Lloyd's - Building a profitable future

It is an honour to be here today. The Institute plays a valuable role in raising the levels of professional knowledge of those working in this marketplace - something which I wholeheartedly support.

This is not the first time that I have had the opportunity to address the Institute. The last time I stood here in February, Lloyd's stood on the cusp of change. I am pleased to say that Lloyd's has made significant progress in the last nine months.

We are now at a key moment in our drive to build a profitable future for Lloyd's.

It's not just that we are coming to the end of what looks likely to be another profitable year, that we have a stable rating with a combined ratio of 98.6% 1 in 2002 and in my opinion, the best pool of underwriting talent in the world.

There is also significant change underway. The Franchise structure is now up and running. We have put in place robust structures and a skilled team to support its development. We have also just come to the end of our first business planning process and are setting the boundaries for next year.

But the biggest change in my judgement is a change of culture. There is now clear evidence that Franchisees are really beginning to take on board the principles of the Franchise and recognise that on occasion they need to take pre-emptive action.

When I accepted this post I was fortunate to inherit a clear mandate for change. I don't think anyone in this room can or will deny that the need for change was compelling. Over the last cycle, between 1993 and 2001 this market saw an average return on capital of minus 5% and an approximate £3billion net loss 2 . Despite the impact of September 11th, this period, from a natural catastrophe viewpoint, was remarkably benign. Clearly these returns are not acceptable to any business or marketplace.

There is now a significant programme of action:

• To make Lloyd's the preferred market for policyholders, brokers, underwriters and capital;
• To create and maintain a commercial environment in which the long-term return to all capital providers is maximised ; and
• To create a disciplined market place of well managed businesses.

Our task is simply put but as in all these things it is far from simply delivered. It is my role to help deliver these objectives. There is no denying that we have a huge task ahead of us but with the right tools and with your support we can build a profitable future for this market.

We are working hard to ensure that the market is with us every step of the way. I ask that you do engage with us actively and regularly. That is not to say that we will be without our critics and doubters. Anyone who has implemented change on a small or large scale will know that it is never easy. It gets even harder when you are dealing with near on 70 independent businesses.

So what does my role involve?

Firstly, to encourage and foster a flexible but disciplined approach to underwriting. Secondly to raise business and underwriting standards and thirdly to encourage the right kind of new syndicates to join this market so it can continue to evolve and develop. If we are to succeed it is absolutely vital that we get full support from all stakeholders within this marketplace.

In the last nine months we have been very busy. We have spent a long time getting to know the businesses in the market - who they are, what they do and how we can help them.

We have met with every franchisee to review their underlying exposures and forecasted Ultimate Loss Ratios and ensure that they are in line with the Franchise Guidelines. We continue to interpret the franchise guidelines that were produced by market practitioners last year in practical and sensible terms and we have used them as a major tool in dialogue with franchisees on their business plans. The guidelines must not become a straitjacket that are blindly applied but undoubtedly if used appropriately I believe that the market's profitability will improve significantly if franchisees operate within sensible parameters.

We have also spent a lot of time gauging each franchisee's strengths and weaknesses and by this I mean its posture and approach towards us, what are its technical competencies, the underwriting processes that the syndicates employ, the syndicate's attitude towards risk and ability to manage risk as well as assessing the attractiveness of its underlying business.

This initial work proved essential to the Business Planning Process. It allowed us to gauge the strengths and weaknesses of the franchisees and concentrate on those with weaknesses. Every franchisee was asked to produce a business plan for the year ahead that included, amongst other things, their underwriting strategy, breakdown of portfolio and profitability forecasts for the year ahead.

We have now come to the end of this first planning process. We were set a very demanding timetable, having to review 36 non-aligned syndicate plans within five weeks and 36 aligned syndicate plans in just under three weeks. Although a third of plans had to be re-submitted due to technical issues and 42% of plans created major validation problems, I am pleased to report that over two thirds of plans were validated within two days and all were reviewed in time 3 . This is a remarkable achievement given that this is the first year that the Franchise Performance Directorate has gone through this process.

We have learnt a lot. Only last Friday we got together all senior mangers involved in the business planning process and took a long hard and objective look at what we did and how we can improve the process in the future. There are a number of things that we will be doing differently for 2005.

We are looking at amending the business plan template and improving the look and feel of it as a result of feed back from franchisees. We believe that the current template can be significantly improved. We are also aware of the heavy reporting burden placed on syndicates and we want to ensure that we only ask for information we really need and in a format that makes less work for you. The current process involves the approval of pre-emptions in July, the submission of non-aligned business plans in September and aligned business plans in October. We will be spending more time looking at the current timetable and auction process and I have committed to spend time with my fellow directors to try and make improvements to assist franchisees with their business planning.

My aim is to make the whole business process smoother for franchisees and for the Franchisor. There will be ongoing dialogue with all franchisees throughout the year so that we understand each others thought processes and approaches. This will mean that when business plans are presented we already have a pretty good idea what to expect.

Of course planning is just one part of what we do. We are also actively involved in analysing market conditions. We have identified the classes of business which are showing the first signs of potential underperformance, namely, property insurance, property reinsurance, marine hull & machinery, energy and aviation and we have taken appropriate action. Indeed there have already been some examples of syndicates reducing from certain lines of business because they have realised that appropriate returns cannot be made. If we are to build a profitable future franchisees must be prepared to look long and hard at their portfolios and decide if certain classes are, and will be profitable. We can help you by continuing to monitor where we are in the cycle, through analysing market trends and feeding this back to you.

We are starting to win the battle but there is still a long way to go. If we are to succeed we must stay focused on the job in hand. Now is not the time for franchisees to be self-interested and solely fixated on the minutiae of their own business plans. They must look at the bigger picture.

This is a joint endeavour but we will not shy away from taking tough action if necessary. The levers that we have at our disposal are there to help this market place build a profitable future and are acting as a motor/catalyst for progress. They should not be seen as break on entrepreneurial spirit. I believe 100% in entrepreneurship - risk takers founded this market and helped it to grow into the success it is today but there must be appropriate controls in place.

So how can we ensure a profitable future?

We are on the right track but we must stick to our guns. We must continue the momentum of change that we have built up in the last nine months. Now is not the time to run out of steam. In the year ahead we must continue to build on the progress we have made.

We will continue to work with Franchisees to implement their business plans and if necessary will work together to adapt them to meet changing market conditions. We do not expect to see a major change in the level of capacity for 2004 but this may be slightly differently structured compared to 2003. Whatever happens there must be a consistent level of high performance across the market. It is essential that we underwrite for profit rather than simply chase market share. In short, Lloyd's must become a more attractive place where people want to do business and its security matches the best in the world. Both can only be achieved through consistent performance.

Franchisee plans have indicated the profits that they wanted to achieve by business line. We will be following all lines closely so we can advise them if and when market conditions change so that they can make the necessary strategic re-adjustments to their businesses.

So far we don't expect a major change in market conditions next year but we must continue to prepare for all eventualities. We have been working closely with the newly created Risk Management team to help develop the Risk Framework. The Framework will ensure that both the Franchisor and Franchisees have an effective, aligned and comprehensive approach to risk management in place. As part of this development process, Risk Management will be visiting managing agents at least every two years to review progress. The Realistic Disaster Scenarios are an essential part of this framework and we will work to further develop and improve the current collection of scenarios. We are currently focusing on further developing the marine and liability scenarios by working closely with a group of market experts.

At the heart of our agenda must be Performance management. This is all about raising standards and promoting best practice within the Lloyd's marketplace.

So what do I mean by best practice? These are areas that we will be focussing on for 2004 and working with you to try and continue to raise standards.

We need franchisees to adopt tighter underwriting controls. I am aware that there have been major changes across the market but we must continue to improve and focus on underwriting discipline. Underwriters in this marketplace should make greater use of robust rating tools to help assist with their pricing. Practitioners must also monitor rate and exposure changes so that we avoid selling our product too cheaply.

We must recognise that most of Lloyd's business is highly specialised and therefore needs active management. I am a strong believer that proactive claims management is critical to the future success of this market. We also need better documentation of underwriting decisions - we can't be in a situation of always relying on a broker's file when we are asked why certain decisions are made often many years after the risk was written.

Conclusion

I genuinely believe that we can succeed but we must all work together and ensure that this market avoids the mistakes of the past and that as the cycle begins to turn the appropriate but hard decisions are made. My principal role is to ensure consistent market performance and I believe that this is the key to building a profitable future for this market. The Franchise is all about preserving the advantages of this marketplace but also protecting the brand, reputation and licenses of Lloyd's.

I continue to have a very positive view of the future and am incredibly enthusiastic about my role. We have a simple vision - in 2007 we want to look back at the results of this market and see that we have outperformed our peers through the forthcoming inevitable downturn. Measuring our success is not straightforward. There will be some immediate short term gains but the real prize will be ensuring our long-term future.

Thank you very much for listening


Sources
1. Lloyd's Franchise Performance Directorate, Market Analysis, September 2003
2. Lloyd's Franchise Performance Directorate, Market analysis, September 2003
3. Lloyd's Franchise Performance Directorate, Business Planning, November 2003