Lloyd’s Chairman, Lord Peter Levene, described a bright future, but one that needs work to be achieved, for those attending the 2006 conference of the Association of Lloyd’s Members (ALM) last week. He stressed three major areas of concentration, where he said further progress is needed, as follows:
— Strong performance management – which will maximize returns for members;
— An optimal global trading platform – which will bring new business opportunities for members; and
— The strategic plan – which in addition to the above will deliver a more efficient capital and processing structure, reducing costs for members.
Concerning performance management, Levene pointed out that while Lloyd’s had made a £1.4 billion [$2.54 billion] profit in the first half of 2005, it was “the second half that illustrated our real progress. Sure, the storms wiped out profits. However, despite net claims of 3 billion pounds , that’s where the damage ended. With an overall loss of just 103 million pounds , the Lloyd’s market proved that it is fundamentally sound, able to meet its obligations, and can carry on with ‘business as usual.'”
Lloyd’s has set an objective “of achieving a cross-cycle return of 7 per cent for our capital providers,” Levene continued, “and it is fair to say reasonable returns have been achieved to date: a 14 per cent annual return above the assumed 3 per cent risk free rate over the last four years . But as we know, two successive storm seasons have had a major impact on profitability, and exercising discipline is a must if we are to get back on track. As Rolf Tolle [Director of the Franchise Board] puts it rather neatly, we cannot plan to be lucky!”
Concerning the progress made at Lloyd’s in making the London market a “global trading platform,” Levene indicated: “It is gratifying to see how well the Lloyd’s brand is recognized around the world, but Lloyd’s needs to continually build and improve its license and trading opportunities if it wants to remain a world-class insurance platform.”
After noting Lloyd’s progress in Asian markets, particularly in China, Levene stated that “in looking east, we certainly cannot ignore the west, and the United States will continue to play the most important role in Lloyd’s future journey.” He then turned to one of his principle concerns – the U.S. rules on the collateral that must be supplied by “alien” reinsurers (See IJ Website “National” June 14).
“Enacted more than four decades ago, the US ‘credit for reinsurance’ rules regard all US licensed reinsurers as good credit risks,” Levene continued. “In contrast, all overseas [alien] reinsurers are required to post funds equal to 100 per cent of their gross liabilities to US companies, in an illogical demand based on location rather than financial health. While this hurts consumers in the end, it also hurts the cost base for members – with the price of compliance for Lloyd’s alone standing at more than 150 million dollars a year.”
In discussing the NAIC’s recent decision to review, and possibly scrap, the trust fund requirements, Levene stated: “This is a major recognition by regulators that the current rules need to be changed. And at their quarterly meeting this month they announced they will explore a new ratings-based system aimed equally at all reinsurers based upon their financial strength. Regulators will continue to consider this proposal and report back to the NAIC in December, and I will continue to lead Lloyd’s important contribution to this dialogue until change is delivered.”
Turning to a discussion of Lloyd’s “Strategic Plan” and the effect of last fall’s hurricanes, Levene indicated that “the global insurance marketplace [is] suddenly becoming awash with new capital, desperate to take advantage of the improving pricing environment.”
He pointed out that one outcome of last year’s hurricanes has made the industry more competitive than ever, “and we know that insurance industry capital is more mobile than ever before. Work we completed last year concluded that, compared with other insurance platforms, Lloyd’s has some very real strengths – including our security, our licences and the brand. But it also identified some areas where we need to deliver dramatic change if we are to make a successful journey into the future and take our capital providers with us.
“The Strategic Plan is about everything we have talked about already – it is about financial performance, and about our trading platform. But it is also about implementing a more flexible capital structure and a reduction in the costs of doing business for our members.”
In his closing remarks Levene stressed that “business processing is a particular area where we need to turn our current momentum into solid results.” He also expressed confidence that the London market will meet the demands of the U.K.’s Financial Sdervices Authority (FSA) on contract certainty. “We are on track, but need to make sure we complete the course,” he stated. “And although often we think of the benefits brought to the customers, we should remember that certainty is just as important for capital providers – who need to be sure that syndicates know their exposures.”
On the search for “electronic processing, Levene stated: ” We still believe we need an electronic means of processing in our market, to make processes more efficient, but earlier this year we made the decision that Kinnect was no longer the right solution. The world and technology have moved on. The market no longer wanted a central technology hub, and advances in the technology available to the market meant that there were now other viable options. The logical and right thing to do in those circumstances was to call a halt. That is precisely what we did. We have now learned the lessons from the project, and we will move on. And move on we must, because it is critical that market participants adopt the best electronic processing solutions if Lloyd’s is to remain competitive in the future.”
The full text of Lord Levene’s remarks may be obtained on the Lloyd’s Website at: www.lloyds.com.
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