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Innovation and flexibility are two of the key buzzwords running through the London international insurance market.

With soft market conditions continuing for the foreseeable future, some underwriters are responding to the market conditions by launching new products and showing greater flexibility to maintain business.

One of the major trends emerging from London is the growth of "packaged" or multiline, multiyear policies.

"I think it is fair to say that London is leading a lot of these things," said Ross McKenzie, chairman of non-marine for Aon Group Ltd. of London. "It is quite flexible with new products and styles."

Although firm feedback on July 1 renewals still is coming in, without question rates are continuing to fall across all lines.

Worldwide property catastrophe rates are down 20% to 25% over the same time last year. The lower frequency of major insured catastrophes means the discounts are fairly standard across all geographic regions.

General liability rates are dropping by about 20%. D&O liability rates are seeing rate reductions of 10% to 30%, London market underwriters said.

On the reinsurance side, underwriters are reporting drops of 20% to 30% for large industrial risks, often for the third year in a row. Coupled with lower attachment points and higher limits, buyers are getting broader coverage for less money.

At the same time, analysts are growing wary of an increased reliance on reinsurance programs and are scrutinizing London market companies' and Lloyd's syndicates' outward coverages.

"We are spending more time looking at what syndicates are buying, how they are buying it, and how they are expecting it to respond," said Philip Maidens, director of syndicate research at members agency Sedgwick Oakwood Underwriting Agents Ltd. "We are really concerned about the soft market encouraging the buying of more reinsurance."

The growth of multiline policies, which combine property and liability exposures in a single policy, is resulting in even greater discounts. The combined programs are generating rate reductions of up to 40%, compared with the separate costs of property and liability policies from previous years.

"Sophisticated risk managers know they can (package) all their exposures together and get a better price," said Timothy Stokes, an underwriter at Copenhagen Reinsurance Co. (UK) Ltd.

Mr. Stokes said primary market underwriters in London also are showing much more flexibility, including broader terms and conditions, reduced deductibles and wider wordings.

The competitiveness associated with the current market conditions also is driving London to reinforce the uniqueness and internationalism of its market.

Derek Stimpson, non-marine underwriter at Assicurazioni Generali S.p.A. (UK), said the biggest difference between London and other insurance markets is that London is "a true market where buyers can go from stall to stall."

The general consensus is that London is emerging from its recent troubles and is starting to re-establish itself as a leading international insurance center.

Ken W. Haddon, retiring chairman of the London International Insurance & Reinsurance Market Assn. and also retiring chief executive officer of AXA Reinsurance UK P.L.C., acknowledged that London has suffered some damage but said that is now seen in a different light compared with a few years ago.

"It probably has not got the same proportion of business as a few years ago," he said. "But it has re-established some credibility as a center of organization and leadership."

"London has bounced and is bouncing back as a marketplace," commented Aon's Mr. McKenzie. "There is lots of capital still finding its way into London."

"The Bermuda companies are buying into Lloyd's, and this is sending clear signs that London is still very much an international marketplace," Mr. McKenzie said.

The attractiveness of Lloyd's to the Bermuda insurers was highlighted in June by ACE Ltd.'s purchase of Tarquin Ltd., a holding company for Lloyd's managing agency Charman Underwriting Agencies Ltd. and corporate capital investor Tarquin Underwriting Ltd. ACE is the largest single investor at Lloyd's and now controls 9.2% of the market's capacity (BI, June 22).

EXEL Ltd. also has been upping its presence at Lloyd's. Its March purchase of Mid Ocean Reinsurance Co. Ltd. gave EXEL control of Brockbank Group P.L.C., a major Lloyd's managing agency (BI, March 23).

A number of non-U.K. insurance and reinsurance organizations still are looking to invest in Lloyd's, according to Sir Laurie Magnus, director of investment bank DLJ-Phoenix Ltd.

Julian Phillips, a consultant with the London-based risk management division of Tillinghast-Towers Perrin, said London has "clawed back" some of its reputation.

"London has had a shock and has taken action," he said.

Mr. Phillips said the problems at Lloyd's have largely been addressed and that there is now a greater emphasis on improved efficiency and better customer service throughout the London market.

U.K. risk managers have never

shown much inclination to move away from London, he said, and European and U.S. risk managers now are happy to use London again.

"Three years ago, it looked like London was starting to lose a lot of business," Mr. Phillips said. "That position has, at worst, stabilized and, at best, is gradually recovering."

London is looking to further rebuild its reputation through the merger of its two main trade associations, LIRMA and the Institute of London Underwriters.

The merger, which will create the International Underwriting Assn. of London, is expected to be finalized by next year. It will result in the world's largest association for international insurers and reinsurers, with an estimated 110 member companies with offices in London and 80 associate members from 40 countries.

Marie-Louise Rossi, chief executive-designate of the IUA, said the merged association will be "uncompromising international in outlook."

While it appears that buyers are returning to the London market, they are also pleased with the market's move away from annual policies.

David Ketley, chairman of the Assn. of Insurance & Risk Managers, thinks the trend toward three-year policies is a reaction by underwriters to the soft market conditions and the demands of increasingly sophisticated buyers.

"Buyers would much rather smooth out their risks," he said. Three-year policies are also a way for underwriters to keep business in and "ride out" the current market conditions, Mr. Ketley said.

But Mr. Haddon of AXA Re said underwriters in a less buyer-friendly market would resist three-year policies.

Tillinghast's Mr. Phillips said insurers have "learned how to become comfortable" with multi-year programs. He said there has been a shift to an increased scope of coverage in London.

"We are seeing a building-in of risks, especially in these multi-year, multi-line programs, that might have been very difficult to insure -- things like product guarantee and recall that have always been restricted," Mr. Phillips said.

AIRMIC's Mr. Ketley said that wider terms, more flexibility on exclusions and more individual tailoring of policies are coming from London underwriters.

One initiative that aims to foster such innovation is ACE U.K.'s new service company, ACE Underwriting Services, launched in June.

The new company allows brokers to place business with Lloyd's without necessarily having Lloyd's broker status. It also will take over much of brokers' administration, such as policy issuance, bringing down brokers' costs.

Rob Page, ACE U.K. marketing director, said the service company is a response to brokers' demands for more flexible and responsive services and easy access to the Lloyd's market.

ACE is not alone in Lloyd's at looking to new facilities and products to extend its customer base. According to Sedgwick Oakwood's Mr. Maidens, new product lines have been developed by almost all Lloyd's syndicates, and many are increasing the maximum lines they can write on risks in an effort to boost premium income.

Despite such actions, some analysts are predicting that Lloyd's syndicates across the market will write only half of its approximately L10.1 billion ($17 billion) capacity this year and that the subsequent results will be lean. "We expect the market to break even, or make a small profit off its investment income" if current conditions prevail, said Mr. Maidens.

But while these high capacity levels continue and losses remain low, there is no possible end in sight to the current soft market, said Steve Lloyd, underwriter at Bankside Syndicates Ltd.

While some underwriters are taking a flexible approach to the current market conditions, others are making "knee jerk" reactions, according to AIRMIC's Mr. Ketley.

"In a soft market, the concern (for buyers) is that some underwriters will lose sight of their underwriting principles," he said. Buyers "don't want to see underwriters taking on bad risks and then start seeing lots of claims flowing into the market."

Mr. Stimpson of Generali agreed that some London insurers are underwriting at a "superficial level" to maintain premium income.

"With rates dropping even further, there is still plenty of capacity, and one notes a certain desperation for income in some quarters," he said.

Mr. Stokes of Copenhagen Re agrees that some companies are writing on volume alone.

"At the end of the day, underwriters cannot just follow others that are putting rates down," he said. "Sometimes you have to say no. We are not afraid to turn business away."

Bankside's Mr. Lloyd has noticed a continued hunger for premium volume and market share. For large industrial risks, this has been exacerbated by the power the buyer now wields, particularly the ability to change brokers at will in order to get the best terms possible.

Competition in London is being heightened by the rise in alternative markets. For example, Singapore and local markets all are competing to share in international business that in the past would have naturally found its way to London. Miami, where Bankside recently opened a local office in the hopes it will generate more business, is becoming a popular access point for reaching Latin American clients.

The local market competition, in turn, has led to competition between brokers' local and London offices, again fueling the raging rate wars.

The first six months of 1998 have seen several emerging issues in the London market.

Plans by Lloyd's to introduce captive insurance syndicates into its market by early next year are generating much interest among buyers.

The debate over broker compensation also has been gathering steam in the United Kingdom. Buyers want greater transparency through more stringent broker regulation. They have lobbied the U.K. government in an effort to force brokers into more detailed disclosure over payments made by insurers for volumes of business placed with their companies and for services provided, such as technology. But brokers are unconcerned, insisting they have nothing to hide.

The effects of broker consolidation also are of ongoing concern to buyers.

AIRMIC's Mr. Ketley said he thinks buyers still are waiting to see the tangible benefits of broker mergers.

But Aon's Mr. McKenzie believes clients have been positive about broker consolidation. "We are delivering a better service at the appropriate cost structure," he said.

Risks surrounding the Year 2000 also are generating concern.

Michael Bartlett, vp at American Reinsurance Co. of London, thinks the London market is "getting its knickers in a twist" over the Year 2000 problem.

"The market doesn't know which way to squirm," he said. "(The problem) needs to be addressed."

AXA's Mr. Haddon said a single solution to the Year 2000 problem is almost impossible. "In the end, because we are an international marketplace, it is down to every underwriter to recognize that a decision has to be made."

"All underwriters are working on it but are at different stages," Mr. Haddon said.

Generally, London market executives agree the outlook is for more of the same. "There is absolutely nothing on the horizon that suggests a change," said Aon's Mr. McKenzie.

Copenhagen Re's Mr. Stokes thinks that even a catastrophe loss would not have the slightest effect on the market in general. "The world's reinsurers have made an awful lot of money since Hurricane Andrew," he said.

"The only way I can see some hardening of the market is through some kind of stock market activity so companies cannot rely on investment gains and have to rely on underwriting profits," he said. "Then we may see cutbacks on investment and reduced capacity."