Ask not for whom the bell tolls, Lloyd’s of London. It will toll for thee, unless thou gettest thy act together. When a vessel sinks, the Lutine Bell is still rung at Lloyd’s, where headline half-year results suggest the market is buoyant. However, a deeper dive shows this flagship City institution is less seaworthy than it should be.
The profits of underwriting syndicates were 22 per cent higher, at £1.46bn, on sales that were 5 per cent better at £16.3bn. But the improvement reflected sterling’s fall against the dollar. This lifted the value of premiums and investments denominated in greenbacks. Lloyd’s underwriting profit crashed £800m to a grisly £206m, it said.
Canadian wildfires were partly responsible. Higher claims can be a good thing for Lloyd’s, because catastrophes stimulate demand for cover. Less positively, steeper costs were also to blame. Net operating expenses increased £300m to £4.3bn.
Foreign brokers already gripe that the Lloyd’s Building — a vertical, steel crankshaft on Lime Street — is an expensive place to do business. Costs are around 10 per cent higher than elsewhere, according to one estimate.
Member-owned markets are good at meeting new demand through internal competition. Lloyd’s, for example, has a fast-growing specialisation in insurance against cyber crime. But they can also standardise terms of business to the detriment of customers.
Unfortunately for Lloyd’s, its clients are acutely price sensitive because capital has been flooding into insurance as investors flee depressed bond yields, depressing premiums. A lack of disasters to rival the US hurricanes of 2011 exacerbates the problem.
The market must meanwhile deal with Brexit, which could shave 4 per cent off its top line unless it relocates some operations. That duty will fall to the chairman who replaces the nautically named John Nelson next year, and to Inga Beale, the chief executive he hired to help him accelerate modernisation. Her difficulty is that she cannot command members as directly as a company boss instructs employees.
If member firms are reluctant to cuts costs and embrace new markets and technology, they will all be in the same boat. And it will be foundering.