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.