Halfway through his first term as chairman of the market, John Nelson says he’s always learning
HANGING above John Nelson’s desk at One Lime Street are a pair of dangerous-looking Lloyd’s swords, traditionally awarded by the insurance market to sailors in the nineteenth century who performed acts of bravery for the British Empire.
Nelson takes one down from the wall and takes it out of the scabbard to show off the gold inscription, careful to point the blade away. He only took up the chairman’s role at Lloyd’s of London a year and a half ago, after a career in banking and various directorships, but he’s absorbed plenty of the firm’s 325-year history in a short time.
His first months were a crash course in the hazards of the insurance business. In 2011, Lloyd’s suffered its worst ever year for catastrophe claims after natural disasters in Australia, New Zealand, Japan and the US.
“Arguably 2011 was the biggest stress test the market had because of this extraordinary cacophony of claims, but there we showed a moderate loss, £500m, capital unimpaired,” Nelson says, sitting in his office before the swordplay began. “It was in the circumstances a very robust result, and that’s a tribute to the underwriting discipline.”
In the past year Lloyd’s has returned to “controlled growth”, despite a $2.2bn battering from claims after Superstorm Sandy, and Nelson credits the profit to the market’s regulation of the 57 firms that form syndicates to insure risk on the Lloyd’s market.
I have meetings in Europe on Solvency II all the time. Does it do anything? Not so far
He is far less favourable about long-awaited European rules for insurance firms, dubbed Solvency II, which now look unlikely to come into force until 2016. “We like Solvency II, we think for a capital setting it’s fine. The criticism we have is the way in which it was introduced, the rules that go around it, which are extraordinarily burdensome and that’s what cost money.
“In our case it cost us £300m and in the industry it cost £2.5bn in the UK, and then they delayed it and it’s uncertain whether it’s going to be introduced. That is frustrating, that is very frustrating.”
Nelson says he meets with European authorities “all the time” to pass on concerns from Lloyd’s agents over Solvency II as the regulators struggle to draft rules to cover the life insurance side of the industry. “And does it do anything? Well the short answer is it hasn’t so far. But we hope it will.” Companies operating in the Lloyd’s market are already working under the Solvency II rules, Nelson adds, meaning delays are not putting a big dent in the businesses.
He is more optimistic about the City’s new financial regulators, the Financial Conduct Authority and the Prudential Regulation Authority, which on 1 April replaced the Financial Services Authority.
“The PRA seems to be adopting a more sensible approach, in the sense that they’re being tough and firm but they’re not putting the administrative burden on the industry that they were two years ago.
“[The FSA] were down in the weeds all the time rather than looking at principle-based regulation, what’s important, what’s really going to affect the security of the industry or companies. We want prudential and proportionate.”
The same can be said for the Lloyd’s expansion plan. One of Nelson’s flagship roles has been the promotion of Lloyd’s as a global insurer.
The task took him to India with the Prime Minister on a trade mission in February, where he discussed how Lloyd’s could benefit from the relaxation of foreign direct investment rules, though the laws that would allow the group to invest are yet to win final approval from politicians.
“It’s always helpful if you’re travelling with the British Prime Minister because you can bring a whole lot of people together to talk about it in a very efficient way, and that’s what we did. What will happen, it’s too early to say. We’re in the realm of politics,” says Nelson of the trip.
While Lloyd’s wants to be at the forefront when fast-growing countries establish insurance markets, Nelson believes underwriters will avoid the trap of expanding too quickly.
“You’re writing new risks where there is not much experience, where there’s not enough data. So you have to be very careful that you’re writing business at the right rates and you’re not just going for growth for the sake of it. Because if you do that in our kind of business, it’ll end in tears probably.”
Asked whether there are particular countries Lloyd’s would like to target, Nelson reels off his list: “We’re fine in North America, we’re in pretty good shape in Latin America, but, you know, you can’t generalise individual countries. Take Colombia, actually a surprisingly important market for Lloyd’s, they’re liberalising their insurance market in the summer with a bill, so that’s good… There are bits of Eastern Europe where we are developing – Poland, we’d like to operate in Turkey, we have discussions going on with the Turkish authorities… South East Asia’s pretty good, China’s fine, Australasia’s fine.”
Before Nelson took up his post opening up Lloyd’s to the world, he spent three decades as an investment banker. Has he spotted ways in which the banks could learn from insurers? “Yes,” he answers, then pauses. “I’ve got to be careful what I say.”
“I’ve observed at very close quarters what’s gone on in the industry in the last decade, and as we know, it hasn’t been a very pretty picture, both from the point of view of putting the customer first, and from the point of view of the culture within organisations and that’s been in part, but only in part, driven by wrongly structured, in my view, remuneration.
“I think, although I’ve got to be careful – we all live in greenhouses – I think remuneration and incentives in the insurance industry are calibrated about right. It feels about right.”
He adds that banks have made progress. “They started out in the UK by changing the management at most of the top banks, which I think was sorely needed and they are setting out on a path that is different from their predecessors, which is good.”
Asked if he feels similarly up to speed with the insurance business, he answers immediately: “No”.
“I can no longer say I’m the new chairman, but I think you go on learning. Look, I’m in an industry which is populated by people who have been operating in the industry in most cases all their career. I will never be as fully versed as my colleagues who have been in Lloyd’s for 20 or 30 years.
“Am I enjoying learning? Oh yes.”
CV: JOHN NELSON
1970: Qualified as a chartered accountant
1971 - 1986: Kleinwort Benson’s UK and US offices
1986 - 1999: Lazard, corporate finance division
1999 - 2002: Credit Suisse First Boston, chairman
2002 - 2011: Several directorships including non-exec role at Cazenove, deputy chairman at retailer Kingfisher and chairman at property firm Hammerson (a position he will hold until May)
October 2011: Lloyd’s of London and its headhunters Odgers Berndtson pick Nelson to replace Lord Levene as its chairman for an initial three-year term
Other interests: Trustee of the National Gallery, senior adviser to Charterhouse Capital Partners