After several horrendous years in which the accumulated losses of the London insurance market climbed to £8.2 billion ($12.7 billion), it is at last possible to believe that Lloyd's is far enough along the road to recovery and reform to remain a significant factor in the global insurance industry.
However, the restructured Lloyd's which emerges from the reconstruction is likely to be a very different creature to the free-wheeling, highly entrepreneurial and relatively unregulated market, whose character has remained unique over three centuries.
The Lloyd's which emerges ought to be a more focused, highly professional market in which much of the capital and underwriting capacity will be provided through corporate vehicles, with limited liability, rather than the individual 'Names' or investors with unlimited liability who were the market's backbone. But there are certain to be serious questions as to whether the new, better regulated and organised Lloyd's will, when it is fully up and running, be as innovative a market as its predecessor which gave the City of London - and its powerful collection of commercial insurance companies - a trading edge in the competitive area of global insurance services.
The fate of Lloyd's is of vital importance to the cost structure of the global airlines. In 1992, the last year for which Lloyd's three year accounting cycle has figures, the market collected some £446 million in liability insurance - a 33 per cent market share. By the end of this year the Lloyd's share of the aviation underwriting market had climbed to 38 per cent. Current market estimates suggest Lloyd's has enough capacity and competitive edge to raise its share to 50 per cent over the next few years as its lead over the other major markets in the US, Continental Europe and Bermuda, increases. But such optimism assumes that reforms at Lloyd's will solidify.
However, there is still some way to go before Lloyd's is back on its feet. The recovery schedule was jolted in late November when the architect of many of the reforms, chief executive Peter Middleton, suddenly stepped down to take on the more lucrative job as head of investment banker Salomon Brothers' European operations. By leaving unexpectedly Middleton, who was succeeded by his deputy Ron Sandler, jeopardised the better relations which Lloyd's built up with the loss-making Names, and the head of political steam for outside regulation of the market.
For the reorganisation of Lloyd's to be successful, it requires several separate but related developments to take place. Firstly, and most importantly, the provisional settlement negotiated by Middleton with the rebellious Names, who have taken out hundreds of lawsuits against the insurance market, has to be settled. Under the proposed settlement, the Names would drop their lawsuit in exchange for some £2.8 billion in compensation which would be funded from the existing market's central fund (the equivalent of its reserves), from future cash calls to be made on the Names by insurance syndicates and from deferred losses. It originally had been expected that the settlement with the Names could be brought to fruition by the end of 1995. That will now have to wait until February amid indications from Sandler that the settlement could be increased to £3 billion.
A second reform which needs to be fully implemented is the establishment of Equitas, a reinsurance company which is intended to take responsibility for the so-called 'long tail' of billions of pounds of asbestosis and pollution claims still unresolved in the US. Sorting out Equitas has not been easy either and Heidi Hutter, hired to do the job, is to quit soon. She was responsible for untangling the mess left behind by the old Lloyd's. This included taking into account the effect on Lloyd's of 'superfund' rulings in US environmental cases, as well as unscrambling 100,000 reinsurance contracts taken out by Lloyd's underwriters to protect themselves.
Once a settlement between the Names and the market is in place and the destabilising environmental and reinsurance contracts are ring-fenced within the Equitas fund, the Lloyd's Council and Sandler can focus on creating the new Lloyd's. The new market will be largely financed using corporate capital funnelled through quoted investment trusts such as the London Insurance Market Investment Trust. It is also expected that existing Names who wish to remain part of the market will be joined together by their syndicates in corporate vehicles with limited liability.
All members of the new Lloyd's will help to fund the liabilities of the old Lloyd's, collected in Equitas, through a surcharge of, say 1.5 per cent on all participants in the market. On the financial front, the reconstruction of the market is being helped by the fact that the insurance cycle has moved in Lloyd's favour, yielding profitable underwriting years since 1992.
The creditability of the new Lloyd's will need to be underpinned by a tougher regulatory regime. This eventually means appointing an outside non executive
chairman and establishing an external regulator. At least Lloyd's has plotted a future and the outlines of a better regulated and newly financed market are in sight.
This, for the moment, has enabled Lloyd's to maintain a leading position in the markets where it is strongest, including maritime and aviation. In the latter, Lloyd's is benefiting from rising premiums as the insurance cycle starts to dip.
In the past Lloyd's has been able regularly to underbid its competitors because of its capacity and cost structure. However, with the loss of unlimited liability and the old laissez faire style, there is a risk of some shrinkage in capacity and some loss of competitive advantage. That in turn could force up worldwide aviation premium rates.
Alex Brummer
Source: Airline Business
