By GRAHAM BUCK, who covers European risk management issues.
LONDON--Lloyd's of London has ditched many of the more archaic traditions in recent years, as it embraces 21st century electronic trading. However, formal attire is still required for individuals to the venerable insurance market's famed underwriting floor. Visitors accustomed to open-necked shirts be warned that means wearing a necktie.
While the market began business in 1688, Lloyd's current home is just approaching its first quarter century. The iconic building in the City district at One Lime Street, designed by Richard Rogers Partnership, was developed at a cost of $121 million and opened by Queen Elizabeth on Nov. 18, 1986. More space was needed as nearby premises in Leadenhall Street, opened in 1928, and a new building opposite added 30 years later both rapidly became unable to cope with growing demand from underwriters. Today's underwriting room or "floor" is actually a misnomer, being spread over three levels.
In Rogers' words, One Lime Street was designed "to be flexible enough to take Lloyd's into the 21st century." With an exterior of polished stainless steel and glass accommodating pipes and cables to create more interior space, its 12 stories are used by 52 managing agents and 87 syndicates. While the latter figure is much reduced from its early '80s peak of 437, it has moved back over six years from a low of 62 syndicates.
"We've been trying in recent years not to lose the benefits of our history, such as face-to-face meetings between underwriters and brokers, but to build on them and ensure that Lloyd's is still relevant and well positioned for modern times," said Sue Langley, director of market development.
This means that Lloyd's Exchange, the information technology hub that commenced operations in February 2010 as the market's single connection point for brokers, underwriters and systems providers to send and receive information, acts as the "backbone" to the underwriting floor and traditional placement processes for business without making either redundant.
The launch followed the earlier failure of a more ambitious project, Kinnect, to establish an electronic trading platform at Lloyd's. Despite five years in development and a $112 million investment Kinnect ultimately had to be abandoned in early 2006--partly due to a failure to win hearts and minds as it won only a fraction of the market's total business.
Lessons learned from that episode were incorporated into Lloyd's Exchange. "We now say to users 'work in any way you like' before it ultimately goes into the system," Langley said. "Bermuda has also retained face-to-face, as you really can't negotiate a complex risk via email. Nor should you try.
"So we've worked with third-party providers to put the room on a more electronic basis without losing the face-to-face element of doing business," she said.
One recent initiative to win media attention was a pilot scheme launched last September with three brokers -- Marsh, Cooper Gay and RK Harrison -- to use iPads in the underwriting room as an alternative to traditional underwriting slips. Mobile technology appears increasingly likely to move in alongside history and early 2011 saw placement of the first electronic contract and accompanying message exchange using an iPad.
To spur greater use of electronic messaging, a successful pilot that saw a group of carriers and brokers submit and agree on endorsements electronically for several business classes is being extended during the course of this year. "Electronic accounts and electronic claims both initially encountered resistance," Langley said. "But with each new initiative the strength of resistance lessens and there is recognition that our aim is to ensure that we build on Lloyd's strengths."
Another tradition Lloyd's seeks to maintain is its reputation for paying claims promptly and efficiently. More than 100 years on, the story of how underwriter Cuthbert Heath instructed his San Francisco agent to "pay all claims" after the 1906 quake still generates invaluable publicity.
As an underwriter on the floor remarks: "Over the years the market has proved that it can take major losses on the chin, withstanding them and also reacting by developing new products that respond to clients' needs."
Lloyd's typically pays out around $16 billion annually in claims, with around 210,000 cases handled at any one time. It is in the early stages of an initiative to modernize its claims-handling processes and systems. Earlier this year David Lang, formerly a consultant with Ernst & Young who has previous experience at Australian insurer QBE's European operations, joined as head of claims.
The Claims Transformation Programme, which he oversees, will roll out a three-level process that reflects the value and complexity of each claim and the initiative will also involve enhancing the market's information technology systems.
Lloyd's ability to move with the times is likely to be tested in the years ahead, as "extreme'' weather events become regular occurrences and a host of emerging risks create demand for new products and services. Neil Smith, Lloyd's emerging risks and research manager, said one of the most immediate risks is "space weather'' and solar flares. In February, Chinese communications were disrupted by the strongest solar flare in four years and activity is set to a, threatening further power outages, as the solar cycle approaches its peak in 2013.
Lloyd's series of 360 Risk Insight Reports have addressed many issues likely to move up the risk agenda in the decade ahead. "The primary function of Lloyd's emerging risks team is to identify, monitor and analyze emerging risks on behalf of the syndicates," Smith said. "We want to raise awareness of new or evolving risks so they can take appropriate actions to address them, and ensure that the market as a whole remains stable, secure and ready to meet policyholders' needs.
"Emerging risks can provide opportunities for an insurer to provide risk managers with new products and services. As a specialist market, Lloyd's is often at the forefront," he said.
Another issue high on the agenda is energy security. A year ago, a report produced jointly by Lloyd's and the Royal Institute of International Affairs (or Chatham House as it is better known) warned of "catastrophic consequences" for businesses that fail to prepare for a future in which oil is an increasingly scarce commodity and western nations adapt to a lower carbon economy.
As one of the room's energy underwriters observes, energy volatility is now on everyone's radar. However, energy liability is a class that has performed poorly for Lloyd's in recent years, despite the market's amassed knowledge and expertise. A string of heavy losses culminated in two massive windstorms that hit the Gulf of Mexico in 2005 and 2008. With 3,500 platforms and wellheads in the region and both the sector's manpower and commodity costs heavy "the potential for loss is horrific," the energy underwriter said.
He added that Lloyd's good reputation for paying claims was again demonstrated last year with the Deepwater Horizon disaster, the biggest energy insurance loss since Piper Alpha in 1988, to which Lloyd's contributed $600 million. Only weeks later the Aban Pearl gas rig went down off the cost of Venezuela; a risk of which only a quarter was taken by Lloyd's syndicates and which has taken significantly longer to settle.
While a string of natural catastrophes globally in the first half of 2011 again focused attention on property/casualty rates, the "Arab Spring'' has renewed interest in Lloyd's more recently developed covers such as political risk and political violence. Political risk cover, initially pioneered by the Merrett syndicate in 1981, has evolved over three decades to include structured trade credit and political violence.
One of a handful of syndicates to have pioneered the cover is Beazley, which began offering political risk in 1997 shortly before the collapse of the Thai baht triggered the Asian financial crisis.
In recent years political violence, originally a bolt-on to political risk, has developed as a stand-alone cover, Beazley underwriter Chris Parker said. Civil unrest in Thailand, the Middle East and North Africa has highlighted some "grey areas" between terrorism and political violence policies. To avoid gaps in cover, demand for separate political violence insurance has grown steadily--largely from companies doing business in the emerging countries.
Despite the losses caused by the credit crunch, capacity for political risk and trade credit has remained high as syndicates have entered the market, and fierce competition has pushed rates lower. "More capacity is fighting for the same business," said Adrian Lewers, Beazley's head of political risks and contingency. "Surprisingly, although there were some opportunities during the recent unrest in Egypt, there has not yet been that great an increase in political risk demand."
Product innovation often comes from face-to-face discussions with brokers, who may bring their client with them to the underwriting room. As Lewers noted: "It's a good opportunity for them to present their case--and good underwriting is very much about getting a proper feel for your client's story."
Beazley's online interactive political risk and violence risk map offers users key information on the most turbulent regions of Africa and the Middle East, the current threat level in specific countries and the group's own risk appetite.
September 1, 2011
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