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Lloyd's insurers welcome risk exchange, want more detail on syndication overhaul

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Lloyd's insurers welcome risk exchange, want more detail on syndication overhaul

Lloyd's of London underwriters are upbeat about the benefits of the risk exchange being introduced as part of the 330-year-old market's modernization plans, but uncertainty remains about proposals to modernize the market's risk syndication process, by which several syndicates underwrite a share of the same policy.

Both proposed initiatives were among the six included in the detailed plans Lloyd's published Sept. 30 as part of its Future at Lloyd's modernization plan. Others include a platform for complex risks, a faster claims process, and a "Syndicate-in-a-Box" program to speed the launch of new syndicates, and all are designed to lower the cost and the difficulty of doing business in the marketplace.

Faster and better

The risk exchange is designed to increase the speed and efficiency of placing less complex risks. Lloyd's said early analysis suggests that up to 40% of the market's total business volume could eventually be traded on the exchange.

Ash Bathia, CEO of Capita-managed Lloyd's Syndicate1492, said in an interview that the risk exchange "could be transformational" when writing coverage for small and medium-sized enterprises, "because it would be a low-cost platform, arguably with low acquisition costs and much greater control of the underwriting of the business."

He said SME business typically arrives at Lloyd's through coverholders — underwriting agencies serving Lloyd's syndicates — where commission levels have been rising and "the performance of some of that business hasn't been great."

James Hastings, divisional managing director for specialty and financial lines at Markel International, said via email that the process for setting up delegated underwriting arrangements with coverholders can be "complex and time consuming" and that it looks as though the risk exchange "will bring efficiencies to this process." He added that small risks tend to be less volatile, and so more profitable.

"If Lloyd's can gain a broader share of this market via the exchange, this should be a good thing," he said.

Follow the leader

There is less confidence for now about the merits of modernizing the market's risk syndication process. Under syndication, a lead underwriter takes a percentage of a particular risk, and then several following underwriters subscribe for the remainder based on the terms set by the lead.

This mechanism is one of the reasons why the marketplace is adept at underwriting large and complex risks, but Lloyd's believes that the system of syndication and the lead-follow process should be improved. It noted in the document outlining its plans that following syndicates unnecessarily duplicate activities such as detailed policy wording reviews, actuarial review of pricing models and data entry.

Today's approach to syndication "is as much by accident as it is by design," Lloyd's performance management director Jon Hancock, who has been leading the overall modernization push, said at the launch event for the blueprint of the plans.

Lloyd's said the technical details for modernizing syndication are still in development, and that it plans to seek feedback on an initial model in conjunction with the Lloyd's Market Association, a trade body for the market's underwriters. The consultation will take place in the six-month transition phase for the Future at Lloyd's, which began Oct. 1. The plan could include "significant and appropriate" differentiation between leaders and followers and accreditation for leaders.

Hastings said "further clarity is needed" on the plan to split the market between lead and follow capacity.

"The word 'accredited lead' has been used by Lloyd's but without explanation or detail," he said, noting that Markel International, which owns Syndicate 3000, leads on "a large amount of business."

Bathia added on the revamped lead-follow process: "I'm not entirely sure about how it will work in practice."

Market support

Hastings acknowledged that the "large and complex" projects that make up the Future at Lloyd's plan "no doubt carry some execution risks." But he added: "Collaboration and communication from Lloyd's has so far been good. This has helped get support from the market."

Bathia agreed, saying that with the engagement with stakeholders in the market and the "really collaborative approach" Lloyd's has taken, "I really think that Lloyd's and [CEO] John [Neal] and Bruce [Carnegie-Brown, Lloyd's chairman] have really set this up for success."

"I don't think we as a market have a choice other than to help Lloyd's deliver this," he added.

Hastings noted that the project would come at a "huge cost" at a time when companies are trying to cut expenses, and that this cost was "thus far unclear." But he added: "Overall I believe the market will be able to see beyond this, and if the project can deliver 10-15% costs saving, then it's worth investing in."