Sean McGovern Lloyd’s General Counsel explains why changes to the Lloyd’s Act are another key step in Lloyd’s drive to modernise the market.
It is 26 years since the Lloyd’s Act 1982 was passed and much has changed in the business world since then. Businesses have become much more global; new markets have opened up and developed; capital and people have become more mobile; technology has both transformed communications and the way business is done and customer expectations have increased.
Lloyd’s has also changed dramatically in this time - both to survive but also to adapt to these changing dynamics. The vast majority of our capital is now provided by corporate investors and many of the world’s leading insurance groups have a presence here. FSA regulation of the Corporation and the businesses trading in the Lloyd’s market is now firmly established and we have adopted a franchise model to change fundamentally how we work with the market to manage and improve performance. Our success can now be measured clearly through the market level financial strength ratings.
This greater transparency and the associated discipline will go some way to improving the accessibility of capital and the flow of business to the market - both of which are critical to our future success.
As we have laid out in our Three-Year Plan, there is more to do to improve the accessibility and efficiency of the market, in particular around the business processes that make the London market difficult and expensive to deal with. We need to take every opportunity we can to make the Lloyd’s market more accessible, transparent and agile to adapt to the future.
This is why we welcome the proposal from the Government to reform the Lloyd’s Act 1982.
The consultation document, published last month, proposes eight amendments. Two relate to removing restrictions between Lloyd’s brokers and managing agents and six relate to improving Lloyd’s internal governance arrangements. All are designed to further improve Lloyd’s efficiency and competitive position.
Business reforms
The removal of the so called ‘divestment’ provisions has been a strategic and public aim of Lloyd’s for many years. These provisions currently prohibit almost any links and ownership between Lloyd’s managing agents and Lloyd’s brokers and their removal should be seen as a welcome levelling of the playing field. Only at Lloyd’s are such links prohibited. Any potential conflicts of interest, which the provisions were originally designed to address, are now much better dealt with through statutory regulation by the FSA which applies to all UK insurers and intermediaries. Whether we will see a rush of transactions remains to be seen but the Lloyd’s Act should not prevent them if businesses see opportunities to realise value or embed strategic relationships.
The removal of the statutory requirement for managing agents to accept business only from Lloyd’s brokers is again a long held strategic goal. Since 2000 Lloyd’s has sought to widen distribution by making it easier for new brokers to access the market. The provision also looks increasingly anachronistic since the FSA took over the regulation of intermediaries in 2005.
None of this should be seen as diminishing the importance of the Lloyd’s market’s relationships with the Lloyd’s broking community. One of the market’s key strengths has been the close working relationships that underwriters have developed with brokers. Without brokers gathering business from around the world, using their skill and knowledge to package risk to present to the market Lloyd’s would not see the diversity of business that it does from around the globe. The London market is core to our business and will remain so and Lloyd’s will only succeed if it works in partnership with brokers.
It would however be dangerous for us to assume that business will continue to flow into London because it always has. This is something that the brokers have themselves recognised. We must, therefore, give ourselves the best possible opportunity to adapt to the dynamic global market in which we operate.
The London market’s pre-eminence has been challenged in recent years with the continued growth in Bermuda, Dublin and other (re)insurance centres.
Secondly, the much talked about trend towards localisation – the retention of business within local markets - is leading insurers, reinsurers and brokers to establish offices in local markets. Whether this is simply the latest fashion or a more fundamental development it cannot be ignored.
Thirdly, business process efficiency is coming and with it risk placement will become even more mobile than it is today.
It has never been more important therefore for businesses, insurers and brokers alike, to demonstrate value and drive towards greater efficiency. To win business, the Lloyd’s market will have to offer the client the best deal and the best service. Likewise brokers will have to ensure their value proposition is clear. Introducing more flexibility into our distribution chain will not immediately change the way business is brought to the market or increase the volume of business flowing in the market - given market conditions we would not want it to. It will however help remove yet another "Lloyd’s-ism" that makes us confusing and inaccessible and will help Lloyd’s to adapt to the wider trends affecting the global insurance market.
Governance reforms
The Government is also proposing a series of reforms to Lloyd’s internal governance arrangements. These reforms will update some of the more outdated aspects of Lloyd’s governance arrangements, bringing Lloyd’s more into line with modern practice in the wider corporate arena.
Changes include removing the current requirement that the Chairman and Deputy Chairmen need to be ‘working members’ of the governing Council of Lloyd’s (i.e. those members of Lloyd’s who work in the Lloyd’s market). This makes sense in a world where companies are increasingly looking to recruit Chairmen who meet the criterion of ‘independence”. The changes would also give Lloyd’s greater freedom to align its internal rules with modern governance practices. The reforms would update our delegation arrangements and would allow Lloyd’s to enable a wider pool of individuals to serve on our disciplinary committees.
The package of reforms proposed by the Treasury supports our drive to become more modern, transparent and efficient. They will help to ensure Lloyd’s can compete on an equal footing with its competitors and truly become the platform of choice.
