilian firms, for example, know why it may be in their interests to write large complex risks at Lloyd’s rather than at home.”

Let’s be clear. London is here to stay.

But the strategic moves it makes in the next few years may determine whether it stays at the top of the tree for generations to come or becomes, as many foresee, just another option in an expansive global marketplace.

Antony Ireland is a London-based financial journalist. He can be reached at riskletters@lrp.com.
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