It’s not the economic crisis that is most troubling Lloyd’s of London general counsel Sean McGovern, it’s getting to grips with the host of new insurance regulation
When The Lawyer met Lloyd’s of London general counsel Sean McGovern in July 2008, the insurance market was enjoying its most successful period in recent history. Then Lehman Brothers collapsed and the global financial markets went haywire.
For McGovern – and the wider insurance markets – the recession has not been as devastating as it has for global banking. The financial chaos has presented the Lloyd’s market with growth opportunities as well as a fresh regulatory web to untangle.
McGovern, meanwhile, has added to his list of responsibilities by being appointed as director of Lloyd’s North America business as well as being responsible for the global legal function.
When we meet this week, McGovern says that the insurance market “has had a good crisis”, with investors looking at the sector as a safe haven for their capital. That is some assumption given that in March Lloyd’s unveiled a £516m pre-tax loss for 2011 compared with a £2.2bn profit the year before. McGovern acknowledges that it is a “significant loss year”, but believes the market can withstand the high level of catastrophic claims given the overcapacity in the global reinsurance sector.
In healthier times, he explains, market rates would be expected to dip following a catastrophic event as investors look for new markets to plough cash into. But while the current financial depression has made the insurance sector attractive to investors, “money isn’t going out of the market” simply because of the volatility in rival markets.
That is not to say that Lloyd’s has escaped the impact of financial instability altogether. McGovern says the biggest impact has been the change in the regulatory environment. Domestically, the impending structural changes to the FSA will shift the sands once more.
“We’re still facing a significant degree of regulatory change and uncertainty,” says a visibly exasperated McGovern.
The longstanding complaint is that insurance regulation has been heavy handed and in a constant state of flux. Prior to Lehman there was a sense that this was coming under control, with regulated entities becoming more familiar with the FSA and the regulator making efforts to forge links with the sector. After the crash of the markets, however, pressure has been on the regulator to crack down and that is being felt across the City and beyond.
“The problem is that a lot of what comes out of the Government is about fixing the banking problems,” says McGovern, questioning whether cumbersome bureaucracy is the best way for policymakers to kickstart an ailing economy. “We have a very full agenda [while] at the same time we’re pushing for economic growth. It makes you wonder how compatible the two things are.”
On a European level the market is still grappling with the implementation of the Solvency II initiative, which obliges all insurers operating in the EU to improve solvency levels. The entire market was initially given a implementation deadline of 1 January 2013, but that has been delayed by a year. McGovern says it is the biggest regulatory change to impact the sector.
“It’s a massive project,” he says. “The FSA has said it’s to spend £2bn on implementation; Lloyd’s of London has spent £300m. We have nine people involved. The financial services director [Luke Savage] is responsible for that team and I’m responsible for lobbying at the EU level.”
Lobbying is ongoing but McGovern and the management team want the Lloyd’s syndicates to prepare as if the 2013 deadline still exists. This will allow time for stress testing.
“When we saw the timetable slipping we knew it would cost more to implement, so we planned to stick to the original timetable,” he says.
With so much uncertainty in the market it is essential that McGovern’s team is integrated closely with the market. He sits on Lloyd’s’ tight-knit management board and is driving market policy in the US.
McGovern is a product of the Lloyd’s market, having joined the legal practice in 1996 at the age of 26 before being promoted to head of legal in 2000 and head of the global legal function in 2003. He is seen as dynamic and demands that his team is flexible to the needs of the sector. The same applies to his external legal advisers. McGovern says it is rare for the market to refer work out.
“Our approach is to be reasonable about what we need – we need people with experience, experience of Lloyd’s,” he says. “Our philosophy is to keep as much in-house as possible, unless we don’t have the skills. Property work is outsourced, employment work on the contentious side is another highly specialised area of law. We don’t parcel it up and send it out; we want lawyers who work with us as part of a team.”
At the bar such expertise can be found at 7KBW or South Square, McGovern adds.
McGovern is a forward-thinking in-house lawyer sitting at the heart of Lloyd’s and contributing daily to its growth strategy and public policy. With a new licence in China, a budding market in South America and a thriving business in the US, Lloyd’s – and McGovern – looks set to weather the storm.
David Gittings, chief executive, Lloyd’s Market Association
One of the biggest legal challenges facing the Lloyd’s market is the new financial services regulatory structure, which we anticipate will be implemented early next year.
The most important thing is that we get a satisfactory memorandum of understanding (MoU) between the Financial Conduct Authority, the Prudential Regulation Authority and Lloyd’s. Lloyd’s managing agents will have three regulators, so we need an MoU to avoid the worst consequences of triple regulation in the UK.
Meanwhile, the European Competition Commission is carrying out yet another study into the subscription market to see how it has changed since their last review in 2007. This is the third time the commission has looked at the subscription market and it needs be taken seriously.
Also, we are considering broker remuneration and the impact of the Bribery Act, the use of contingent commissions and what it means in terms of the act.
There is also the Insurance Mediation Directive, which will introduce the requirement for greater transparency by brokers.
The Law Commission is continuing a consultation on damages for late payment of claims: when dealing with high-value, complex claims, which are international by their nature, how do you define a late payment?
The Lloyd’s Market Association (LMA) is also helping underwriters adopt gender-neutral pricing, effective from the end of the year. Underwriters will have to find new ways of formulating contracts based on occupation or age, for instance, rather than gender.
As you can see there is a lot on; and the international regulatory issues we are dealing with just keep growing.
However, there are things that the Law Commission is doing that we are in favour of, for instance rule changes to make the broker and insured liable for premiums in marine business. Currently brokers are liable. We are also looking at pre-contract disclosure, there is a big focus on risk management and, of course, the Solvency II initiative.
The LMA provides support to the Lloyd’s of London underwriting community and represents their interests; all managing agents at Lloyd’s are members, together managing a gross premium income of around £24bn per annum.
Position: Director and general counsel
Reporting to: Chief executive Richard Ward
Pre-tax loss (2011):£516m
Employees: 800 worldwide
Legal capability: 30 lawyers (25 in London, five in the US)
Legal spend: Approximately £3m
Main external law firms: Baker & McKenzie, Beachcroft, Dewey & LeBoeuf, Freshfields Bruckhaus Deringer