IT was Lord Davies, the former boss of Standard Chartered and current trade minister, who put it best. Speaking at a gathering of senior figures at Drapers’ Hall organised by the City of London on Monday night, he pointed out that among all the chaos in financial services, there is one player that has emerged with its reputation reinforced. He was referring, of course, to Lloyd’s of London, our 321-year old insurance market. While the banks have suffered, London’s huge insurance industry has helped steady the boat and helps to explain why the reduction in employment across the Square Mile has been much less severe than predicted.
Its trading update yesterday didn’t disappoint. Lloyd’s said it remained financially strong, with total assets exceeding solvency shortfalls by its members of £2.55bn at 30 September, roughly the same as three months earlier. In 2008, Lloyd’s profits halved after hurricanes Ike and Gustav contributed to total catastrophe losses of $50bn, making it the industry’s second-costliest year ever. A lot of the market’s recovery this year has been due to luck – investment returns have been boosted by the recovery in stock and bond markets – but also, quite clearly, to prudent management.
Much of Lloyd’s success is attributable to Lord Levene, its chairman, and Richard Ward, its chief executive. Levene is one the City’s most powerful advocates and one of the few who has stood up for it publicly in recent months. But not enough has been written about Ward, whose reforms and modernisation of the market has been a key reason for its resilience. He had the guts to impose greater centralised controls in areas where they were needed, while still allowing Lloyds’ syndicates to retain their traditional independence. Ward has a refreshing background: he has a PhD in Physical Chemistry from Exeter University. In the 1980s, he worked as a physicist for the Science and Engineering Council, before joining BP; when one talks to Ward, it is immediately apparent that his scientific experience is serving him well in this completely different environment.
Insurers measure their profitability in very specific ways: Lloyd’s combined ratio is a measure its underwriting profitability based on the ratio of net incurred claims plus net operating expenses to net earned premiums. A ratio of 100 per cent is break even; over 100 per cent equates to a loss; less than 100 is a profit. Lloyd’s combined ratio of 91.6 per cent is getting a little worse but is much better than the 100 per cent for US property and casualty insurers; 94 per cent for US reinsurers and 99 per cent for European insurers and reinsurers. But it is not as good as the 84 per cent in Bermuda, symbolically a great problem for London, which is battling an exodus of firms, capital and talent to low-tax jurisdictions.
Lloyd’s greatest problem is that the tax code in Britain is hugely uncompetitive and getting worse. The Tories and Labour need to think clearly about what they can do to make sure that insurance stays in the City. That must eventually mean much lower corporation tax; a reversal of the 50p tax rate; and other pro-growth, supply-side policies. The aim must be to fight back against low-tax jurisdictions, grab business from Europe and for the City to start regaining market share. As soon as George Osborne tires of bashing bankers, he should schedule a meeting with Ward, one of the great victors of the recession. There is no time to waste. email@example.com