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By Graham Buck

The league table of world economic powerhouses will be radically transformed as the 21st century progresses, as was long ago noted by Jim O'Neill of Goldman Sachs, creator of the acronym "BRICs," for the four most dynamic emerging global economies of Brazil, Russia, India and China.

Although Europe's seemingly interminable sovereign debt crisis threatens to put a brake on its growing trade, forecasts suggest that BRIC members will continue moving up the league table, with China potentially displacing the United States as the world's largest economy as soon as 2017.

The changes are keenly noted by Lloyd's of London. The 324-year-old market is, in the words of its Chief Executive Richard Ward "the global center for insurance and reinsurance specialty business."

At present, Lloyd's derives 40 percent of its total business from North America, 20 percent from the U.K. and 19 percent from the rest of Europe. Ward candidly admitted that it must respond to the rapidly shifting global economy, or risk losing its pre-eminence by the middle of the next decade.

"Over the coming years," said Hank Watkins, president of Lloyd's America, "economic growth in the emerging regions of the world -- including Latin America, China and Southeast Asia -- will outstrip that of developed countries.

"China, for instance, is forecast to grow by more than 400 percent by the year 2030, and Brazil by 200 percent. Russia remains a key market for us and we already write over £200 million ($312 million) of premium there," he said. "We're keen for that to grow."

Watkins added that rapid economic development inevitably gives rise to new risks. "As these economies develop, the requirement for specialist insurance and reinsurance will become more important than ever. Access to the high quality reinsurance capacity and expertise that Lloyd's can offer will be needed to support this growth and mitigate those risks."

This means that Lloyd's is accelerating its efforts to gain a larger slice of its overall business from the BRICs and other fast-developing economies in regions such as Asia and Latin America.

New Chairman John Nelson described the challenge as "growing the Lloyd's footprint" in emerging-growth countries. This means adding new business in many of these countries at the same rate as GDP growth, while in others, to even exceed it, as well as internationalizing Lloyd's underwriting community.

"We're pushing Lloyd's out to these markets, at the same time we want to pull more business into London," Nelson told Risk & Insurance® earlier this year. "The strategy is to attract quality overseas carriers with expertise through the London market."

As Watkins noted: "Whilst we don't have competitors in the same way a stand-alone insurer might, we are competing within the insurance and reinsurance industries across the world -- including the U.S., Europe and Bermuda, and also from fast-developing industries within high-growth economies themselves, such as in Shanghai."

Wider Horizons

The policy of looking beyond its established market is something of a no-brainer for Lloyd's as Europe stumbles from crisis to crisis, with most of its economies either in recession or managing only anemic growth. Hence, the launch in May of a new initiative, Vision 2025, to emphasize the Leadenhall Street-based insurance market's international ambitions.

Launched in the Underwriting Room of the iconic Lloyd's building in London, the event was high profile enough to attract British Prime Minister David Cameron, who made a brief speech of support.

"It was fantastic to have the PM attend the launch," said Watkins. "To have our vision endorsed at the highest level in the British government is a clear vote of confidence in Lloyd's and the London insurance market."

He noted that Cameron's speech acknowledged the key challenge to the industry of new regulation: the Solvency II legislative program to be imposed across the European Union's 27 member states. The declared aims of the new regime, effective at the start of 2014, are to introduce a harmonized EU-wide insurance regulatory regime that beefs up consumer protection, modernizes the industry's supervision, deepens EU market integration and increases the competitiveness of its insurers.

Yet, Solvency II continues to produce rumbles of dissent, with critics suggesting that its main achievement has been to push up the industry's costs and erode competitiveness. Last year, Lloyd's finance chief admitted that its own budgeted figure of £250 million in increased costs was too conservative.

"We need to ensure that we have a stable regulatory regime which is prudent, proportionate and pragmatic and I welcome his [Cameron's] support in getting that right," said Watkins.

At the launch, Nelson emphasized that Vision 2025's aims extend beyond Lloyd's writing more business outside of North America and Europe. The plan is also to attract more capital and more foreign insurers to London; an ambition that, not surprisingly, has keen government support when the city's pre-eminence in banking services looks increasingly vulnerable.

Nor does the strategy focus solely on the BRICs. Ward pointed out that Lloyd's already writes annual premium of $650 million in Mexico, representing a significantly bigger market for its syndicates than Brazil.

The initiative also pleases ratings agencies. Fitch commented on it favorably, while also noting that an emerging-markets strategy is not without additional risk.

However, it said, the configuration of Lloyd's, which comprises more than 80 underwriting syndicates, gives it an advantage over individual companies both in accessing new capital and underwriting large and complex risks. Lloyd's is also lent additional flexibility by the number of specialist purpose syndicates that have developed in recent years, enabling investors to provide underwriters with capital for a strictly limited period.

"We'd like to increase the amount of business we do across the globe," Watkins said. "Vision 2025 isn't about restricting business, it is about opportunity. So, in addition to the BRIC economies, we're interested in other high-growth economies such as Mexico, Colombia and Turkey.

"And we also shouldn't forget that the U.S. is still our largest market and is likely to stay that way. And as U.S. GDP grows, so should our business there."

A Longer Perspective

Vision 2025 marks a radical departure from the three-year plans that have been central to Lloyd's strategy in recent years and which, said Watkins, have concentrated on short- to medium-term business priorities. "The Vision takes a much longer perspective -- it is about sustainable growth over the whole cycle.

"Clearly over the last few years, market conditions have meant that our ability to grow the business has been limited, and this remains the case in some areas. The focus at the moment is, very rightly, on underwriting discipline."

While the longer-term perspective has been welcomed, one criticism the new strategy has attracted is that its aspirations are not matched by detail on how they are to be achieved. Watkins confirmed that Lloyd's currently has no plans to add new offices to its existing network of 34, more than half of which are in Europe, as part of its internationalization.

"Instead, we'll build on the strengths of our existing offices, while also looking to make better use of brokers' global distribution networks to bring business to Lloyd's," he said. "Over the next few months, we will further develop our plan in detail for how we'll build upon this Vision, including metrics and identifying milestones. This will help shape Lloyd's strategy for 2013 and onwards.

"What I hope to see is a situation where brokers are extending their owned and partner networks, picking up new business across the world and placing it at Lloyd's. This would be a truly global industry, with Lloyd's at the heart of it."

The next few years could also see further initiatives such as that recently developed by Catlin Underwriting Agencies, Lloyd's largest syndicate based on gross written premium volume. Last November, Catlin announced a partnership with China Reinsurance, owned by the Chinese Ministry of Finance and state-owned Central Huijin Investment Corp., with the formation of a special purpose syndicate at Lloyd's as part of the deal.

By April of this year, the Catlin Group had won approval from the Chinese Insurance and Regulatory Commission to open a representative office in Beijing.

For the moment the new office will not be able to underwrite business, but Catlin said the move enables it work more closely with Chinese government and insurance industry organizations and carry out market research on the country's developing needs.

Given developments such as the Arab Spring and Europe's uncertain outlook, can Lloyd's plans for the world of 2025 go beyond an educated guess?

"It's important to remember that Vision 2025 is a long-term vision and a statement of intent for where the market wants to be by then," said Watkins. "There will be ups and downs across the world over that period, but it is difficult to predict with any degree of certainty what those may be.

"But that's why the insurance industry is so important. We're here to protect and ensure that businesses and communities can rebuild if the worst happens."

GRAHAM BUCK is a London-based writer covering European risk management issues. He can be reached at riskletters@lrp.com.

August 22, 2012

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