The end of a decade of change

With 2009 drawn to a close, the curtain falls on a decade that could lay claim to being the most momentous in Lloyd’s 321-year history. The period was scarred by some of the biggest losses – both man-made and natural – the insurance industry has ever seen, as well as the deepest financial crisis in generations. It further saw the Market undergo arguably its most radical modernisation and restructuring ever witnessed.

Lloyd’s has not only withstood these crises, but the lessons learnt from 9/11 and the hurricanes of 2005, as well as the Market traumas in the late 1990s, have enabled it to gather strength at a time when other institutions have had their frailties revealed by the financial turmoil.

Robert Hiscox, Chairman of Hiscox, said: “Who would have thought in its crisis years in the 90s that ten years later Lloyd's companies would begin to dominate the British insurance industry? Or that of the only 15 insurers in the world to grow their net assets in 2008, five would have been born out of Lloyd's?” He added: “It’s a fantastic achievement.”

Having ensured the Market's survival through the Reconstruction & Renewal plan in 1997, a determination within Lloyd's that the ordeal should never be repeated saw the establishment of the Chairman’s Strategy Group (CSG). It was set up in 2001 to find ways to transform Lloyd’s into a modern, dynamic marketplace that would attract capital providers and policyholders alike. 

The CSG set about tackling a number of challenges: heavy market losses, a stark disparity between the performance of syndicates and an opaque, outdated operating structure that made it difficult for investors to compare Lloyd’s performance with that of its peers.

On 11 September, 2001, terrorist attacks in the US that resulted in the deaths of 2,976 victims caused shock and revulsion across the world. Lloyd’s played a leading role in helping the rebuilding efforts following the tragedy, paying more than $3bn (£2.08bn) in claims from the costliest man-made catastrophe in history. Lloyd’s share of the $32.5bn (£22.5) industry loss was greater than that paid by any domestic US insurer.

While the CSG was considering the repercussions of 9/11, another milestone on the road to Lloyd’s modernisation was reached at midnight on 30 November, 2001. The UK’s Financial Services Authority took over supervision of Lloyd’s, bringing to an end the Market’s system of self-regulation.

Modernisation landmark

Barely a year after the 9/11 attacks, Lloyd’s members approved plans to overhaul the Market at an Extraordinary General Meeting on 12 September, 2002. The proposals included the establishment of a Franchise Board that would set and maintain underwriting and risk management standards across the Market, a move away from the three-year accounting system to the more conventional annual reporting, and an end to new members joining with unlimited liability.

Lloyd’s Chairman at the time, Sax Riley, told the meeting the proposals would transform the market. “Lloyd’s will be a modern, transparent, efficient, strongly regulated and more profitable market able to deal with the very worst the twenty-first century has to throw at it.” Little could he have known that this new structure at Lloyd’s would be tested so severely only three years later.

Lord Peter Levene was elected Chairman in November 2002. As the first outsider to serve in the role, his election was a statement of intent that the new Lloyd’s was an open, commercially driven marketplace looking to compare itself with the best-run businesses across industry.

Two crucial steps were taken in 2003: the establishment of the Franchise Board and the appointment of Rolf Tolle as Lloyd’s first Franchise Performance Director.

Tolle set about recruiting a team to serve in the Directorate and developing a range of information tools to gauge Lloyd’s performance and identify trends across the wider insurance market. Minimum underwriting standards were laid down and a number of risk management procedures introduced.

One of the innovations was the creation of Realistic Disaster Scenarios (RDS), in which syndicates are required to model their expected losses in the event of a range of major disasters, such as a Japanese earthquake, a US hurricane or an act of terrorism, to ensure they haven’t taken on too much exposure to a single event.  

The value of this exercise was shown graphically in 2005, when the Gulf of Mexico was buffeted by a series of powerful hurricanes. Hurricane Katrina, a Category Five storm that slammed into New Orleans and churned its way down the Gulf coast leaving a trail of devastation, became the costliest insured disaster in history, leaving insurers with a bill of over $40bn (£27.3bn).

Despite having net claims of over £3.3bn from the storms, Lloyd’s made a loss of only £103m in 2005. At the time Lord Levene said: “For Lloyd’s to emerge from such a year with just a small loss represents an excellent performance by the Market. That outcome would have been unthinkable just a few years ago, which is the true measure of the progress Lloyd’s has made.”

Moving forward

Lloyd’s has taken a leading role in the London market’s reform initiative as part of its own rolling modernisation and efficiency programme. The implementation of ‘Contract Certainty’ in 2007 ended the Market’s ‘deal now, detail later’ culture, while the Insurers’ Market Repository effectively created an electronic filing cabinet from which premiums and claims can be processed. Further innovations are planned to make the Market a cheaper and easier place to do business in the coming years.

In 2008, historic amendments to the Lloyd’s Act modernised elements of the Market’s governance and removed unnecessary restrictions on how Lloyd’s organises its affairs, including doing away with the requirement that risks had to be placed via a Lloyd’s broker and rules preventing brokers from owning managing agents. It also paved the way for Lord Levene to become the first person elected to serve a third term as Chairman of Lloyd’s.

The recent financial crisis has shown how far Lloyd’s has come in the last ten years. At a time when other insurers have been hit hard, its policy of conservative investments and sticking to classes of business it knows has paid off. As clients have been made acutely aware of the risk of doing business with just a handful of counterparties, they have become attracted to the advantages of dealing with Lloyd’s, the world’s leading subscription market for insurance risks.