LONDON (Reuters) – Lloyds of London is reviewing all aspects of its business, including its centuries-old structure, to ensure it is cost-competitive and responsive to both clients and members, especially after Britain leaves the EU, industry sources said.
People walk outside Lloyds of London's headquarters in the City of London, Britain, July 31, 2018. REUTERS/Simon Dawson
The review, coming after a 2-billion-pound loss last year and the news in June that CEO Inga Beale will step down, goes to the core of the institutions hybrid personality, senior insurers and other officials in Londons financial services sector said.
Lloyds has been holding board and other internal meetings and separate discussions with broader market participants on the best way forward, the officials said. Precise details of the review have not been disclosed, they said.
“A strategic review is being worked on,” said one financial services source, asking not to be named because he was not authorised to discuss it. Another source, a senior executive at a firm that supplies services to Lloyds members, said he understood that included looking at its unique structure.
“The most fundamental question is, what does Lloyds actually want to be?” the executive said.
At present, Lloyds is both a marketplace for its 80-plus syndicated members and an umbrella body that sometimes acts like an insurer by getting deeply involved in members day-to-day practices. It also regulates the members under the auspices of the UK government.
Asked whether Lloyds was conducting a strategic review, Chairman Bruce Carnegie-Brown told Reuters on Monday he would not use that term.
“To me a strategic review implies some kind of crisis, where youve got to put everything into a big hat and end up boiling the ocean. We are not interested in that. What I think we have is a series of improvements and ideas,” he said in a telephone interview.
He said Lloyds was looking at all aspects of the business, however – cost structure, technology, its role as a marketplace and a regulator, and how it mutualises risk. He said recommendations from an “annual strategy day” in June were presented to the board last week and a number of “workstreams” were being set up.
“I think what we need to do is to look at all aspects of what we do, to try to make sure everything we are doing is done better and turn it into more of an exercise to keep turning the stones over of the things that we do to figure out if we can make things more efficient,” he said.
Carnegie-Brown said he did not see Lloyds relinquishing its regulatory duties but said there were “whole aspects of regulation that we need to look at to make sure that we are not duplicating what is already done by other regulators”.
MARKETPLACE
If Lloyds was a pure marketplace, member syndicates could be more innovative, accommodating short-term losses for future gains, industry sources said. Doing so would risk Lloyds losing the single-A credit rating that benefits all members, however.
“If its a marketplace, its for each party to come to the market, its for them to work out what they want to offer,” the senior executive said, while an insurer would incorporate the individual groups operating within it to form a company.
“I do not think it is being crystal clear which one it is, or wants to be.”
The UK government is keen that Britain, the worlds largest commercial insurance centre, remains competitive in financial services after Brexit. Lloyds is setting up a subsidiary in Brussels to maintain access to Europes single market.
“Lloyds needs to ensure that London keeps its edge in insurance, which is vital for the wider financial future of London,” the financial services source said.
Lloyds started life in Edward Lloyds coffee house in 1688. The futuristic look of its 14-storey headquarters in the City belies an emphasis on customs and tradition.
Most business is still conducted face to face. Underwriters and brokers use briefcases or suitcases to carry paperwork around the building; some marine insurers record the sinking of ships with quill pens. The requirement for men to wear ties was relaxed only recently.
The market was almost brought to its knees by asbestos-related claims in the 1990s, which wiped out many of its individual investors, known as “names”.
Members include small underwriters as well as listed UK firms like Beazley BEZG.L and Hiscox (HSX.L) and units of global insurers, specialising in complex commercial risks such as marine, aviation and niche energy markets.
Julia Graham, deputy chief executive at insurance buyers association Airmic, said Lloyds has set up a working group with her client organisation to discuss improving their relationship. She said Airmic regularly met Lloyds at board level but that a meeting this month was “a bit more intimate”.
“The main point is that they asked us,” she said. “Lloyds is still a leader. Its important that it remains relevant.”
COSTS
Last years two-billion-pound loss, the first in six years, followed a record year of insurance losses from natural disasters globally. London also faces competition from rivals like Bermuda and Singapore.
Lloyds will be looking at ways to cut members costs, which have ballooned as a result of increasing regulatory and compliance paperwork and rising commissions from brokers, industry sources said. The high costs of operating from London and administrative expenses have also weighed, they said.
A new electronic processing system introduced by Beale, the first female chief executive of Lloyds, was unpopular with smaller brokers and underwriters.
“If you are pushing it through an electronic system, there will be little scope for enhancements or individual treatment, which is what a lot of people come to Lloyds for,” said industry veteran Andrew Bathurst, director of London and Dubai insurance broker PWS Gulf and a director of Mystic Capital.
Whether to continue implementing the new system at the current pace – 30 percent of all business this year rising to 80 percent next year – is likely to be part of the review, two insurance sources said.
Lloyds insurers have an expense ratio of 40 percent, according to ratings agency AM Best, which Paul Merrey, a partner specialising in insurance at KPMG, said is about 10 percentage points higher than competitors.
“The costs of operating are getting out of hand” due to increased regulation, said one senior underwriting source. He agreed the biggest question mark was over structure, however: “What is Lloyds? Is it a market or is it an insurer?”
Editing by Sonya Hepinstall
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