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Two centuries of political independence aside, U.S. energy companies still rely heavily on the London markets for important insurance, especially catastrophic coverage from Lloyd's syndicates. Recent economic and regulatory changes on both sides of the Atlantic in the past two years have driven a rise among the independent and boutique firms, especially in London.

A few new independents have been formed, and a few others have joined forces. But for the most part, the boutique renaissance has happened as individual brokers and teams move from larger firms to independents. To be sure, the regulatory environment in London makes startups very difficult. That means there will always be a good bit of movement among brokerage firms, instead of creation of new ventures as is common in the United States.

At the same time, the investigations in the United States, primarily by New York State Attorney General Eliot Spitzer, have shone a harsh light on the bundled prices that the major brokerages have charged their clients. This spotlight has not just caused a compliance challenge for some firms. It has meant that firms with large overhead have to be more explicit about fees and charges.

There has also been a regulatory sea change in the United Kingdom. At the beginning of 2005, the General Insurance Standards Council was dissolved and insurance oversight was brought under the Financial Standards Authority, as per unified European Union regulations. Brokers say the new governing body is noticeably more stringent, although the sea change in the London market has not been as disruptive as the investigations have been in the United States.

About the same time as the advent of FSA oversight in London, 124-year-old independent R. K. Harrison Insurance Brokers Ltd. brought in some high-powered talent and launched a new energy operation.

"The big brokers can't just go to the windstorm underwriters anymore and get a better rate because they are bringing loads of business," says Tim Law, divisional director for energy for R.K. Harrison. "Underwriters have a great deal of business, and they have a great deal of income. They can afford to be very discerning of what they write, so we need to differentiate risks to achieve best results from underwriters."

For example, through work with oil companies, R.K. Harrison has learned that full storage tanks withstand wind and subsequent floods better than partially filled tanks.

"We have a client with a tank farm," says Law, "and when he got 72-hours notice of a storm, he filled all his tanks. It cost some money, but it secured them. And they all survived the storm. That, therefore, becomes a better risk that distinguishes the client as one who can look after his own property. So we can then go to the market and give the client the best choices."

More broadly, Law tries to keep the notion of a "CAT crisis" in energy markets in historical perspective. "There is clearly an issue in catastrophic coverage, specifically a wind issue," he says. "We've had a couple of bad years in the U.S. Gulf. But from a broker's standpoint, there is a different issue every year. Several years ago we had a soft CAT market. Was that a crisis? The market will grow, shrink, change."

Law notes that in the early 1970s, named windstorms were excluded from CAT coverage. "You had to buy it back on a monthly basis for quite a lot of money. It was bolt-on coverage," says Law. "Now we may be going back to the way it was before. If we get a few years with no major losses, the present high premiums won't collapse, they will just ease off."

"Offshore there is still a market, but the job of the broker is much harder," says John Keely, formerly a London broker and now senior vice president and director of exploration and production for Aon's natural resources group. "A broker needs both the U.S. and the U.K. markets to participate. Our capability is not just brokering, but retail service to the account. In London we are classified more on the wholesale side with design and brokering."

In the London market, Keely sees the recent higher profile of independent brokers more a result of market structure than a new trend. "There is quite a high barrier to entry," he says. "You need to be under the umbrellas of an established broker and recognized with Lloyd's certification."

It is important to note that Lloyd's is not an insurance company but a society of members, both corporate and individual, who underwrite in syndicates on whose behalf professional underwriters accept risk. Supporting capital is provided by investment institutions, specialist investors, international insurance companies and individuals. Historically, that capital was provided to a large degree by individuals called "Names." Today, however, corporate money provides the bulk of the underwriting capacity.

It is also important to note a significant difference in terminology on opposite sides of the Atlantic. When Lloyd's refers to "capacity," it actually means total premium taken in by syndicates, not underwriting capacity as the term is used in the United States. Lloyd's officials say there is no fixed correlation between syndicate premium and underwriting capacity.

Keely's colleague, Kurt Tetinger, is senior vice president, director, natural resources property syndication, for Aon, as well as a Risk & Insurance®Power Broker. On the rise of independents in the United Kingdom, he says, "There is just too small a sample to say. But in London it is very difficult for an individual to go out on his own. You have to have that Lloyd's association. Even in the U.S. where a lot of people have been going into startups in the energy market. Look closely--they are still affiliated with a larger firm."

Lloyd & Partners is most assuredly affiliated with a larger firm. It was formed by London major Jardine Lloyd Thompson Group in January 2005, but operates completely autonomously.

"The logic to Lloyd & Partners is to focus on the U.S. energy market, especially with U.S. independent brokers," says John Cooper, partner. "We are not licensed to deal with buyers in the U.S., and many U.S. boutique brokers are unable to come to London. But the rise of independents is mostly to do with clients wanting choice. A lot more insureds want to select their broker in London. They want to be part of the process."

They also want to know more about their bills. "Contingency commissions sometimes allowed larger brokers to cut their up-front fees to almost nothing," says Cooper. "Smaller independents could not. We never did that. We had to win business based on our expertise, not on income through the back door. But following the Spitzer inquires, in theory everyone is having to bill up-front."

That said, Lloyd & Partners has not had any easier time in the current market than anyone else. "Our business is mostly U.S. windstorm coverage, so we have had a very challenging year," says Cooper. "We are concentrating mostly on renewals. Some clients are not happy about premiums, but we have not had anyone turn away. We have managed to find a solution for everyone. The big question is where do we go from here. If we have a quiet hurricane season, the market could make very good money this year despite aggregated policies and capped policies. But if it is another bad season, prices could go even higher."

GREGORY DL MORRIS is a business journalist based in New York City.

September 1, 2006

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