There is no doubt that 2004 was an exceptional year. With four hurricanes making landfall in the US and 10 typhoons in Japan, it seemed that the British obsession with the weather was suddenly a worldwide phenomenon. For Lloyd’s it marked a return to a more normal risk environment following an extraordinarily benign year free from major losses, natural catastrophes and other events in 2003.

Despite this, 2004 was another year of profit and progress. The market recorded a profit of £1,357m on an annually accounted basis and a combined ratio of 96.9%; demonstrating the market’s ability to withstand a year of claims on a par with the total incurred loss of the World Trade Center disaster.

During the last year, I have taken the Lloyd’s message around the globe to North America, continental Europe and Asia; and it is clear that the market’s impressive progress is well understood in both developed and emerging markets.

Lloyd’s continues to benefit from its global network of licences and a high level of brand recognition. In 2004 we further developed our global reach, securing licenses to trade in eight of the new EU accession countries, appointing a full–time representative in Spain and opening a new West Coast office in the US.

We continue to look for opportunities in developing markets and are in ongoing discussions with the Chinese regulators to secure an onshore licence in China.

Let us not forget, however, that 2004 was not just another year of profit and progress, it was also a year of challenges for the insurance industry. The year was punctuated by a series of defining moments – the unprecedented series of natural catastrophes, the New York Attorney General, Eliot Spitzer’s investigations, and the Silverstein trials in New York.

Risk management: an urgent priority

The events reinforced a number of issues that the industry must address. The first is a trend towards more severe catastrophe losses and the consequent need to improve the way the industry and businesses in general evaluate risk. Lloyd’s has worked to improve its risk management capability in recent years, developing a series of realistic disaster scenarios for a range of catastrophes from windstorms to earthquakes. Risk management must now be on the agenda of every boardroom and we as an industry must pay more attention to preventative measures and early warning systems. The natural disasters also served as a pertinent reminder of the importance of pricing risk correctly. The critical role of the industry in paying claims and assisting in the process of rebuilding can only be sustained if its balance sheet is strong. To ensure this, underwriters must continue to ground their decisions in economic reality and reflect the nature of the risk in their premium, terms and conditions. There is strong evidence that this is happening which has enabled us to say that we have weathered the recent storms but there are inevitably testing times ahead.

The need for greater transparency

Despite the catalogue of natural catastrophes, it was arguably the industry’s reputation that took the greatest battering during 2004. The importance of greater transparency was highlighted by the New York Attorney General’s investigation into commissions and bid rigging. It has presented a real and unstoppable mandate for change and looks set to end in a fundamental overhaul of industry practices. We need to deliver improved transparency by clarifying who is doing what, for whom and at what cost. We then need to communicate this to those outside the sector and rebuild trust with policyholders, politicians and leaders. If we do not take the opportunity to change, then it will be our industry that suffers.

The Silverstein trials, related to the insurance cover for the World Trade Center, highlighted the importance of what was to become an industry buzz word last year – contract certainty. The case illustrated the fundamental importance of agreeing final contract terms prior to inception – hardly earth shattering concepts in other sectors.

Contract certainty: a key Lloyd’s objective

Improved contract certainty has been a key objective of Lloyd’s for some time now and in the past year some important milestones were reached. A new standard slip for recording deals done in the London market was mandated and Kinnect, the electronic system for exchanging data and agreeing contract details in a secure and transparent way between brokers and underwriters, started to handle increasing volumes of live risks. The insurance industry owes it to its customers and to itself to deliver greater contract certainty. There is much to be done and everyone in the insurance chain from risk manager, to broker and underwriter must work together to deliver that change.

2004, despite its challenges, was another year of sustained progress for Lloyd’s. A year when the progressing development of the franchise received positive recognition from the capital markets, the rating agencies, brokers and policyholders. A tough agenda has been set for 2005 to meet the challenges ahead and build upon the substantial and real progress that the market has made in 2004.

I would like to express my thanks to my colleagues on the Lloyd’s Council and Franchise Board, for their hard work, co–operative spirit and dedication during the year, and pay tribute to the continuing commitment and achievements of the Corporation staff and the market. We have come a long way in recent years, but we cannot afford to become complacent.

Peter Levene, Chairman 6 April 2005

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