Ladies and Gentlemen, I am very honoured to be asked to address you today as the relatively new Chairman of Lloyd’s. I thought that what I would do this morning is to outline to you how I see Lloyd’s today: what my own three main priorities as a Chairman are, talk about our long term strategy and finish with some observations on Names and Names capital.
I am not an insurance man. I come from a banking and business background. So – anything which I say, I will say modestly.
When I became Chairman nine months ago, the market was grappling with some pretty significant issues. The global economic uncertainty was allied to difficult market conditions in the insurance sector generally; low premium rates, low investment returns and exceptionally high claims.
2011 was, as everyone in this room is well aware, one of the world’s costliest years ever for catastrophe claims, with floods in Australia, earthquakes in New Zealand and Japan, windstorms in the US and floods in Thailand. And alongside this, we had to manage some significant regulatory changes – not least the preparations for the introduction of the Solvency II regime, which will be the most significant change in regulation for the insurance sector, for a generation.
Blowing the trumpet for Lloyd’s, we have emerged from one of our largest catastrophe years ever in a very strong position.
Despite incurring a record level of claims – we did of course show a loss of £500m - our capital position has remained unaffected, and our ratings at A+.
This performance is a tribute both to the underwriting community in Lloyd’s and also a positive endorsement of the performance management standards which have been developed over the last few years within the Corporation.
So I have identified three main priorities which I have identified as your Chairman. The first – it won’t surprise you to hear - is to ensure that the oversight of our underwriting standards remains the best of breed.
Of course, we need to ensure that the imposition of these standards does not dilute the innovation in the market, so fundamental to Lloyd's reputation and essential today when businesses are facing new risks such as the management of supply chains, reputation and cyber threats. I also want to see a culture of entrepreneurialism, spurred by competition, thrive in the market.
In my view, these elements are compatible with the prudential oversight of underwriting.
My second priority is to improve the efficiency of Lloyd’s and to accelerate the modernisation of market services.
We have taken steps in the last few months to reduce costs in the Corporation, including the difficult step of redundancies, and these savings are being passed on to you, the market.
On modernisation, as you may well be aware, we have been making significant investments: improving our processing of claims which is so vital for the reputation of Lloyd’s; the development of the Exchange messaging system and, most importantly, on re-platforming and re-engineering the back office processes of the market.
We have made some adjustments to improve the governance of Lloyd’s including some changes to committee structures. For example, we have put in place separate remuneration and nomination committees and changed their composition so they are better balanced with both Franchise Board and Council members.
On the vexed question of executive remuneration, we have made a few changes to executive pay from 2012, to change the balance between the fixed and variable elements.
In essence, we have reduced the variable proportion to reflect the role that management plays in the Corporation, which is to manage a market rather than as a PLC with a P&L account and balance sheet. These changes were supported by the findings of an independent review.
My third priority was to consider the long term aims and ambitions of Lloyd’s. I believe that, for any organisation to succeed, and particularly a market, it needs to have a clear sense of direction - of what it is trying to achieve - so that the market participants, Managing Agencies; our customers, the brokers and our ultimate customers, the insureds, have a clear view of the role that Lloyd’s is playing.
We have an excellent rolling 3 year strategic plan which we use as an important management tool. However, we also needed a longer term vision for the market to inform the crucial decisions that we are all going to have to make over the next few years. So, soon after my arrival, I asked the managing agents to think seriously about this issue. And, with the support of the Corporation, we were able to produce a statement – which very much belongs to the market - which we can all get behind. And we have called this Vision 2025.
In 2025, at my great age, I will either be dead or almost eighty but I will certainly be long gone from Lloyd’s. Indeed this was the case for many of us working on the Vision, but we all want to feel that we have set Lloyd’s on a path for long term success.
So one of the purposes of the work on this Vision was to find the collective will to be efficient, and to modernise, in the face of increased competition that will undoubtedly impact on our ability to capitalise on our third priority: to develop the business internationally and to provide a long term framework in which Lloyd’s, and indeed, the general insurance market of London EC3, can grow its global footprint and remain the global hub for specialist insurance and reinsurance. This is at the heart of our longer term vision for Lloyd’s.
Why do we need to do this? Because, as the emerging growth countries industrialise and commercialise, the market for specialist general insurance worldwide is going to grow at a very significant pace over the next ten to fifteen years.
Many of you may have seen that the Prime Minister visited Lloyd’s last month to launch our Vision 2025. David Cameron spoke passionately about the opportunities for this country’s financial services industry to grow into the emerging markets, which is precisely what we intend to achieve with Vision 2025.
However, for those of you who have perhaps good reason to fear untrammelled growth, let me be clear that we are talking about sustainable and profitable growth across the underwriting cycles.
There are a number of elements to this Vision, but today I want to concentrate on how it will affect our capital mix, which is the most important part for all of you.
But first, to sum up the aim of the Vision in a nutshell, it is to diversify and to internationalise the market, at all levels and through building relationships with new partners.
Lloyd’s is a powerful international business, but it was this opportunity to become the global hub for specialist insurance and reinsurance which really attracted me to the job of Chairman in the first place.
Because Lloyd’s, with its underwriting talent, its fine reputation and its secure capital, has an extraordinary opportunity to grow its business in the emerging economies.
This means that we must diversify the capital base of Lloyd’s, by bringing in high quality carriers from emerging growth territories, with business franchises.
This is not the only change which we need to make in terms of diversification. I also want to see an ambition to internationalise the people in Lloyd’s to reflect the business that we aspire to write. Because to maximise our chance of expanding our business, we do need greater diversity, particularly national diversity, in the underwriting market in London.
Having said that, Vision 2025 is predicated on the existing strengths of Lloyd’s, and one of the most important is that we are here in London, backed up by one of the best judicial systems in the world which is fundamental for the insurance industry. We are in the right time zone. We have a critical mass of insurance expertise and resources right here in London. We have an economy which is open to inward investment, with few barriers and we have a competitive corporate tax regime and, frankly, a city which people like to live in. So we definitely want to retain Lloyd’s in London.
We believe that continuing as a mutual, with the market supported by our central fund, is a huge strength. We have an unequalled license network and, above all, we have a culture of integrity and therefore a market built on trusted relationships. In undertaking and placing complex risks, these things are fundamental, as is the face to face negotiation that we see every day around the boxes in the Room.
Vision 2025 is about the onward evolution of a 325 year old market to capitalise on an era when vast business opportunities will emerge in markets such as China, India, Brazil and Mexico.
So, in my view we have a huge opportunity here at Lloyd’s to contribute to the growth of the UK economy.
But to achieve this, as we build relationships in new markets, we must continue to examine our own culture and our working practices, to make sure that we are efficient, that we are modern and that we foster entrepreneurialism and innovation.
Now I come to Names capital. As a business man, and as I have said, a non-insurance man, looking at Names capital from the outside, I have to be frank, it’s a diminishing proportion of Lloyd’s capital and it will continue to diminish proportionately as our long term strategy kicks in.
Names capital now represents slightly over 12% of our capital and, as you well know, the number of names has drastically reduced over the years from over 30,000 at its peak to around 600 working members and just under 2000 actively underwriting individual members today. And, as in my case, the age profile is rising. We are now down to 3 Members’ Agents only. So, in business terms, this, on the face of it, does not feel very sustainable.
However, as part of our development of Vision 2025, we debated the future of Names capital and you will be pleased to know that we have in Vision 2025 a section that says, and I quote:
“Private ‘Names’ capital will continue but new ‘Names’ capital will be provided on a more flexible basis and more efficiently, mainly via Special Purpose Syndicates.”
I believe that Names capital, while only a small constituent within Lloyd’s, is a valuable feature. It is part of our DNA and provides good quality, loyal, knowledgeable capital.
So I believe that Names capital needs to be invigorated. To do this, the attractiveness of Lloyd’s Names capital needs to be appreciated by a wider constituency of, frankly, high net worth individuals. And, on the other side of the equation, we need to increase the attraction of Names capital to managing agents, making it more user friendly. Part of the problem at the moment is that we are not increasing Names capital other than in very small amounts and there are limited opportunities, as you all well know, to deploy that capital because of its relative unpopularity with the syndicates.
Over the last few months, therefore, I have encouraged the 3 Members’ Agents to collaborate to find a way in which they can streamline the structure of Names capital and find additional methods of introducing the capital in order to make the Lloyd’s opportunity more appealing both to syndicates and new Names.
I am pleased to say that Members’ Agents have embraced this as a concept and are working together, taking some outside advice, to produce some ideas to achieve the aim. Unless changes are made, inevitably, the business model of Names capital will begin to disappear– which would be very sad.
I hope to see the Members’ Agents identify more user- friendly systems. These efforts will require imagination and lateral thinking but I hope will be driven by the aim of making the system more attractive to current Names and prospective providers of capital, equally.
So Ladies and Gentlemen, as you can see, we have an energetic agenda in front of us at Lloyd’s. I have been very impressed by the quality of the people working in the Lloyd’s market and indeed by the quality of the Corporation management and staff.
I seriously believe that Lloyd’s has in front of it an opportunity that very few businesses in the UK have; to grow over the medium and the long term.
This is our challenge, and I look forward to working with you on this. I am delighted to answer your questions.