Conflicting notions of growth

The news was not necessarily remarkable—the office adds to a rapidly growing network of global hubs the market has developed in recent years. But it was important for Lloyd’s in the sense that any foothold in the Chinese market is achieved only on the back of many years of attrition and hard work, and this clearly presents Lloyd’s with an opportunity and potential head-start in that part of China that it will cherish.

The Beijing office follows its reinsurance company licence, which was granted in China in 2007, and that licence being extended for direct business in Shanghai in 2010. As a direct insurance company, Lloyd’s China is licensed to write general insurance in Shanghai; general insurance outside of Shanghai classified as large commercial risk & international marine, aviation & transit (MAT), or via master policy; and onshore and offshore reinsurance business of general insurance.

The news meant the conversation also naturally steered towards Nelson’s thoughts around Lloyd’s role in the world going forward. Conceptually, this is interesting: one of the world’s oldest and most traditional institutions making the transition to find its place in new markets around the world—albeit by offering very traditional and much-needed products.

Lloyd’s role as an innovator is also an interesting concept in this sense. The market’s historical foundations were built upon its participants’ willingness to take real risk and conquer true risk-related challenges. The market also bears the scars of some failures along the way. Innovation is exactly what many emerging markets need—yet discipline and prudential underwriting are the watchwords of the modern Lloyd’s.

It is all about balance, Nelson states. The market may be ancient but it is also vibrant, he jokes.

“It is hard to generalise about innovation and what that really means but Lloyd’s certainly has a reputation for this in many growing markets,” Nelson says. “The brand is very strong. People associate it with many things and the understanding varies, but innovation is certainly one of those things and I think we continue to deliver on that as a market.”

Mind the gap

He notes that the challenge to remain relevant is one facing the wider insurance industry. He believes that while there has always been a gap between the risks companies and individuals face and the insurance products available, this is now wider than it has ever been. The challenge of closing it remains great—but Lloyd’s has led the way in many areas.

“When I speak to different companies, you cannot help but realise just how much the nature of the risks they face has changed. The gap between the needs of society in terms of risk transfer and risk management is bigger than it has ever been.

“That is a real challenge. It is one we are facing up to and Lloyd’s has led from the front in some areas. If you look at some of the products that have been developed around supply chain risk, terrorism coverage, reputational damage, climate change and in the cyber insurance space, Lloyd’s has demonstrated its ability to innovate.

“But the real challenge is to remain innovative yet prudential—we must be careful not to lose our discipline. It comes down to having the skills and the intellect to maintain this balance.”

The signs on this front are good. “The market is not growing much at the moment, which is a good sign in these market conditions. The balance seems good for now. It is well managed yet able to innovate within these parameters,” says Nelson.

Increasingly entering this delicate mix, however, is the way Lloyd’s operates in other overseas markets and how its growing role in the wider world affects the market’s ethos and business mix. Setting up operations in countries such as China is not a one-way street: Lloyd’s may offer tried and tested products and services from the outset, but over time a stream of experience, talent and learning will begin to flow the other way as well.

Nelson acknowledges this. Vision 2025, the plan Lloyd’s released in 2012 detailing its long-term vision of what Lloyd’s would look like, how it would operate and how it plans to connect with all corners of the globe and establish a permanent, physical presence in more places, also recognises this reality.

Nelson describes Lloyd’s global expansion as dynamic yet also flexible. Each base it has established, he notes, brings different things to the market. While many markets it has targeted are clearly under-insured (offering opportunities for growth) others allow access to different types of risks where the expertise available at Lloyd’s can help.

"INNOVATION IS EXACTLY WHAT MANY EMERGING MARKETS NEED—YET DISCIPLINE AND PRUDENTIAL UNDERWRITING ARE THE WATCHWORDS OF THE MODERN LLOYD’S."

“The execution of the plan is not set in stone and is very adaptable,” he says. “It is all done on the basis that we are a speciality hub with an appetite to grow into the right territories. We have performed well overseas so far. We have a good footprint of business in South America, especially certain markets like Colombia and Mexico.

“We have a footprint in the Middle East now through Dubai as well as Singapore, which acts as our Asia hub, and we have made great strides in China. We would love to get a presence in India but it is a very difficult environment politically to get things done.

“London will always be the epicentre but all this bring us much closer to our customers in these markets. Some countries are now developing very strong insurance markets and in many countries if you are not in there on the ground you do not get the business.”

But he acknowledges that he is as interested in learning from these new markets as he is in potentially offering solutions.

“The one thing we do not want to be is simply a source of capacity and nothing more,” he says. “We want to attract the best people who can help us deliver more innovation and a wealth of creativity. As we extend our global reach, it is about mixing our ethos at Lloyd’s with different cultures and different types of underwriting talent seeing what that can deliver.”

Dynamic change

Against a backdrop of a rapidly changing re/insurance industry in some other areas—notably its sources of capital—this is not the only area in which the market will mix different types of people and talent with different perspectives and approaches to risk.

Nelson compares the inrush of capital from hedge funds and institutional investors into the re/insurance industry in recent years to a similar dynamic which occurred in the 1970s when a new class of capital entered the banking industry, especially targeting institutions in the London Market.

That process helped turn London into one of the great financial centres and a centre of innovation when it came to banking, he says. A similar dynamic could now occur in the re/insurance markets.

“Along with the capital that entered the banking world, came some very good people,” he says. “On the back of that, London became the centre of innovation for banking and it turned London into the banking centre of the world.

“Insurance is a smaller industry but we have the opportunity to be very innovative now and London can be the hub again. We are seeing different mixes of capital and expertise being thrown into the pot with insurance. It will be interesting to see where that will take us in terms of innovation and maybe even long-term change.”

He acknowledges that this is a massive talking point in the industry at present and the pressure this influx of capital has had on the market. Competition is fierce and rates in many lines are soft. It is a market that “favours the disciplined,” Nelson says.

Yet the market is performing exceptionally well as a whole and he says that “people in the market are pretty happy at the moment”. So they should be, perhaps. Last year was an outstanding year for Lloyd’s, with profits of £3.2 billion, a combined ratio of 87 percent and return on capital of 16 percent. It was also recently upgraded by rating agency Fitch.

There is a counterbalance to this positivity, however. Against a backdrop of Lloyd’s embracing a modern world of globalisation, Nelson also expresses his fears that many parts of the world are moving in the opposite direction.

"Governments agree that low trade barriers are helpful and important on the one hand but it is extraordinary how many then revert to implementing protectionist measures."

He highlights the twin trends of protectionism on the part of some governments and a wariness of international trade more generally in society. Added to this is the concern in some quarters that the free-flowing nature of capital is partly what caused the most recent financial crisis and subsequent drawn-out global economic downturn.

In a speech made at a Lloyd’s city dinner just before Monte Carlo, Nelson cited several examples that illustrate these trends and which worry him. A recent poll in the US showed that two thirds of Americans believe international trade is bad for the country. “That’s somewhat unsettling,” he said.

In another example, he noted that cross-border capital flows fell from $11.8 trillion in 2007 to $4.6 trillion in 2012. Cross-border trade is being compromised by a rise in trade barriers, he said, stating that between May 2012 and May 2013 governments around the world imposed three times as many protectionist measures as moves to open up their economies.

Resisting protectionism

Nelson believes the re/insurance industry has a duty to resist such trends and better explain the benefits to governments of having the free movement of trade. Specifically in relation to risk management and transfer, he is clear that the industry has a positive role to play in the development of emerging economies.

But the industry can operate efficiently only if it is also part of wider economic picture that allows the free flow of capital—a dynamic, he says, that brings prosperity and choice to people and has the potential to lift millions out of poverty.

Such a model has been proved to be effective time and time again, he says. In the aftermath of costly disasters, the international re/insurance markets have the potential to pump money into countries’ economies, speeding up recovery and allowing society and businesses to get back on their feet faster. International funds in such instances are used to absorb shocks which could otherwise destabilise local communities.

Nelson says he sometimes gets confused by the mixed messages coming from governments around this issue. He says while the understanding of the importance of spreading risk is often there, the reality of their policies around trade does not always reflect this.

“When I talk to governments around the world they all understand the importance of reinsurance as a diversification tool for risk, and most say they will encourage that process to happen.

“But this is often then balanced out by an element of protectionism. I speak to international carriers and many have the same concern. Governments agree that low trade barriers are helpful and important on the one hand but it is extraordinary how many then revert to implementing protectionist measures.”

He says politics seems to be becoming increasingly local and notes that this dynamic can be seen in many scenarios around the world: from wars in the Middle East to the September referendum in Scotland.

He urges governments to consider carefully the benefits of the free movement of capital, before they erect barriers around their national economies. “The success of Lloyd’s is built on its willingness to trade freely with the world,” he notes.

While the risks it handles are clearly international, so now is the capital that funds the market.