The special insurance relationship

UK brokers and Lloyd's have long been a winning combination, with the vast bulk of the market's near-£15bn (£8bn) capacity to accept premiums this year placed directly through this distribution channel. Yet, when one analyses the source of this business, aside from the UK, one market really stands out - the US, which is comfortably the largest overseas market for Lloyd's underwriters.

Despite the best intentions of Lloyd's to write more business in other important markets such as Europe and China, the overriding importance of US business is unlikely to change for some time yet. The fact of the matter is that the US accounts for over one-third of overall premium income for the market, and Lloyd's has trust funds deposited of approximately $12.2bn. It may have been the scourge of many underwriters in recent years, with US lawsuits the bane of many a syndicate, yet with figures such as these this is one special relationship that looks secure for the time being.

A hands-on approach

The figure at the helm of Lloyd's involvement in the US for the past six years is Wendy Baker, president of Lloyd's America. Based in a Fifth Avenue location in the heart of Manhattan, only metres away from the Rockefeller Center and St Patrick's Cathedral, the easy-going Ms Baker has taken a much more hands-on approach to what her office is there to accomplish since assuming her role: "This used to be just a regulatory and legal office but, when I arrived here in 1998, we started business development and broker development and since then have undertaken countless presentations. We found that, while Lloyd's is very interesting and a fabulous place, it is very difficult to understand."

Indeed, the arrangements for Lloyd's purely in the US are complicated enough: underwriters are licensed only in Kentucky, Illinois and the US Virgin Islands, and there are approved surplus-lines insurers in all US jurisdictions except Kentucky and the US Virgin Islands. Underwriters are, however, accredited reinsurers in all states.

One of the more recent extensions, clarifying Lloyd's position and extending marketing activity, was the opening in August this year of a new office in Los Angeles, run by Tony Joseph. "California is our second-largest state, but we do want to talk to brokers in Washington, Oregon and Arizona," Baker comments, indicating that Lloyd's is already well represented across the country - it also has offices in Chicago and Kentucky as well as New York - and that, for the time being, there are no further plans to open other offices.

Although Lloyd's has a long-established presence in North America, there is no reason for brokers to believe that such levels have reached saturation point, she explains: "Somewhere in the region of 42% of Lloyd's business comes from the US, which works out at a little over $8.5bn. We have increased that figure from $5bn in 1998, so there has been a lot of growth in five years and there is always a lot of room to grow the business. We are here to write specialist business, to make Lloyd's available, visible and known to brokers."

For London-market brokers keen to do business in the US, Baker indicates that there is room for further expansion, despite the market's already healthy stake: "All sorts of market conditions can change, such as people going away from businesses and that sort of thing. There is always new business, new possibilities and new opportunities."

Is this really the case, given Lloyd's chairman Lord Levene's commitment to writing more business in other foreign markets? "Certainly there is an interest by Lord Levene to do more business in Continental Europe and Asia, but there is a lot of room in the US because it is such a valuable relationship, dating back to the early 1800s, through to the 1906 San Francisco earthquake and continuing all the way up to 11 September 2001. There is a strongly personal relationship that works between Lloyd's underwriters, brokers and their counterparts in the US, and that is difficult to beat."

New product writing

It is not only the strength of the historical relationship that bodes so well for Lloyd's when it comes to North American risks, she claims: "Writing and being able to write new products is a big selling point - and SpaceShipOne is a perfect example." The spacecraft hit the headlines this summer when it became the first privately manned vehicle to travel beyond the earth's atmosphere, with Lloyd's insurer Amlin confirming it was the lead insurer on the $100m liability policy.

Despite such high-profile success stories, it has not all been sweetness and light when it comes to Lloyd's relationships with the US authorities.

One of the most bitter battles in recent years has been Lloyd's attempts - in conjunction with the International Underwriting Association - to change the US regulatory authorities' stance on the amount of collateral that must be held for reinsurance business.

Collateral

At present, as a non-US or 'alien' reinsurer under regulations, Lloyd's is required to hold collateral in the US, either by way of expensive letters of credit or cash in non-working trust funds, amounting to 100% of its gross liabilities. By comparison, US reinsurers fund their liabilities on a net basis, taking credit for reinsurance purchased. Naturally, this situation places Lloyd's at a huge disadvantage to its US competitors, as so much more capital is tied up to suit regulatory purposes that could otherwise be used more purposefully.

Although the battle over the funding of US liabilities has raged for many years now, and intense pressure has been placed on the relevant authorities over the past two years, there still seems to be no indication that any relaxation of the rules is in the offing. However, Baker has not given up hope: "Talks are still in progress. Our chairman is still intending to bring some relief for the system that means we, like other alien reinsurers, post 100% collateral regarding our liabilities, which is discriminatory. But I am generally optimistic."

For Lloyd's underwriters looking towards the US, there is little immediate sign that any concessions will be forthcoming, despite Baker's guarded optimism. For UK Lloyd's brokers, however, a much more serious threat to their relationship with their counterparts in the US potentially arises from the market's decision four years ago to allow domestic US brokers to become accredited Lloyd's brokers.

Despite the obvious threat this means for those UK brokers with long-established distribution links with the US, Baker is convinced that, in practical terms, it has changed very little, suggesting that the well-established wholesale relationships with the London market are still intact: "It was a good idea to open up access, as we have had a number of brokers become Lloyd's brokers and place business directly into the market. At the same time they still do business with broker A, broker B and broker C, and place business into the market through them.

"Sometimes it is good to have something different to make that access 'mouth' a little bit wider," she adds. "But it depends on technology. Ten to 20 years in the future you can be sure that more business will be cyber-business and, as technology is enhanced, more brokers will become Lloyd's brokers."

Baker is keen to stress that the possibilities that technological change will mean in terms of widening distribution beyond traditional London-market Lloyd's brokers should not mean that the current means of business are in any way to be disparaged, however: "Insurance is very personal, and people do not want that to change. They may be personal relationships but they are relationships first and foremost."

Exposure to liabilities

But to what extent do underwriters really want to continue to accept large US placements from brokers? After all, such exposures to certain US liabilities have crippled many a syndicate in recent years. Moreover, the new - and supposedly tougher - regime at Lloyd's, with the Franchise Board now scrutinising the business plans of syndicates, may well not look too favourably on what it perceives to be excessively volatile US exposures. "I think it all depends on what the individual business plan looks like," Baker responds in defence to such suggestions. "The level of deductibles, terms and such like - it all depends on that."

Baker is not afraid to appreciate the inherent weaknesses involved in placing business in North America, however: "I can say that Lloyd's has paid a lot of money for environmental and asbestos liabilities, which is primarily due to our tort system, which I deplore. But with the tort system I think we have a chance now to change things. A lot of business people are interested in it, our President is interested in it and it is his second term, so he does not have to stand for re-election. I have a ray of hope."

Of course no one in involved in commercial insurance at the moment and, especially in New York, no one can avoid the ramifications of New York State Attorney General Eliot Spitzer's investigation into price fixing and contingency commissions. Indeed, Baker concedes it is one of the most significant events ever to affect the insurance industry, but is nonetheless adamant that its effect on Lloyd's is minimal.

Market rigging

"Spitzer is not affecting day-to-day business, except that a lot of brokers are busy doing something other than placing risks. Personally, I am surprised about putting two things (market rigging and contingent commissions) into one, as every intermediary business in the world has contingent commissions."

She points out as an example the practice of supermarkets favourably placing certain brands in their aisles, which she says is merely the retail market's equivalent of what the insurance market has done for years.

"Of course market rigging is against the law and no one can condone that but, from a people point of view, it is horrible. Marsh had to lay off 3000 people - some of whom I know - so it is a very sad time."

Despite the turmoil that is going on in the industry as a result of Spitzer, Baker is convinced that Lloyd's itself has at present a pretty good reputation: "Thanks to the hard work of a lot of people in Lloyd's, the market is in good shape. We paid out some $5bn in 11 September claims and now there are the hurricanes, but that is why we are in business, to accept risk. Our market has turned out to be reasonably solid over the past two years. People were sceptical that Lloyd's could pay out over the events of 11 September, but we did it and proved people wrong."

In 2004, Lloyd's standing in the US would appear to be as strong as it has been for some years, and if it emerges untainted from the current round of Spitzer's allegations it is likely to have that reputation only further enhanced. The crucial question for the immediate future is likely to rest, however, on reform of the 'deplorable' tort system. Without such reform, underwriters may be increasingly unwilling to accept US risks from brokers - no matter how attractive the price.

CV

- President, Lloyd's America, New York City.

- Prior to joining Lloyd's, she had her own firm, Beekman Advisors, and served as a consultant to a number of insurance and reinsurance clients.

- Baker has worked in the insurance/reinsurance industry for over 20 years, spending much of her career at the Continental Corporation, attaining the position of president of Continental Re. Following that she was senior vice president for the Special Operations Group. After the sale of Continental, Baker spent two years at Minet, now Aon.