In-House Sector Focus: Brave new world

The London insurance market is unique. However, due to centuries of deals, the culture of Lloyd’s and the influences from international and new markets, London is now facing some of the toughest challenges of its 300-year insurance history. Notably, the events of 11 September have had a major impact on the sector.

Barlow Lyde & Gilbert insurance partner Yvonne Jefferies notes, though, that while 11 September “decimated” the market, it had already been struggling. Other large claims and a poor investment environment resulted in a huge loss of capital from the sector and a consequent reduction in capacity. The losses after 11 September just got bigger.

William Bloomer, head of legal at insurance and reinsurance broker Heath Lambert, says that since the attacks it has become more difficult to place insurance – premiums are now higher and claims are less likely to be paid.

Mark Turvey, head of legal at insurance company SVB Holdings, agrees that costs have risen. “Rates have climbed generally since then, although the rate of increase is tailing off,” he says. “Premiums are now substantially above where they were.”

Aside from 11 September, the US is generally becoming increasingly influential. While the London market is a world leader for industrial, aviation, energy and marine insurance and reinsurance, much of the sector is now controlled by the US. As Jefferies notes: “Many companies report [in the US] and as such it has an influence [on the UK] and on the Continent. London is not necessarily where it all happens.”

The industry has also looked to the US in light of Lloyd’s chairman Lord Peter Levene’s recent tort reform comments. James Healy-Pratt, head of legal at listed insurer Amlin, says: “The US judicial system is the biggest global casino owing to hefty damage awards and the nature of juries. This has a follow-on cost to different sectors, including insurance. Lord Levene has spoken about curbing excesses, but there’s doubt that anything will actually happen. The US is a very generous place and very pro-plaintiff.” The tort reform debate will be watched closely by the London market, especially in regards to claims work.

The self-contained market of Lloyd’s has been susceptible to trends such as corporatisation and the changing face of capital. At Lloyd’s peak in 1988, there were 32,433 natural names [those who used to provide capital] underwriting risks; in 2002, the number had fallen to less than 2,500. Corporate names have had to plug the capital gaps. “This business depends on other people’s capital as well as our own,” says Turvey. “Old Lloyd’s names were accepting of the volatile nature of financial results. Now corporate capital providers demand less volatility. So we now face a balance to keep the best of Lloyd’s entrepreneurial spirit and to smooth out peaks and troughs, finding new ways to distribute the capacity.” SVB has accordingly opened up a distribution scheme, catering to the small-to-medium enterprise market with the aim of easing capital volatility.

This creeping corporatisation is indicative of the altered culture of the whole of the London market. Richard Barnett, claims and litigation director at investment agency RiverStone Management, says: “The feeling that we’re all part of one large club has been replaced by a more professional attitude within the sector. Now we take technical points against each other – we don’t let things slip. The introduction of corporate capital has meant a stricter discipline and more objectivity.” The lawyers agree that the checks and balances now imposed are a positive change, even at the expense of collegiate relationships.

One aspect of the industry the lawyers are still collectively preoccupied by is corporate governance, especially as the sector prepares to absorb looming Financial Services Authority (FSA) regulations and EU changes.

Jefferies summarises the in-house position simply. “Insurance counsel need to get on top of these various tensions,” she says. “Compliance issues are traditionally seen with dread, which is a counter-productive response. In-house counsel now must make the company aware of the new regimes and how roles will have to be changed.”

Lloyd’s vehicles have an even tougher time of it. As Turvey says: “As a Lloyd’s managing agent, we were regulated by Lloyd’s then passed to the FSA, but Lloyd’s maintained the supervisory role
in order to protect the Lloyd’s franchise.

“There have been overlaps in the two regimes, with Lloyd’s duplicating the FSA’s efforts. Our most alarming moments have been when our regulatory obligations as a quoted company have directly conflicted with those we owed to Lloyd’s, but increased understanding of these issues on the part of Lloyd’s makes this unlikely now.”

The Lloyd’s franchise has been developed to police and preserve the quality of the Lloyd’s concept, while the FSA regulations stem from a broader interest in the structure of business. “In effect, we’ve been regulated by the FSA from the top down and Lloyd’s from the bottom up, with overlaps – and sometimes it’s been difficult to tell the difference,” adds Turvey.

Randi Cigelnik, head of legal at Ace European Group, believes that whatever the recent changes, the insurance market is in good shape. “We’re in a good business cycle now – and I think underwriters are happy. Because of a low frequency of catastrophes and disciplined underwriting, we’ve had a good year last year and have been able to charge fair rates for the business. In most lines of business, terms, conditions, pricing and client relationships are looking good, and there’s lots of opportunity in property and casualty and accident and health for a company with a strong capital base.”

The good times are rolling for other players in the market too, including private practice lawyers, according to Jane Owen, head of legal at insurance/reinsurance brokers Aon. “The market went from soft to hard,” she says. “There was a retreat of capital and lots of companies went into runoff, and it’s become a beanfeast for private practice solicitors. Insurers and reinsurers are afraid not to take legal advice in today’s legal corporate governance environment. Solicitors are giving legal advice and their clients are paying lots in legal fees, but claims aren’t always getting paid. This explosion of claims has also meant much more work for brokers.”