Reformers

LUKE SAVAGE

Of all the executive offices on the 11th floor of Lloyd's, the one designated for use by the chief executive is the most impressive. It has a panoramic glass wall, with St Paul's Cathedral in the near distance and sweeping views of the West End skyline, as yet uncluttered by Foster & Partners latest City edifices.

When Lloyd's last chief executive Nick Prettejohn departed in autumn 2005, Luke Savage shifted his responsibilities from finance director and moved into this imposing office. He has been keeping the hot seat at the right temperature, but will soon relinquish it to new chief executive Richard Ward.

Savage gained respect from many managing agents over the past 12 months for his work on the new independent capital assessment (ICA) regime. Respect for him grew and some hoped this would propel him into the chief executive position.

"I was not surprised that Nick left. He had been with Lloyd's for six years which is a long time for any chief executive in the present day.

I was pleased and honoured to get the opportunity to do this job.

"I can't comment on whether people wanted me to take the job full time. You'll have to ask them but I feel I have developed good relationships with certain members of the market," says Savage.

Ward's learning curve has been described as "vertical" but Savage, another outsider who came from the banking community, draws on his own experience and believes the curve is "easily manageable".

His overall objective with the ICA provision was to allow individual managing agents to be assessed on their own merits. It also put the onus on underwriters to fully understand and calculate their risk-based capital and reserving requirements.

"You have a market where there are a bunch of individual businesses that must be treated as individual businesses. One of the drawbacks with the previous capital provision structure was that it treated everyone as market average.

"Despite it treating everyone as market average, I still think it was streets ahead of the rest of the insurance industry. Nonetheless, it still caused grounds for concern among market members," says Savage.

The demand was there and Lloyd's decided to leverage the FSA's ICA regime as the basis that its model "made sense," according to Savage, as it saved the market from going down a "parallel routes scenario" where managing agents would be expected to comply with dual regulatory requirements.

"We could have stuck with our old capital regulatory model for two to three years which de facto would have left members abiding by two different systems," explains Savage.

Individual assessments of Lloyd's capital provisions should break down barriers to new entrants and should allow those vehicles which wish to write the unfashionable long-tail liability or marine lines of business to be judged on their own merits.

With Amlin and Hiscox both launching Bermuda start-ups to take advantage of the post-hurricane season business, there has been talk of the demise of the Lloyd's market.

"You have to look at some of the jurisdictions where people can write business and wonder about the long-term sustainability of this market.

"Capital ratios for those writing motor business in Gibraltar are so low that we wouldn't want to see that type of business in Lloyd's. The flip side is to say that is 35% minimum for motor, will that remain? That figure may not be set in stone.

"These places, and Bermuda is there too, are in competition with Lloyd's but we must make sure that Lloyd's remains attractive," he says.

When he replaced Andrew Moss, the previous finance director, in 2004, Savage was in the centre of a horrendous windstorm season. Then in 2005, it got worse.

"Now analysts predict that the heat from the waters around the Gulf streams will mean 2006 is another event year. I think the market is very resilient to windstorms and dealt with 2005 very well.

"When we put out our early windstorm loss estimate in November, we said it would cost the market a net £2.9bn and that the likelihood that making a profit in 2006 was small. That is in total contrast to 2001 when the catastrophic losses of 9/11 were estimated at £2bn but eventually the loss was more than £3bn.

"We, and the market, are in a much better position to understand what is happening and this is directly attributable to the great work Rolf Tolle and his team have achieved in the market," Savage says.

After the hurricane season many major insurers were downgraded but Lloyd's kept its 'A' rating status which Savage is very proud of.

Will he miss the 11th floor office? "I am quite looking forward to going back to the 5th floor because I have a three year strategic plan to work on.

"I have the next three years mapped out," he says.

- Elliot Lane

STEVEN HAASZ

Inheriting the unenviable mantle of having two months to breath life into the dying beast that was Kinnect is something even the worst Lloyd's critic would sympathise with. Possibly. In September last year Steven Haasz was thrown exactly into that deep end with two months to sort out the £70m flop of Kinnect.

The market didn't want Kinnect. Alternatives were looked at, but rejected.

It seemed to be a case of how to get out of the disastrous Kinnect labyrinth without losing too much face. "We had to admit when we had made a mistake," Haasz says of the Kinnect debacle. Some mistake at a cool £70m.

"Well I don't think it was the easiest decision. But it is a strength of an organisation when you admit you have made a mistake and not shy away from it. It was important for Kinnect to have the full support of the market, which clearly it didn't." Fair enough.

He adds, however: "We are a market, and a market solution should be built and grounded in reality, and have support from the market. If the support is not there we cannot go forward. When Kinnect kicked off it was a central solution, but by 2005 Aon and Benfield had invested their solutions and developed their capability. They were not saying we have no confidence in Kinnect, it was just we have confidence in ourselves." That assertion is more debatable.

But the problem that Kinnect tried to address still exists and shows no sign of being solved. Paper mountains are still part of doing business at Lloyd's. "We are moving away from Kinnect but not the overall problem in the market," admits Haasz. While at the time he says: "We should be setting standards not building solutions." It is an easier mantra to live by than Kinnect, but it could, in time, present its own difficulties.

Haasz came to this strategic post having been given an elevation from the responsibility of change management and human resources, and he now has a three-year plan to sell. Ironically, a plan is something that is unprecedented in Lloyd's history. Never before has it looked longer than a few weeks never mind three years. "That is a fair comment," accepts Haasz.

"The plan is a plan to take us to a place. It is not something that says where we are at the moment, so we have showed our intentions looking at the costs of doing business at Lloyd's and access to Lloyd's. If it is expensive, we ask: 'what is expensive?'. Understanding the cost base and the driver of cost is very important. Then we can look at cost reduction."

But he adds: " I, and other directors, have changed the situation and worked very hard with the market, the LMA and franchise board and representation from brokers to go forward.

"We are trying to do what it says on the tin and provide an 'optimal platform'. So I would say this is the best place to do business. The key point has to be for clients to bring the risk."

But it is also about longevity and focusing in on business.

"We need to look at the risk of continuing to underwrite in bad years and maintain performance and cut the cost of the cycle."

- Andrew Holt

JULIAN JAMES

Julian James is relaxed and planning another hectic year travelling the corners of the globe. The director of worldwide markets is stoical, but positive about the future of Lloyd's under the new chief executive Richard Ward. James was the insider tipped to take the top job but lost out to the outsider.

"Myself, Luke Savage and the franchise board will be dedicating our time this year to making sure Richard gets up to speed and we will support him in his efforts," says James.

His role over the past few years has been to express and initiate the Lloyd's branding strategy, which he feels "has made Lloyd's a far stronger market externally." His vision of a modern underwriting floor, rid of the "toilet paper ticker-tape" and dated Teletext screens, to be replaced by Nasdaq-like trading floor might take shape under Ward's stewardship.

Ward created the international oil export electronic trading platform and the expectation is he can achieve the same at Lloyd's.

China and India are the two new territories on the Lloyd's target list this year.

"We should get the regulator's approval by the end of the year. In 2007, we will be ready to enter the Chinese market.

"The attraction is that its size will bring scale. It does have virtually every peril, such as earthquakes, flooding and windstorm but it has opportunities.

Lloyd's has been involved in the Chinese reinsurance market for 25 years and we have a physical location on the mainland. Lloyd's wants to expand on this. And it is the same for India," says James.

Last year's hurricane season was a "shocking event particularly the massive human devastation" says James, and wiped off millions of pounds worth of capital off the Lloyd's managing agents balance sheets. "But that does not mean underwriters cannot take risks from the Gulf of Mexico," he adds.

Negotiations over the past 12 months over the TRIA agreement on terrorism in the US meant James was on Capitol Hill for much of 2005. "Questions on terrorism insurance and how we tackle this in the future has led the ourselves and the LMA discussing alternatives with the government.

"The Treasury has asked all stakeholders what our suggestions are and we must submit those by April this year. The consensus is though that terrorism should be offered as a federal cover."

- Elliot Lane

ROLF TOLLE

Rolf Tolle is in defiant mood. "I can't see Bermuda in any way competing with us on the breadth of business we are doing here. They just don't have the talent, the people, or the ability to do that."

Scathing it might seem, but don't let his confidence be confused with disrespect.

Tolle might work in an insurance market not known for its passion for change, but he is not blind either to the attractions of Bermuda.

"For certain businesses Bermuda is a good platform," he concedes. "The main reason for that is the no-tax environment. When you go there, you write business which is highly volatile and because it is highly volatile it also has potentially high reward. But it is always on the assumption that you don't make losses."

The Bermuda benefits have already seen the likes of Amlin, Hiscox and Catlin, some of Lloyd's major players, spread their insurance wings and set up separate trading platforms there.

This has led many to ask, will others follow?

Tolle is quite clear: "I don't know of anybody who has plans to do that and for a very simple reason. There is a danger that if you are a mono-line writer in Bermuda you will have increasing capital requirements, which are quite harsh. They could be of a size where your return on equity possibly decreases quite a lot. If that is the case then you need to reduce the capital requirement, which you cannot develop in Bermuda."

Competing with Bermuda

In the London versus Bermuda debate, Tolle is keen to point out that at Lloyd's you have the benefit of its licence, its rating, and its capital requirements.

"In the long run, if we also then perform and have the bottom line results we can easily compete with Bermuda, because we have less volatility than them." Clearly Tolle is not a man with an inferiority complex. "When you look at the results, we have been on par with them without any problems and when you look at our strategic plan, we are now addressing our weaknesses."

So, as part of the Lloyd's therapy, what flaws will the franchise board be facing up to in 2006?

Tolle is quick to dismiss the issue of cost. "People don't say, well because the Lloyd's market is so costly I will go to another area, which is low cost." In fact, he insists it is something for the market to debate and not for the board.

"What we can do is, over time, take some of the excuses away for why costs should be higher in this market by creating an environment where processes become more streamlined. And by taking some of those excuses away it should enable us to drive costs down."

Instead, the self assessment is driven by objectives set down in Lloyd's 40-page document Building the optimal platform. Namely, to have a better performance management framework; a more optimised capital framework; a proper rating; access to the markets that really count; and improvements in business process reform.

On performance, Tolle insists the challenge will be to achieve the overall profitability for the market.

With the losses in 2004/2005 and the "higher probability" for further losses in 2006, Tolle's task is to get people to act and react in a more disciplined way so that Lloyd's can "maximise and optimise" the return at any give point in market conditions.

"Perhaps the most difficult challenge to achieve is to get the changes in business process reform done in time, fast enough, and to the extent necessary where it really makes a difference from a cost perspective," he explains.

With long term investment in the Chinese reinsurance market now under his belt, Tolle is setting his sights on India. When that is done he believes Lloyd's will be able to cover all the major markets. "Brazil is also something which will come in time, and when it opens up then we will have to address that, but that is really down the road."

There is much to be done for the franchise performance director and his board, but let's not under estimate how far they have come.

"2004 and 2005 were the two worst years from a CAT perspective," says Tolle.

"We have gone through that without anybody having to turn the central fund and we have come out of it stronger."

Lloyd's is by no means a finished article, but for Tolle the market is reacting "much more proactively" to the changes necessary; the board has installed a good business plan process and installed an atmosphere of co-operation.

"When you say franchise what you really mean is to change culture and culture you don't change overnight. So, when you look at what we have achieved over the three years then I think it is quite amazing.

- Emma Jones.