August 31st, 2012

Lloyd’s Priorities for 2012 – 2014

Posted at 1:00 AM ET

Matthew Day, Senior Vice President
Contact

For the near-term, Lloyd’s announced its most recent three-year strategic plan (2012-2014) in December 2011, laying out its key priorities for 2012 and beyond. The implementation of Solvency II is one of its top priorities. Lloyd’s plans to continue to lobby the Financial Services Authority (FSA) to ensure Solvency II and other planned European regulations are appropriate for Lloyd’s and to fully understand the impact they will have on Lloyd’s international licenses. Despite the continued uncertainty over implementation dates for Solvency II, Lloyd’s will issue guidance on suggested practice and ensure that managing agents and syndicates meet its requirements.

Other important priorities for Lloyd’s in 2012 include market oversight on underwriting discipline and risk management, a claims transformation program and a market operations review. Lloyd’s intends to implement a roadmap to not only renew back office operations that are currently in place, but also make efficiency gains for the future. These areas of focus highlighted by Lloyd’s are indicative of the challenges currently facing the broad (re)insurance sector. Indeed, recent events have reinforced the importance of portfolio diversification, broker relationships and market modernization.

Market Portfolio Diversification

(Re)insurers are increasingly seeking new approaches to risk diversification, and the Lloyd’s Market is no exception. Lloyd’s has a portfolio concentrated in catastrophe-exposed business. This emphasis is driven by profit opportunities and the relative capital efficiencies of the Lloyd’s Market.

The geography of Lloyd’s business has traditionally been dominated by North America and the United Kingdom. Meanwhile, European markets have been well served by domestic insurers, and developing markets have typically seen growth in lines outside of Lloyd’s focus. However, as discussed, Lloyd’s now has a vision that focuses on growing internationally in the medium and long-term, while consolidating its business in developed markets. During the next three years, Lloyd’s intends to utilize existing operations in China, Singapore and Japan to grow its business in these countries and implement a market development framework to consider business in new geographies. There is already some evidence of growth in emerging markets, with Lloyd’s increasing its premiums by about 4 percent in Central Asia and Asia Pacific, Central and South America and other emerging markets since 2009.

Distribution Model

(Re)insurance brokers can help facilitate international expansion, and Lloyd’s is well positioned to exploit its strong relationship with the broking community to achieve this. Lloyd’s is very much a broker market, and this model serves it well. Brokers play a key role in the Lloyd’s Market, and the mutually beneficial relationship between Lloyd’s and brokers is likely to continue.

Whether business is placed on a delegated authority basis in a local market or agreed through face-to-face negotiations in London, brokers are integral to the identification of business and the structuring of risk placement. Lloyd’s continues to rely on the
largest three brokers (see Figure 1), which produce approximately half of its premium flow.

Figure 1

lloyds-report-f1

As emerging regional centers continue to grow, Lloyd’s must develop and/or broaden relationships with brokers that operate in these territories to exploit growth opportunities to the fullest.

Market Modernization

The evolving and increasingly complex (re)insurance marketplace has forced markets to revise and improve their operating systems to cut costs and remain competitive. Lloyd’s has traditionally lagged behind other markets in terms of efficiencies. To increase its competitive position, Lloyd’s has compiled its own market modernization program that focuses on improving processing infrastructure to support the operation of the subscription market and to meet tax and regulatory reporting requirements. This program will modernize the way Lloyd’s business is processed by introducing new technology and encouraging market participants to embrace the changes.

One important development has been the gradual introduction of the Claims Transformation Programme. Prior to the program’s launch, the vast majority of Lloyd’s market claims were handled by the outsourcing firm Xchanging plc. However, the introduction of the Claims Transformation Programme opens the Market considerably. Lloyd’s expects the program to significantly improve claims performance across the Market by enhancing the segmentation of claims, introducing the choice of whether to manage claims in-house or outsource them, increasing flexibility in claims notification and settlement processes and strengthening the claims governance framework.

Another process improvement project at Lloyd’s is the Exchange initiative, which started as a pilot program in May 2009, and was officially launched in March 2012. The Exchange initiative allows Market participants to exchange risk information electronically, including all endorsements in every class, using ACORD standard messaging. Several brokers, insurance companies and all managing agents are now transacting endorsements electronically at Lloyd’s.

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