News...
EC3
Lloyd's Modernisation -
Trading Places
29/05/2008
POST Magazine, View From The Top
While most of the recently proposed changes to Lloyd's have been received positively, the suggestion to allow non-Lloyd's brokers access to market has split the industry. Stephanie Denton investigates whether Lloyd's will become the international platform of choice or, as some fear, lose its 'executive status'
The government has recently set out a series of proposals to modernise corporate governance arrangements at Lloyd's of London. The proposals are intended to remove the "unnecessary bureaucracy" and would overturn aspects of the Lloyd's Act 1982 through new legislative reforms. Among the proposals is the removal of the requirement for Lloyd's managing agents to only accept business from a Lloyd's broker; allowing the Financial Services Authority to approve appointments of nominated council members instead of the Bank of England; and relaxing the rule requiring the chairman and deputy chairmen to be working members.
Last week 51.77% of Lloyd's members voted on the proposals and the result was a resounding 99.14% in favour of the proposals, but despite these figures not everyone welcomes the changes.
Frank Murphy, chief executive officer at THB, says removing Lloyd's broker status remains a contentious issue: "This has been debated at some length and removing the Lloyd's broker status is very emotive. Lloyd's brokers have made a significant contribution to support the market, so some brokers will wonder why to continue doing so when everyone will get the same benefits."
James Summers, UK CEO at Cooper Gay, asks the most pertinent question: "What is the motivation behind the changes and who wants this done? Some people believe it is because of distribution issues but distribution has worked in Lloyd's for 300-odd years - why change it now?"
It is all to do with modernisation, according to Mr Murphy: "I suspect the reason is that Lloyd's wants to modernise and be the platform of choice. It sees its exclusivity as a perceived barrier to Lloyd's. The change may be driven by Lloyd's rather than brokers hoping that more business will come its way, but as brokers are remunerated to bring business in, it's in their interest to do so."
Paul Anscombe, managing director for James Hallam, agrees: "It is all about speed, minimising costs and reducing frictional costs. Lloyd's has watched change around the world and realises it needs to react. If there are more barriers then there is less work, so it wants to drive business through."
However, Andrew Holman, CEO at Holman's, says the blame lies squarely with the brokers themselves: "This issue came from Lloyd's brokers as their exclusive position was negotiated in a settlement after problems in the 1990s. Lloyd's brokers paid a levy to bail Lloyd's out of trouble until 1998 and so they were granted exclusive access. "Large brokers were clamouring for Lloyd's to allow direct access in the past as they had subsidiaries that had to go through the London office and the delay and extra expense was an issue," he adds.
International reach
Michael Deeny, chairman of the Association of Lloyd's Members, sums up the
rational for changes when he says: "It is in the long-term interest of
the market to try and reach out to international markets and this process
involves a review of the position of brokers."
So what benefits would opening up the market bring? Robert Lewis, partner in the financial sector at KPMG, says: "The old view is that brokers and managing agents should not be connected but this is unduly restrictive. Lloyd's managing agents want to set up distribution channels and this is understandable as insurers are buying brokers to protect their customers."
And Mr Holman agrees: "Syndicates and managing agents will see this as a good thing as it increases distribution and access to the market in South-east Asia. They would hope to see more business that might not come to London otherwise. Around 52% of the market is surplus lines for the US and they are keen to diversify from reliance on this business.
"As to whether this is good or bad will depend on how Lloyd's puts it into practice and whether control is delegated to the managing agents. But if the interest is coming from a captive or risk manager in China, why shouldn't they enter the market? As long as they can handle their account there should be no problem and that is going to be the issue."
But not everyone is so upbeat about the changes. Mr Summers explains: "We don't see there being a material gain from removing the Lloyd's broker's status. Lloyd's brokers allow distribution and at the same time protect the brand. This is a reputation issue and the changes mean all sorts of brokers can access Lloyd's - however, this increases the risk for the market. While Lloyd's status will remain, it will become meaningless as all brokers can offer access to the market. Lloyd's might think it will gain from globalisation but it has been able to access the world for some time with its brokers support."
Mr Murphy agrees: "Lloyd's brokers have specialisation that local brokers don't have. By removing this status the market opens up regulatory issues and also the adequacy of professional indemnity. The majority of firms don't understand the reasons involved in doing this as underwriters have already modernised and set up platforms."
However, Mr Anscombe says it should not be a problem as long as Lloyd's underwriters are still able to choose those firms which brokers they deal with: "This offers a greater ability to trade and there are lots of brokers that don't understand Lloyd's, but underwriters can still choose those firms that make sense and have sectors they want to be in." David Ottewill, managing director of Camberford Law, agrees: "Checks and balances will still rest with the underwriters and their compliance teams are strong."
But this is not the only problem, according to Mr Holman, who believes there are other risks: "The fundamental issue is that brokers will be exposed to takeovers: firstly, by the syndicates and managing agents wanting to buy up distribution, as has happened in the composite market; and secondly, medium to large brokers are exposed to foreign takeovers. Margins are tiny at the moment and this will make a difference too."
Despite the issues raised, few believe these problems will really come to bear as most think that few new brokers are likely to enter the market anyway. Mr Lewis explains: "Most brokers that want to be in the market are already here, and Lloyd's is always keen to help any firm through any problems with red tape."
Alec Finch, chairman of Alec Finch Group, agrees: "As a regional broker there is no difficulty in accessing Lloyd's, and Lloyd's syndicates have serviced the regional market well. They fulfil the needs well for most business; I don't think it will open up the market, it will be business as usual. Lloyd's has been around for 300 years and has seen lots of changes but it keeps going - it is resilient and flexible and I think it will respond to change.
"There aren't a large number of brokers across the world anyway and, in fact, Marsh, Willis, Aon and JLT handle most international business. There aren't that many brokers of size outside the traditional markets that are controlling large risks and risk managers probably instruct large brokers anyway."
And Mr Anscombe adds locality will also have an effect: "There is a lot to be said about the physical aspect of a market where you have underwriters together and there is an exchange of ideas and solutions. This only works if there is direct access to the building.
"Smaller brokers that want to deal with Lloyd's would do best to make the effort and come to London. Strategically it helps them to build up business outside the composites if they spend time with underwriters."
New prospects
"This is the opportunity for regional brokers to access Lloyd's if they
show they have expertise to administer policies correctly," adds Mr Ottewill.
"It is not only super-regional brokers that can access the market as
some smaller ones may look to develop relationships with the market."
He adds that concerns these brokers may have over how well Lloyd's deals with their business are unfounded: "I don't think non-Lloyd's brokers will feel their business is being mismanaged as composite insurers often don't have a great regional knowledge anyway.
"The only barrier to the market is the expense of the Lloyd's administration, but I believe most brokers will be able to get used to the admin. It is more difficult to buy when further away from London, however, if they do some research it is achievable."
So will Lloyd's accredited brokers have a place in this brave new world? Mr Anscombe believes so: "Lloyd's brokers will always have something to add to the market as they are different to the regional brokers in terms of skills. The function will be different but they will evolve."
Mr Finch agrees: "I'd like to take the view that people will value those firms that are in the market everyday and have working relationships they have built up - it can make a real difference when you are dealing with complex risks."
While there is much debate over the removing of Lloyd's broker status, the other proposed changes have almost been overlooked. However, most agree the additional changes are long overdue, as Mr Deeny explains: "It is very important that Lloyd's should have the best council members and chairperson to support it; therefore, the removal of restrictive working practices may be important to achieve this.
The right chair
"Lloyd's can be in a world of it own and it is wonderful if there is
a working member who is a good candidate for the job. But this is an artificial
constraint in the modern world - which means the market might be missing out.
The qualities that make a good underwriter do not necessarily make a good
chair."
Tim Leggett, partner at Ernst and Young, agrees: "It is key to look at the overall balance of the business, and in UK Limited there tends to be a good mix of working and non-executives. There is no need to have just one or the other as long as they have the appropriate business skills."
And the general consensus is that as the FSA now regulates the industry there is no need for the Bank of England to double-check the appointments. There is also agreement that most of the changes are expected to transpire.
Mr Holman explains: "This is probably quite likely to go ahead as the European Union is concerned about the Competition Commission. This is a restriction on access to the market and has the potential to be anti-competitive. The counter argument is that Lloyd's is unique and to trade you need special skills. Whether the EU will take this on board is another question."
But Mr Finch concludes that Lloyd's will respond by playing on its strengths of resilience and flexibility: "The government doesn't like what it perceives as a cartel and Lloyd's will modernise anyway. There are a lot less obstacles to becoming a Lloyd's broker than there ever was. Lloyd's will respond and conform to changes imposed and continue its existence.
"I don't think it will lose its 'executive
club' status. I could be accused of being complacent, but in the short to
medium-term it won't affect the way business is being done. Relationships
are more important than that and they transcend everything else. There is
no point using an accredited Buenos Aires broker if they are not in the market
each day."
