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Despite falling premiums and rates, Lloyd's of London continues to be a contender in the international reinsurance market, retaining business amid heavy competition from other markets.
The market also continues to aggressively explore new programs and ways of doing business to attract new business.
But the market still faces several challenges as it restructures to regain its prominence in the world of reinsurance (see story, page 20).
In 1996, the last full year for which statistics are available, Lloyd's wrote gross reinsurance premiums of L1.6 billion ($2.69 billion), a 16% drop on its 1995 total. These figures exclude facultative business, which is bundled in with direct insurance and not broken out in the annual figures.
Breaking the figures down further, U.K. business resulted in gross written premiums of L276 million ($463.4 million) in 1996, while U.S. business represented the greatest premium source, with L806 million ($1.35 billion) written in reinsurance during the year.
Other significant territories included L45 million ($75.6 million) from France, L36 million ($60.4 million) from Canada, L54 million ($90.7 million) from Germany, L43 million ($72.2 million) from Australia, L21 million ($35.3 million) from Italy and L19 million ($31.9 million) from Bermuda.
According to an analysis by Lloyd's commercial policy unit, the market got about 4% of the world's non-life reinsurance premiums in 1995, the last year that full figures are available.
Figures for business in the first three months of this year show that as a proportion of Lloyd's business, reinsurance is playing a slightly more important role, representing 33% of the market's premium volume, compared with 31% in the first quarter of 1997.
Despite comprising a larger share of Lloyd's overall volume, gross reinsurance premiums are down by a slight 0.9% to L620 million ($1.04 billion) for the first three months of this year. Facultative business has slid further, down almost 21% to L209 million ($350.9 million) for the first three months of 1998.
Market executives agree that falling rates are the main factor behind lower premiums and note that in certain cases, syndicates have been walking away from business because rates have fallen too far. Nevertheless, anecdotes still abound of underwriters writing business for cash flow rather than syndicate profitability.
One of Lloyd's problems is that it is not very good at writing "bouquet" business, according to Grahame McKean, director of Ballantyne, McKean & Sullivan Ltd., a Lloyd's broker. "Lloyd's is much more segmented," focusing on specific classes of business, rather than on offering a complete package, he said. The growing trend toward creating large syndicates with a number of different underwriters for various lines of business may help Lloyd's increasingly compete for multiline accounts, he said.
Many of Lloyd's customer relationships were forged over a number of years, and reinsurance buyers generally remained loyal to the market during its shaky loss-making years. These have been "valued relationships over a long period of time," commented Mr. McKean.
At the same time, new ceding companies are approaching Lloyd's underwriters to take on lines of their business in which those new buyers don't have expertise, relying on Lloyd's tradition of specialization. "Lloyd's has got a high degree of specialist skills in a variety of areas," said Mr. McKean.
John Charman, chief executive of ACE U.K. Ltd., agreed.
"Lloyd's has acknowledged global specialty underwriters and leaders," he said. In addition, the business continues to be relationship-driven.
Lloyd's network of licenses around the world is another attraction to customers, said Mr. Charman.
Recently, the market has been beefing up its international operations, opening new contact offices in Australia and South Africa, and it is considering setting up an operation in Singapore. Latin America and Eastern Europe also are commanding Lloyd's interest, said Lloyd's Chief Executive Ron Sandler.
Such moves are part of Lloyd's attempts to re-establish itself as a major competitor in the international markets. Mr. Sandler freely admits that Lloyd's took its eye off the competition leading up to and during its restructuring period but said he hopes the market now can redress that situation.
Moves such as opening local offices are "sowing the seeds," said Nick Bonner, underwriter with the Brockbank Group P.L.C. Expanding the Lloyd's network shrinks the world for Lloyd's and keeps the market in the forefront in different countries, he said. "It's important to have local representation," he added. Geographically, Lloyd's has diverse business sources all over the world. "At Brockbank, we have got an enormously diverse account from an enormous number of territories," he said.
At the same time, Lloyd's is looking at its distribution structure, assessing the role of the Lloyd's broker and investigating ways of cutting the cost of getting business into the market (BI, June 29). This could result in local brokers around the world becoming able to transact business direct with the market, for example, another mechanism which could increase the amount of business flowing into the market.
Despite such long-term possibilities, the market in the near-term is focused primarily on coping with the current soft rating environment.
"Certainly there's no sign of an upturn in the reinsurance market," commented Mark Hewlett, managing director of European property & casualty and reinsurance at Moody's Investors Services Ltd. in London. "Rates are weakening all the time. The feel of the market is akin to the late 1980s."
The absence of a London market
excess-of-loss spiral -- a major contributor to Lloyd's problems 10 years ago -- lessens the danger of a cataclysmic downside, but the larger volumes of spare capital mean certain syndicates may be retaining more business rather than ceding it out of Lloyd's, he said.
In contrast, Mr. McKean said he suspects syndicates are buying reinsurance "quite ferociously" as they take advantage of cheap rates elsewhere. Mr. Hewlett has identified more business being ceded to European reinsurers and a "fair amount" to the Australian market.
Although Lloyd's capacity has remained fairly constant over the past few years, capacity utilization is slumping, currently projected at 61.5% this year, down from 66.6% in 1997.
"If you look at Lloyd's as a market of last resort, it has quite a strong position," said Mr. Hewlett. "But when the insurance markets have surplus capacity, there is less need to use the Lloyd's market in that way. . .Lloyd's has to continue to think how it can offer added value and reposition itself accordingly while looking at how the quality of underwriting and skills are applied until the upturn."
This is partly manifesting itself by Lloyd's non-marine underwriters beginning to offer three-year contracts, which previously had been the preserve of the marine market.
At the same time, Lloyd's centrally is investigating the possibility of offering alternative risk financing products, though Mr. Sandler notes that the annual venture, whereby the capacity of Lloyd's is effectively reinvented each year, may be a barrier to providing long-term alternative risk financing programs.
"Within the confines of the annual venture, we are looking at ways to develop ART products and the required changes to bylaws," he said.
Few are prepared to predict when a turn in pricing might happen.
"Personally I think rates are stabilizing," said Mr. Bonner. "They're not far off the levels of the previous soft market," he added.
ACE U.K.'s Mr. Charman foresees the current market conditions lasting at least another 18 months.
"The fall is decelerating," noted Richard Keeling, chairman of Murray Lawrence Group P.L.C., though "market conditions are all over the shop."
Five years with no catastrophic losses have helped fuel the downward slide in rates, said Mr. Keeling, but it could well take more than a single catastrophe to make a difference to conditions. In the meantime, it remains a buyer's market.