To redefine Lloyd’s, you’ve got to start by asking does it even need to exist

Lloyd’s of London, an insurance and reinsurance market steeped in history with a perpetual ambition to reinvent itself for the future.

The Lloyd’s market and its very existence is a constant source of discussion, raising questions such as (some of these from personal experience):

  • Is the Lloyd’s model fit for the now?
  • How can it embrace technology?
  • How many times can you show someone/thing the future without them embracing it?
  • Is the building & expensive real estate Lloyd’s is housed in appropriate at a time when margins and returns are so under pressure?
  • Just how many cooks does one simple broth (process) take?
  • Is it fit for the near future?
  • How does it ever get ready for the far-future, when a significant amount of what it does can be digitised?
  • Does the global insurance and reinsurance market actually even need it?

That last question is important to ponder on, I believe.

When people start talking about revolutionising the Lloyd’s market, or redefining it as CEO John Neal said recently, it’s best to go back to basics and establish if there’s a need for it in the first place.

Lloyd’s is currently a major player in global insurance and reinsurance of course. While its home London is still the most dominant global location for the risk business as a whole.

But at only 5% of global underwritten premiums, albeit with an ambition to double that to 10% (as CEO Neal said recently as well), it’s perhaps not as significant as you might think.

Much of the capacity backing Lloyd’s comes from sources that could easily be routed via the company market (most of it emanates from there anyway), global players and of course insurance-linked securities (ILS).

In fact there’s a case to say that some just participate as an arbitrage of sorts, capitalising on what remains unique about Lloyd’s today (licensing, leverage, market access).

If you’re realistic about it, there’s little that’s truly unique about Lloyd’s and its capital anymore, aside from the specifics of the structure itself thanks to central fund, attractive rating, licenses and the support (and arbitrage opportunity) that provides.

The largest global insurance and reinsurance players have already proven they don’t need it and can often emulate all that’s good about Lloyd’s entirely on their own.

So the uniqueness of the capital, central fund and structure aren’t really enough on their own to definitively say Lloyd’s is needed anymore (I believe).

But, syndication of risk. It’s a marketplace damn it!

I hear you cry…

Yes, the premise of Lloyd’s was that risks enter the market and are underwritten by experts, while distributed or syndicated to the various mini-underwriting operations in the marketplace.

Marketplaces are supposed to be efficient by design, as was Lloyd’s at its founding prior to the advent of technology.

Does that still stack up today though?

A lawsuit suggests otherwise, as the subscription market of Lloyd’s syndicates has been likened in a recent one to an operation that is akin to divisions of a single corporate entity, rather than as true individuals and competitors, as you’d expect to see in a truly efficient marketplace.

At the same time, there’s not a week goes by that someone doesn’t suggest that Lloyd’s has become a market run for the corporation and its largest backers. A complaint about Lloyd’s that I’ve been hearing for over two decades now.

There will always be detractors of course, but this complaint that Lloyd’s is no longer designed to support its members and ultimately capital providers is quite damning.

As too is the accusation (such as in the lawsuit) that it’s not really a marketplace at all and certainly not an efficient one.

Is a risk underwritten and priced by one lead and then signed onto by everyone else, at or above the baseline terms set, really generating efficiency for the customer (or for the capital)?

A lot of business in Lloyd’s goes down that path and it seems to be a disservice to a customer who’s seeking efficient placement of their risks into a pool of diversified capital.

There must be a better way…

So what’s Lloyd’s still got going for it?

It’s a significant hub of expertise in risk, insurance and reinsurance. That cannot be denied and should not be understated. It’s quite unique and is precisely what Lloyd’s needs to learn to leverage and capitalise on.

Nowhere else in the world can you take the most extreme or exotic of risks and almost guarantee that someone in the building will be able to understand and underwrite them.

For the biggest risks, the direct & facultative or most extreme, this is especially important for now, as the expertise + syndication = risk dispersal (which is key), albeit not always at the most efficient terms or in the most efficient manner.

But what else is there?

Capacity, a central and expensive location in London, leverage and a structure that can support small underwriting teams to achieve much more than they could on their own.

But again, is that enough?

So much of this is replicable by existing re/insurers (especially the big ones), while the syndicated nature of the marketplace can be achieved (and significantly improved on) with much greater efficiency through the use of technology (I believe).

Just look at other “markets” in insurance and reinsurance.

Bermuda is considered a “market” and does very well at it, without any of the history or legacy of Lloyd’s.

It’s got the expertise and the capital, with enough players located there to syndicate risk if you want to. And they’re truly independent (of each other) players as well.

That’s all well and good.

But, in the modern world, location and physical marketplaces defined by geography are not going to be as important as efficiency, connections and networks.

The expertise is everywhere and by looking within a single building in EC3 you’re actually just limiting yourself, some might suggest.

Capital is abundant and fungible, with an appetite to attach itself to insurance related risks that is growing globally.

Leverage and mechanisms to make capital go further are equally available nowadays (expect more of this as well).

Yes, the security of Lloyd’s central fund, the incubator it can provide to niche underwriting teams and the oversight set-up remains unique.

But, in a functioning, modern risk transfer marketplace of the future, you’d expect to find security anyway. Via the layers of protection, the broad syndication only achievable through globally accessible open and transparent risk marketplaces, next generation hedging strategies and much greater dispersal routes into diverse capital sources, I think.

Can Lloyd’s ever achieve that?

Can it revolutionise and redefine itself enough right now to put it in a state fit for the next decade, twenty years, half century, more?

The problem is, that while Lloyd’s is unique, re/insurance is still a niche. So it’s been able to sustain itself without much change over the last few decades. But as time passes, the world modernises and markets evolve, it becomes increasingly less relevant at the same time.

Can it ever keep pace with technological change? Or simply with the change that the risk market’s it focuses on are undergoing?

The consultants currently ensconced at Lloyd’s are going to do their best to deliver “one change program to rule them all,” as one Lloyd’s underwriter said to me.

That’s a significant challenge, but one we’ll hear a lot more about in the next fortnight when the awaited blueprint emerges.

But back to the title of this missive.

Does Lloyd’s even need to exist?

I’ve actually struggled to find anyone who can fully convince me that if Lloyd’s as a concept disappeared tomorrow the capacity it provides wouldn’t be swiftly replaced through corporate re/insurers, or the same underwriting teams & capital providers from new, independent locations.

But still others swear Lloyd’s will never die, although in the main they all struggle to explain why that should be the case.

It’s almost as if the concept of Lloyd’s itself has become more important than its functionality, especially to London of course. As a result it’s future is a contentious topic, but one that needs to be considered.

Over and over again Lloyd’s tries to reinvent itself.

But it’s always without actually changing the overarching concept of Lloyd’s.

It often seems more about saving rather than revolutionising itself.

Which is a shame, as there are clear signals that embracing openness, transparency, capital markets and technology, to create new valuable market chains that allow risks within Lloyd’s to flow out, or risks/capital outside to flow in, would be a clear winner for the market.

This has been the case for two decades or more and enough times the subject has been broached, with little to no real uptake.

It is clear though, that expensive EC3 real estate is not really required to support a truly modernised vision of Lloyd’s.

So… Virtualise Lloyd’s?

Allow the underwriting experts to participate from wherever they like. WeWork is all the rage I hear…

Sustain the central fund, oversight and a set of rules in one fully regulated form or another, as the buffer(s) within and around the system.

But allow risk transfer interfaces (technology) to connect to participants and the risk pool, bringing risk/capital into and out of the market more efficiently.

Allowing the capital to attach to those flows however the heck it likes.

Lloyd’s would become some sort of fee generating business then, a virtual regulated marketplace, connecting risk and capital, while renting out its central security.

But is that even Lloyd’s any more? Well it’s kind of what it does today, minus the legacy, building, lunches and all those people.

But without all that legacy has the concept of Lloyd’s just been thrown away entirely?

Which leads me to ask again. Does Lloyd’s even need to exist?