? Lloyd's market should be "watchful" of U.S. protectionism, chairman says
? Location of European authorities in Brussels "no bad thing" in deciding to set up unit there
? No hike in insurance prices on the horizon
Lloyd's of London's Chairman John Nelson told S&P Global Market Intelligence that the location of the main EU institutions in Brussels made it more attractive for Lloyd's to set up its European headquarters there, and he admitted to fears that the protectionism espoused by the new U.S. administration could threaten Lloyd's most important geography by gross written premiums. Nelson will step down in June after six years at the head of Lloyd's, to be replaced by Bruce Carnegie-Brown.
The following is an edited transcript of the conversation.
S&P Global Market Intelligence: You announced [March 30] that Lloyd's EU subsidiary will be based in Brussels. Why did you choose that city over other potential locations such as Luxembourg and Dublin?
John Nelson: We decided before the Brexit referendum that, if it went the way that it did, that we would need to operate within the EU. We need to make sure that all our stakeholders have got seamless access to the EU so that we can place EU risk. That's what we've managed to achieve with this.
We were evaluating against 30-odd criteria, very objectively. I would probably pick out two or three issues that we were very concerned about. One was regulation: The quality of regulation, the depth of the resources available, and the bandwidth of regulation. We are a unique organization, and we need to make sure that we have regulators that understand enough to regulate the market. There we scored Belgium very highly. What's also important to us, being a global organization, is that the regulator is of good quality and has a great reputation, which they do.
The second thing is access to talent. We are satisfied that Belgium has a good talent pool; they have themselves a pretty vibrant insurance sector.
The third reason is that the Lloyd's market is one of the leading insurance brands in the world. If we are going to be onshore in the EU, it behooves us to go to the heart of Europe, and I can't think of anywhere that is more at the heart of Europe than Brussels.
When you say the heart of Europe, do you also mean that it makes lobbying that much easier?
The fact that the EU is based in Brussels is no bad thing, I would agree with that.
You said in Lloyd's 2016 report that the market should be "watchful" of the policy direction of the Trump administration in the U.S., from which (with the addition of Canada), half of Lloyd's business originates. Is there any action that the new U.S. administration could take that would raise red flags for you?
There are things they could do. They could erect barriers around the U.S. to stop the liberalization of insurance. That would probably be more serious for the U.S. economy than it would be for anybody else. The insurance market by definition is a market about diversifying risk and freedom of capital movement, which helps sustain economies because it takes risk off the balance sheet of the country. I don't see an immediate threat, but we have to be very careful.
How concerned are you about the plunge in the underwriting result for 2016 (to £468 million from £2.05 billion year over year), and when can we expect insurance prices to increase again?
The underwriting result had two drivers: We've had more major claims this year than since 2011. A lot was caused by the Fort McMurray wildfires in Canada and Hurricane Matthew. We expect lumpy claims; some years it's heavy, some years it's not. The second driver is the extraordinary weight of capital in the insurance sector that is driving rates down. It's a fact of life and something that we've got to live with. What's important here is to maintain underwriting discipline, which I think the Lloyd's market has done. Some of my colleagues say these are the toughest conditions they've seen for 20, 25 years. That's probably right. But it's the way the world is.
I don't see any short-term improvement in rates, let's be clear. If base interest rates increase a bit, that will reduce the pressure on specialist insurance markets like ours. That's what one's looking to. And then of course there's always the prospect of a really major catastrophe somewhere that would also have an impact [by taking capital away from the market]. Those are the drivers, but from a planning point of view, we have to be prudent and I think that these conditions aren't going to change in the short term.
Lloyd's is overwhelmingly geared toward developed-markets risks. How much growth do you see from emerging markets?
In the medium to long term, I think there is no question that the major part of growth will come from emerging markets like India and China, although the U.S. is continuing to do quite well on the back of strong economic growth at the moment. We want to really get going on improving our license network worldwide. Under that heading, I would say we've done a very, very good job. The progress we've made in Latin America, in the Middle East, in India, in Singapore, in China, has been very good. It's a continuing effort and the new chairman I know will be taking it very seriously.
Click here for more on Lloyd's full-year 2016 results and its plans for its new subsidiary in Brussels.