Treading Water at Lloyd's
Best, Chris F., Risk Management
THE LESSON that can be learned from Lloyd's recent announcements is that there is no better delaying tactic than setting up a task force.
Lloyd's has been having a bad time for the last few years as underwriting losses have risen and the names, or the individuals who subscribe their personal wealth to form the market's underwriting syndicates, have resigned and taken their money elsewhere.
Some action needs to be taken, but the Lloyd's establishment, like all ruling inner circles, prefers the status quo. Pressure has mounted for change, with the outside," non-market names appalled by losses and the apparent indifference to their plight of the people who run Lloyd's. Therefore, a compromise was achieved: a task force was set up under David Rowland, chairman of Sedgwick Insurance Brokers, to make recommendations for change.
That action maintained the status quo for the period during which the task force was at work. Now that it has issued its report last January, the Lloyd's Council can stop any change from going into effect for much longer by setting up working parties to look into the feasibility of implementing particular recommendations of the Rowland report. When these working parties eventually report, spearhead teams will immediately be created to weigh the pros and cons of implementing the working parties' reports on the feasibility of accepting the recommendations of the Rowland task force. It might be helpful to remember, the Rowland task force was established essentially to look into the validity of the demands for change which the outside names had been making for years. It could go on like this forever ! With some luck, most of the Lloyd's ruling elite will reach their natural retirement age before anything is done to radically alter the way Lloyd's operates. Or at least they will do if only Lloyd's survives that long as a competitive and viable force without radical revision of the way it works.
Perhaps the dire nature of Lloyd's problems will, however, force Lloyd's to change quickly and radically. If the Rowland recommendations are all implemented, will they restore the balance of risk and reward to keep the old names happy, and at the same time, attract new ones?
In the good old days, underwriters made big profits for their names. Even when Hurricane Alicia produced a bad year or two, it was only a blip on an otherwise steady profit line. Also, the Lloyd's scandals of the late seventies and early eighties had not yet occurred, nor was there a multitude of regulations to prevent them from occurring again; thus Lloyd's expense ratios were much lower in those days. Concurrently, with increased expenses at Lloyd's over the past decade, insurers have been gradually reducing expenses, thus improving their competitive position in relation to Lloyd's. Lloyd's expenses used to be about 4 percent of premium income-, nowadays they stand about 13 percent of gross premiums.
In addition, Lloyd's once offered names a unique tax break. Because the Lloyd's system only calls on names to provide capital to pay claims, the names are in fact being given a chance to "use" their wealth twice. Money invested in stocks is also used to back premium and earn a profit from under-writing. This sounds like a nice idea, but it was even better in the days when the United Kingdom's top-rate taxpayers faced a marginal tax rate of 98 percent. If there were underwriting losses, they could be offset by other taxable income. in effect, because the tax rate was so high, the Inland Revenue was underwriting the risk of underwriting losses.
But that was not the only tax break. Both names' deposits (which is the percentage of their total wealth to be lodged with Lloyd's) and incoming premiums were invested. This was because, as with all insurance, profits from investment were often needed to offset losses from pure underwriting. But as the top tax rate on capital gains was only 30 percent compared with income tax of 98 percent, names naturally preferred capital gains to investment income. …