An About-Face

In distancing itself from the controversies of the past, Lloyd’s of London is setting a new track for profitability. In Canada, the charge is being led by attorney in fact Nicholas Smith. But his task will not be an easy one. With a complex regulatory landscape and an insurance industry in financial straits, he says now is the time for change.

Nicholas Smith is no stranger to Canada. Although a native of the south of England, he has been in Canada for 13 years, and, as the new face of Lloyd’s of London in Canada, Smith is enthused by the challenge of turning around the company’s image and its financial status.

Lloyd’s has a long tradition in Canada, the 300-year-old insurance market’s second-largest market outside of the U.K. The Canadian economy has made it an attractive place to do business for Lloyd’s investors in the past. “This is a major G-8 economy with high growth,” says Smith.

He was brought into Lloyd’s originally in 1998 as its regional manager for Canada, and led a review of the market’s Canadian operations which resulted in a restructuring of the Canadian office and an outsourcing agreement with Telus. The business plan will take traditional back-office processes and convert them to an e-commerce platform.

Part of the restructuring was the formation of Lloyd’s Canada Inc. late last year, of which Smith is the first president along with his duties as attorney in fact. Prior to that, Smith had taken a break from a long insurance career to travel the world and also served full-time in the Canadian Navy.

Canadian content

An important part of Smith’s new role will be continuing to demonstrate the suitability of Canada as a place for Lloyd’s underwriters to invest. But this could be a challenge given the country’s diverse body of insurance regulations, he explains.

Between federal solvency requirements and differing legislation in each of the provinces and territories, he admits, “it is a barrier to businesses, such as ourselves, that there are these pockets of rules”.

Auto insurance in particular is a minefield of regulation, including Ontario liability requirements, which are “a response to a crisis 15 years ago in hard market conditions”. Federal demands are also no less taxing, he adds, “without question it’s a cost to underwriters to follow all this compliance, with frequent demands for information”. Canada’s solvency requirements “do not compare favorably with other jurisdictions”, he observes. “Canada has a reputation of being a costly place to do business.” In fact, the cost of compliance is estimated at 10-times that of Europe.

There is also the question of tax laws, with the Insurance Bureau of Canada pointing out how the industry has been “soaked” by taxes by the various governments, Smith says. “We are dealing with a global business that is seeking to recover from years of losses and looking for places to do business that are less costly.” The question is, why should investors do business in Canada, “when they could put capital in another country and get better results?” Smith says it is all a question of capital. “Where do you invest it? Where do you put it at stake? Regulators have to wake up and be aware of these things.”

Handling tragedy

Another facet of Smith’s job will be promoting Lloyd’s within Canada. With a loyal broker force this may not sound difficult, but the market has faced some bad publicity in recent times, and Smith will be responsible for turning this around. This is no more true than right now in light of the events of September 11 in the U.S., where Lloyd’s exposures have been pegged provisionally at about US$1.9 billion. Speaking just days after the events, Smith notes that Lloyd’s was already assessing its losses and looking to new scenario tests to determine its ability to withstand the terrorist attack claims. Lloyd’s had insured the World Trade Center as well as both airlines involved in the events.

Although some have accused Lloyd’s of dragging its heels in coming up with a loss estimate, Smith says because of the unique nature of the market, it would be a complicated process to determine entire losses. He did say, however, that even early indications showed Lloyd’s losses would be manageable.

The lack of certainty surrounding the impact of the terrorist attacks is something being dealt with by the entire industry, he notes. “Every time I turned the [newspaper] page, the losses went up $10 billion.” He predicts it will take weeks, even months, to understand all of the exposures. “The whole business context is changing because of the events in the U.S.”

One question is how the event may impact the market’s capacity. The Association of Lloyd’s Members (ALM) had predicted capacity for the market would be up substantially next year, from 11 billion pounds sterling to 13-14 billion pounds, due mainly to market hardening and the entry of large corporate members such as AIG. The ALM had also predicted the market could begin to turn a profit again as early as 2002. “A lot of those judgements are now on hold,” Smith says.

The real impact on the marketplace could be seen over the next few weeks as investors are asked to make their commitments for 2002. Some factors did point to contraction in the marketplace, including the demise of several insurers, including U.S.-based Reliance, Australia’s HIH and Independent in the U.K.

The damage done by terrorist attacks goes beyond claims, Smith notes. With some of the biggest names in the insurance industry facing the personal loss of staff members, “this is much more personal to everyone in the industry”, he says.

Cracking down

What Lloyd’s future holds has been a source of debate and speculation. Following the trials of the past, including the heavy asbestosis losses in the U.S. that led to a settlement deal with many Lloyd’s members in the 1990s, the market has been tightening up its regulatory compliance and focussing on profitability. “Ultimately profits and losses are made by the syndicates, and there’s a lot of focus at the level of managing agents over where business is going. What are the unprofitable lines? Where are things going wrong?”

Along with the rest of the industry, Smith says the market is seeing much needed hardening of rates. “At the syndicate level, on a day-to-day basis, you can see the correction.” The market’s regulatory division is cracking down on those syndicates “that contribute disproportionately to the losses”, and addressing the level of exposure each syndicate brings to the market, “and to the Lloyd’s brand name”. Attention will be paid to the level of capital these syndicates will have to bring to the table in the future based on that exposure, he notes.

These changes and the financial issues that inspired them, however, are not unique, Smith points out. “I don’t think our problems are particularly different from the rest of the industry. Our numbers make headlines because they’re particularly large.” The struggle to reduce costs and boost profits is universal to the industry, which faced a 112% combined ratio in the first quarter of the year. “It’s sad to say as a whole the industry has performed particularly badly…It’s pretty grim news all around.”

Time for change

In conjunction with Lloyd’s “London market modernization plan”, Smith will be looking at ways to improve the efficiency and profitability of the market’s Canadian business. Rate increases will certainly help the cause, although he points out that Canada seems to be lagging behind the U.S. in this department. But, cost reduction is another key to achieving the end goal.

The Telus plan is part of the cost reduction scheme and a response to “the type of business and service improvements Lloyd’s needs to stay competitive,” he explains. Lloyd’s is also making it easier for brokers to do business with the market through a new accreditation process allowing some brokers to deal directly with Lloyd’s underwriters. Traditionally Canadian brokers have worked through London-based intermediaries. In October, Montreal brokerage B.F. Lorenzetti and Associates became the first Canadian firm to be grante d direct access to the market. The new broker plan is “not necessarily linked to better results…it was really taking a look at the cost of doing business at Lloyd’s” and a response to U.K. regulators, says Smith. Other Canadian applications are being considered for the program. “This is an initiative we see as running parallel to the traditional distribution chain…wholesale Lloyd’s brokers will continue for many years to come.” Brokers in Ontario also have access to Lloyd’s.com, a “dating agency” in Smith’s words, linking brokers to Lloyd’s underwriters for particular risks.

Smith promises that Lloyd’s tradition of insuring some of the most interesting risks in the industry will continue. The market has long been known for taking on bigger, stranger and just plain riskier risks. “This is reflective of what Lloyd’s is,” he says. “We have a lot of capital available and a lot of risk-taking, entrepreneurial underwriters that are willing to take a look at these risks.”

He does admit, however, that over time what once seemed unique risks covered by Lloyd’s have become today’s “typical covers”, such as professional liability. But, the “best known, least understood brand” in the insurance industry will surely continue to make headlines for its unusual policies, Smith asserts. “I’m not sure you’ll find the industry will start to specialize in insuring Madonna’s body parts going into the future.”