Besso Chairman Michael Wade writes;
As Lloyd’s tackles the thorny issue of distribution, perhaps a fundamental issue is that it must encourage the market to continue to rejuvenate by enabling the creation of new syndicates.
Start-ups are the lifeblood of the market. As larger underwriting groups consolidate or develop outside the Lloyd’s structure, the dynamic subscription principle of the London market would be comprised, or even lost, without the emergence of new syndicates.
It is now 20 years since the Lloyd’s Taskforce recommended the introduction of corporate capital to support syndicates; the immediate impact of which was to keep the market growing at a time when its survival was in question. Six years later, in 1998, the corporate-backed syndicates crossed a fundamental line in being permitted to own a managing agency – enabling the Integrated Lloyd’s Vehicle.
And so began the inevitable evolution of ‘insurance companies’ at Lloyd’s where capital and underwriting management became integrated; and ‘holding company’ structures appeared, enabling the development of other platforms in Bermuda and UK insurance companies.
With the growing financial strength of these underwriting groups, and Lloyd’s itself changing its rulebook, there has been significantly increased entry into the distribution chain – often in competition with Lloyd’s brokers who had hitherto enjoyed exclusive rights of access to Lloyd’s syndicates.
If we examine the role of distribution and recognise the necessary tension between ‘broking’ and ‘underwriting management’ we also need to dissect the underwritings groups’ structures as between their ‘Lloyds’ and ‘non-Lloyds’ interests – plus what Lloyds actually represents, as well as defining what it wants to be in 10 years time.
So, perhaps the logical conclusion – and where interest already exists – is that Lloyd’s brokers are feeling cut out of the distribution chain should begin to sponsor new Lloyd syndicates with integrated underwriting and distribution models backed by corporate capital vehicles (or private capital). A proportion of the capital could even come from their customers.
Of course it will be essential to recognise the potential conflicts of interest and design transparency into the structures; but where is the difference to the larger Lloyd’s underwriting groups now owning their distribution service companies or brokers?
The changes in the Lloyd’s Act of 2009 enable such structures – although, thus far, Lloyd’s itself has effectively blocked this possible evolution both in principle and in practise by introducing arbitrary rules, such as a 20% restriction of business from any one broker.
Lloyd’s wants the market to thrive but in order to achieve this it has to recognise the need to establish distribution rules that allow for that. It is time for Lloyd’s to take action and facilitate free market development.