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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Near the grand facade of the Bank of England, in front of the Royal Exchange shopping arcade, it is plain to see the new balance of forces in the City of London. Office buildings reach low around the London Stock Exchange, while tall towers loom to the east along Fenchurch Street and in the insurance district.
Richard Rogers’ shiny Lloyd’s of London building sits amid the skyscrapers, dwarfed in scale but the reason that so many insurers are packed into a small area. While many banks and asset managers have dispersed to Canary Wharf and Mayfair, Lloyd’s remains queen bee in a hive of activity.
But it’s hard to imagine Lloyd’s being invented, if it did not already exist. A partly mutualised insurance market that emerged out of a 17th-century coffee house where shipowners and merchants met to exchange news, it is unique. While insurance hubs have grown from Bermuda to Dubai, Lloyd’s peculiar constitution and history cannot be replicated.
It has experienced hard times, notably its near-collapse in the 1990s; many of the individual Names who bore unlimited liability for natural catastrophe losses faced ruin. But the insurance cycle has been much kinder to Lloyd’s recently: four years of strong underwriting profits have brought billions to more than 50 insurers and reinsurers making up the market.
Now it faces another shift, with the world becoming even more volatile and a triple departure this year of chair, chief executive and finance director. There is no institutional crisis, despite delays to a long-planned upgrade of back office technology, but Sir Charles Roxburgh, who becomes chair in May, will have to restore management order quickly.
His deeper task is to maintain Lloyd’s improbable success. A physical marketplace of face-to-face insurance broking and underwriting in a historic district seems ill-suited to a world of global capital flows and artificial intelligence. Yet Lloyd’s has restored profitability while managing to increase the volume of direct insurance written both in the market and in London.
Lloyd’s has less than a 10 per cent share of global insurance and reinsurance and just holding its own would be an achievement compared with the difficulties facing London’s stock exchange. But it still shines in the most esoteric and bespoke forms of insurance in which it specialises: the risks of harm to oil rigs or space satellites, or of corporate cyber hacking.
This partly reflects the entrepreneurial tradition within Lloyd’s specialist insurance syndicates. “What I like about them is that they’re brave, or you might say stupid,” remarks one observer. It takes nerve or strong instincts to shoulder a risk for which there is no known market or data. If calculated correctly, this can be more profitable than plainer business.
It also reflects the historic genius of Lloyd’s structure. Its underwriters can syndicate risks through the market and benefit from Lloyd’s credit rating because they are ultimately backed by its central fund. They write policies around the world through the many regulatory licences it holds: even the world’s largest insurers see the benefit in coming to London.
But Lloyd’s has to stay attractive and the task is not getting easier. Hubs such as Bermuda and the US specialist insurance market (in which its syndicates operate) have grown faster. Global insurance companies and brokers do business both at Lloyd’s and other places; they can look elsewhere if London offers inferior best terms.
Technology has also started to encroach on its uniquely human nature. Given enough data, there is no bar to algorithms calculating insurance premiums (Ki Insurance, one Lloyd’s syndicate, is already using them). While Lloyd’s thrives on the esoteric and unusual, every novel insurance contract can be absorbed into a risk model that learns for the next instance.
Still, Lloyd’s has plenty in its favour, not least a brand that no one can fully imitate. Its new leaders now need to run the modern-day coffee house efficiently, and upgrade its technology smoothly and soon. They must be careful to retain its advantages, including its credit ratings and licences. The government has to ensure that regulation does not put off global investors.
This all matters not only to Lloyd’s but for the City of London and the UK. Insurance comprises a third of the City’s economic output and much of it depends on the presence of Lloyd’s amid the skyscrapers. It might not be invented now, but Britain should be thankful that it once was.
