The early 1980s was a golden era of the Lloyd’s Broker start-up. Men (they were all men in those days) with guile, flair and no shortage of talent, bored by the humdrum of working in old-school-tie broking houses, joined together to create new and exciting businesses. It was no coincidence that the focus for these entrepreneurs was the US reinsurance market where those who were smart and doggedly looked after their clients could reap handsome rewards. They had a great run but companies like BMS moved on to other things; RK Carvill closed its doors; and there is trade press speculation that Towers Watson may consider selling Denis Clayton acquired in 2002, the last remaining of those 80s start-ups.
In a world today of expensive analytics and an evolving myriad of non-traditional financial solutions, the barriers to entry for a small specialist intermediary in the reinsurance sector are so daunting that the vice-like grip of the mega-brokers looks impenetrable. It is not just reinsurance; aviation and even energy, once a fertile ground for start-ups, are also sectors where size seems to not only matter but is everything. Writing in the Insurance Day last week, its editor Richard Banks predicted a bloodbath of small and medium-sized brokers as the diseconomies of scale and regulatory burden bites.
Much is said of the large volume of business sourced into Lloyd’s from the big three and soon it will probably represent as much as 50% of the market’s volume. As the recent debate over sidecars has revealed, there is much headroom to grow even further but it is a journey not for the feint-hearted. Almost certainly underwriters will need to compromise on their accustomed approach to selecting and pricing risk; Aon, Marsh or Willis are unlikely to bend their business model to suit London’s taste.
The pity for the diehards is that to simply focus instead on the second tier is not as simple as turning a tap on. One thing to be said about the class of 1980 was their fierce loyalty to the Lloyd’s market and whilst it is true that independent producers like Miller and Tyser have mostly stuck to the faith, these firms are becoming more the exception than the rule. Consolidators like Cooper Gay and Howden have an international network and ambition that goes beyond London and the strategy of others like Lockton, Gallagher and Integro is steered from their parents in US.
Where once underwriters called the tune, it is now the distributors who have leverage and are setting the ground-rules. To fulfill its vision 2025, Lloyd’s must tailor an appeal and style of trading for different sorts of producers who these days have no particular allegiance other than to themselves and their client. Achieving this and at the same time maintaining high standards of underwriting performance is possibly the biggest challenge that the market currently faces.
Roger Bickmore 
Time has come when Lloyds should consider empaneling Brokers around the Globe so that their business expands. In this age of technology it is pity that Lloyds still patronize brokers based in London or having a base there.
Terrific article Roger. I remember those small brokers and their addresses all too well. Feeling like a bygone era!
The key as you say will be to tailor the underwriting and operational processes in London to the needs of the big 3 – or at least the bigger 10 ( as opposed to expecting it to be the other way round). I think there’s a long bumpy journey ahead for the carriers who can’t or won’t adopt the necessary changes.Its taking a long time but P2P with the top 10 will happen – cost will drive it there.
The inevitability it seems will be for the consolidation of the distribution channels to continue ( opposite path of the 100s of TV channels we now take for granted) – and for Lloyd’s and probably London as a whole to embrace a fully centrally serviced model. The days when the carrier is the team of underwriters and some specialist claim handlers and the rest happens
centrally are certainly foreseeable. The basic question to be faced being if it does not add value to the broker or the insured then why do it here?
As a student just about to embark on a career in insurance, I always find it interesting to learn about how this industry is changing.
To what extent could we say that the concentration of brokers is putting downwards pressure on prices, maybe even contributing to a longer soft cycle?
As always Roger, a great blog. We have fond memories of the 1980s as well. As you point out, the competitive environment has changed since then. Scale has become more important in many areas but elsewhere those that can innovate, specialise and provide independent advice are able to prosper.
BMS still holds onto its original ethos of being an independent, employee-owned business. Our people retain the entrepreneurial spirit exhibited by our founders. We have adapted to the new environment by strengthening our US presence, growing our global footprint (especially in emerging markets), and by building a new underwriting platform, Pioneer.
As a result, we have grown by 27% over the last two years. We may not have the scale of the big three, but we remain independent and innovative. We have talented people…who still have the same spark in their eyes that was there in the 1980s.