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Lloyd’s plots a course through troubled waters

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Lloyd’s has faced some home truths and presented a vision for change in its bid for a more prosperous future, after a few years it might rather forget.

It has made it clear that more needs to be done to provide cover for rising threats – both from new risks and traditional perils – while admitting that the venerable market’s processes are too cumbersome and costs high.

Lloyd’s position, built on a 330-year history, cannot be taken for granted as innovation and technological change occurs around the world, including in the younger Bermuda hub.

The market has reported corporate losses for two consecutive years after high natural catastrophe costs. It has faced sexual harassment claims in London, despite championing the global Dive-In diversity festival, and has been slow to act on some of its own advice.

Nevertheless, it has been improving its system, and recent consultations to develop The Future at Lloyd’s document, which was released last week, are another step on the long road towards clearing roadblocks and making more rapid advances.

The document, outlining six key ideas, marks a collaborative exercise, with stakeholders invited to provide feedback and attend focus groups as proposals are refined.

The ideas include a platform that enables efficient digital placement of complex risks, while at the other end of the spectrum is a proposed Lloyd’s Risk Exchange, through which simpler matters could be placed in minutes.

The document advocates flexible capital that can easily and effectively access a diverse set of insurance risks, and a “syndicate in a box” that offers a streamlined opportunity for innovators to bring new products and business into the market.

A next-generation claims service would improve customer experience and increase trust by speeding claims payments, while an “ecosystem of services” could help all market participants develop new business and provide outstanding service to customers.

The ideas are illustrated using fictional first-person stories, each introduced with the phrase “Imagine a world in which…”

These vignettes are from the CEO of a European logistics company, an insurance buyer at a 600-employee company, the fund manager at a wealth management group, the head of a US provider of specialist cyber insurance, the owner of a small textile factory in Florida, and a Lloyd’s syndicate underwriter.

The stories contrast with a hard-nosed assessment of the current reality, in which people need more insurance but are not buying it because of various industry shortcomings.

More innovation is needed at Lloyd’s to better align its products and services with clients’ needs, and processes must become more efficient, the document warns.

Insurance acquisition and administration costs are high and are reducing more slowly than those in other sectors, and a 30%-or-more cost of doing business does not compare favourably to a 4-13% cost of an equity initial public offering.

Large corporations are increasingly retaining risk on their own balance sheets because it is more efficient to do so, and when they do want to transfer risk it is not always possible.

About 57% of Lloyd’s business is written by global carriers, but Lloyd’s makes up less than 7% of their global business. The top three brokers place 41% of Lloyd’s premium but generate only 14% of their revenue from the market.

The document recommends embracing new capital, points to the success of other hubs such as Bermuda in that regard, and notes the impact of third-party capital is going to become greater.

“Although its impact has been largely confined to property catastrophe reinsurance so far, it will affect other lines as barriers to access are reduced and investors seek new opportunities.”

The industry needs to compete harder to attract the best talent and will struggle to do so without an inclusive culture in which everyone is respected and valued.

“We know there is much more we could be doing in this area and we are addressing it urgently,” the document says.

Lloyd’s has started consultations on the document, with work to begin on “building and delivering prototypes and full services” from October.

“The issue is clear: either carry on with business as usual and risk becoming less relevant as customers see decreasing value in what insurance offers, or change and realise the multiple opportunities afforded by the new risk landscape.”

The marketplace, which famously has its origins in Edward Lloyd’s coffee shop in 1688, says it has sought to reinvent itself and innovate throughout its long history.

It really needs to focus on doing that now, as recent problems and new challenges are demonstrating.