20:25 Vision

“I’m not an insurance man,” John Nelson says. It’s a self-aware admission he repeats often, even after nearly a year as chairman of Lloyd’s.

He grew up as a banker, matured in the boardroom, and only now—at an age when most people throw in the towel—has become entrenched in the risk transfer business. Perhaps, as someone who is not an insurance man, he feels acutely like a stranger in a strange land, but he is in a very good position to learn the ropes. His job is to oversee the world’s largest insurance market, which saw 2011 premium income of £23.5 billion ($36.3 billion), and to manage the industry’s most famous brand. As part-time jobs for the uninitiated go, running Lloyd’s of London is pretty plum.

Granted it’s an odd place that Nelson looks down upon from his modest office at the top of Lloyd’s iconic building. Positioning itself as “the world’s specialist insurance market,” Lloyd’s is an arcane organization that manages to be both cutting-edge and infused with a sort of imperialist antiquarianism. It’s the kind of duality that only British institutions seem able to play well, but Nelson reveals neither a hint of awe at the market’s 324-year pedigree nor a shred of concern over its complexity.

“Lloyd’s is a unique organization, no question,” Nelson concedes. He’s not a man inclined to look backward to past glories. It was untapped potential for growth that enticed him to take the top job in London insurance. “The more I looked at it, the more of a business opportunity I could see. That excited me.”

In his short tenure at Lloyd’s, Nelson has put his name on two, broad, forward-looking strategy documents. A three-year strategic plan, launched in 2011, is designed to address immediate needs. More recently—and with much more fanfare—he championed a 13-year aspirational blueprint for development of the market: “Vision 2025.”

David Cameron, the British prime minister, launched the long-range plan this summer with some pomp. Cameron used the occasion to dollop praise onto Lloyd’s during a nine-minute oration that invoked the word great five times. (The PM’s speechwriter had clearly digested the handful of hardcore corporate messages contained in Nelson’s vision, and he was firmly on message.) Cameron’s nationalistic praise for the vision’s planned expansion into emerging markets is one of Nelson’s key themes. And with the British economy sputtering, the prime minister is a devotee.

Nelson’s chairmanship is no ordinary top-man job. The Corporation of Lloyd’s, the central body that has run the market’s infrastructure since 1769, has only a limited say over how its constituent organizations run their affairs. So implementing corporate strategy is not as straightforward as issuing an executive decree or maneuvering an idea through a critical board of directors. Instead, Lloyd’s underwriting agencies, brokers and capital providers must be won over and brought on board. Achieving buy-in from the broad Lloyd’s community for a central initiative is never assured.

This must shape the way any Lloyd’s chairman (who until a decade ago had always been a market professional rather than an outsider) measures the extent of his job.

“The way I look at the role of the corporation is threefold,” Nelson says, launching into a set of verbally annotated bullet points. “First, it has a role as a regulator.”

Since his appointment, Nelson has regularly and publicly awarded primacy to the regulatory function. Lloyd’s has plenty of external regulatory masters, one at least in each of the 200 countries and territories where it underwrites insurance and reinsurance. But the first line of quality control is the corporation itself.

It is a role that has been taken rather more seriously since the market escaped, by a hair’s breadth, the ignominy of collapse in the 1990s. That crisis had been brought on in no small part by hopelessly incompetent underwriting. It was averted only by the indefatigable efforts of the broker Sir David Rowland, one of Nelson’s predecessors and the first full-time chairman of Lloyd’s. When the dust finally settled, those members of the Society of Lloyd’s who remained standing almost universally viewed as positive the more assertive central oversight of the business written under the Lloyd’s policy. Central oversight is also critical to the marketwide financial security ratings which all Lloyd’s underwriting entities automatically enjoy.

OVERSIGHT UNDERWAY

Today, Lloyd’s 10-year-old Performance Management Division is the center of a self-regulatory regime that imposes underwriting oversight on the risk-bearing syndicates, which deploy the capital of “Names” (individuals who provide about 12% of Lloyd’s capital, down from 100% in the early 1990s) at “boxes” in the underwriting “room” (where benches, which echoed the 18th century furnishings of the eponymous coffee shop, have at last been replaced, mercifully, by ergonomic office chairs).

Nelson says the division has passed a hurdle successfully. Potential disaster accumulated in 2010 and 2011, fueled by the eurozone financial crisis and a long string of natural catastrophes. “A coincidence of circumstances led to £13 billion [$20.3 billion] of net incurred claims, yet we produced an aggregate loss of only £500 million [$780.4 million], our capital is at record levels, and our rating is intact. It was a good stress test.”

Nelson says underwriters tell him they genuinely respect the market administrator’s regulatory role. By design, he explains, it eschews intrusion in favor of comprehensive reviews of syndicate business plans. This, he says, will largely cast a light on potential aggregation problems.

“I think they find that, in some respects, this is very constructive,” Nelson says, unusually tentatively. “I think it also means that the regulators outside respect what we do. It means we are taking a knowledgeable insurance approach.”

Paternalistic oversight includes a “significant effort” to monitor U.S. coverholders and MGAs, but it is not the most important element in the link between London and its U.S. producers, he says.

“The syndicates are giving the pen to a third party, so it has to be a trusted relationship,” Nelson says, adding with satisfaction that bottom-line results prove that these relationships have improved. “At all times we are trying to expand that part of our business, and hopefully we can widen the pool.” The old system of “Lloyd’s brokers” was abandoned a decade ago, so today any broker, following an authorization process, can garner direct access to the market. After an all-encompassing wave of consolidation since the 1990s, the few largest brokers dominate the business at Lloyd’s and have increased their market share very dramatically.

“That is a given,” Nelson says. “The aim is to try to expand the amount of business we do with those [few largest] brokers, since even relatively small increases make a huge difference to Lloyd’s.” He has already spent a good deal of time with these organizations “to improve those relationships,” but he also sees potential for growth lying outside the realm of giants. “Medium-sized and small brokers are also very important, in the U.S. and elsewhere,” he says. “Some of those businesses are very specialist, with a great deal of expertise, which is extremely useful to us. It is a great challenge to be all things to all men, but that is what we wish to be.”

The second role of the corporation, Nelson says, returning to his bullet points, is “enabling.” Making things work is “the classic role of any market.” At Lloyd’s this primarily means a mountain of admin—processing the market’s premiums, claims and policies. That, in turn, requires spending money on IT.

“We have a series of projects to improve the processing function by keeping legacy systems up to date,” Nelson says.

He endorses the “gradual and continuous” updating of systems, rather than investment in revolutionary solutions. Lloyd’s has been a place where marketwide information technology initiatives tend to ski off a precipice of hype into a crevice of obscurity. Nelson’s slowly-slowly enabling approach seems refreshingly realistic, and he hopes it will follow the success of the “claims transformation” program, recently implemented, which Nelson says has already provided a reputational boost.

He wants continuous enabling to sit at the top of management priority lists. To boot, in the current age of austerity, he is pitching enabling as linked directly to cost cutting. “I think the insurance market—and I’m not an insurance person, I am new to it—is a place where we all need to pay more attention to costs,” he says.

Running a tighter ship, “lean and fit,” leads to a better bottom-line result, Nelson declares, straying vaguely—and for the first time during a short meeting—toward management philosophy. “It’s partly psychological.”

FARSIGHTED MARKET

The third role of the market’s central administrative body, straightforwardly enough, is to promote Lloyd’s, and to help it to develop its business, both short- and long-term. Here Nelson’s more recent corporate messages, the core of Vision 2025, drift into view. He’s plainly more excited about them than he is about supervision and back-office processes, and they subsume any broader discussion of bullet point three.

He launches into a brief and well rehearsed summary of Vision 2025. “Roughly 80% of our business comes from the English-speaking world,” he says, listing the countries involved, “and about 80% of the market’s capital comes from the U.S., from Bermuda, the U.K., and from Europe.”

This, he says, means that any significant expansion of Lloyd’s specialty-lines business is likely to arise in “emerging growth countries.” This is true almost by default: Western Europe, with its very high insurance penetration, well established insurance companies, and a pair of reinsurance behemoths, has never been particularly fertile for Lloyd’s. Its underwriters’ efforts to capture substantial market share there have garnered only limited success. Chasing growth in the BRICs (Brazil, Russia, India and China) is a tenable alternative to the mundane business of maintaining an enviable international position in Anglophone markets.

Nelson doesn’t mention the Russian Wild West, but Brazil, India and China are territories where, he says, “we have an ambition,” alongside Mexico, Turkey, Poland and Southeast Asia.

Under the Vision, Lloyd’s centrally will work with its market constituents to ensure that it captures a significant share of emerging business.

Grand ideas of ambitious expansion into far-flung markets are bound to set off alarm bells for any experienced insurance man, but Nelson is aware that growth-chasing strategies must be exercised with extreme caution. The oversight role must not be allowed to fail. He mentions several times that newcomers to Lloyd’s must be able and prepared both to meet its capital requirements for underwriting syndicates and to get the details correct.

“We must make sure we do it in the right way, that they have a good track record, and that they get the culture and the underwriting discipline,” he says.

Part of the corporation’s function is to create a market environment in which qualified new participants can flourish while current bread-and-butter markets are not neglected. Vision 2025 calls for maintenance of existing market share in established territories through the increase of underwriting to match or beat local GDP growth. Thus the U.S. is expected to remain Lloyd’s single most important geographical customer.

EXPANDING UNDERWRITING

Key to implementing the vision is attracting foreign insurance organizations from targeted territories to participate in Lloyd’s as underwriting agents. Nelson is understandably cagey about offering further details of current contacts. “To do more business in South America or in China, we need more people from those territories here in Lloyd’s,” he says.

He cites the example of a cooperative venture between the Chinese national reinsurer, China Re, which teamed up with the Lloyd’s underwriting agency Catlin just weeks after Nelson’s arrival at Lime Street in 2011. The Chinese are to capitalize a new syndicate, 2088, with $50 million, which will be used to take a quota-share of Catlin’s existing underwriting account. Earlier this year Catlin opened a representative office in Beijing. The moves are the latest in Lloyd’s long-term entry into the Chinese market, which took its first tentative steps in 2006, when Catlin opened a Hong Kong office, and in 2007, when the corporation formed Lloyd’s China in Shanghai.

The new Catlin deal will see Chinese personnel spend time in the agency’s London offices (a process Nelson describes as “inculcating people into the Lloyd’s market”) and Catlin personnel seconded to China Re. While the arrangements are small at the moment—Catlin’s gross premium income in 2011 was $4.5 billion—the strategy positions China Re eventually to expand its business (through Lloyd’s and Catlin) to assume more risk in China.

Another concrete precedent of vision-style market entries cited by Nelson is the outright acquisition of another Lloyd’s underwriting agency, Kiln, by the Japanese insurance giant Tokio Marine back in 2008. So the implementation path towards Vision 2025 is already somewhat trodden, and Nelson says it’s had “a lot of support from our customers, the brokers.”

CUSTOMER FOCUS

His comment proffers another insight into Nelson’s view of Lloyd’s unique realm. Underwriters, capital and service providers, and brokers comprise the market, but casting the latter as Lloyd’s customers (in place of the end users, the brokers’ clients) is a change of perspective, which may be obvious but perhaps is clear only to someone who is not an insurance man. Most of Nelson’s recent predecessors in the chairman’s suite have been brokers themselves. The new man sees them differently, as the market’s clientele, and has invested much time, by his own account, in treating them as such.

He draws optimism from their faith in the market, citing Aon’s claim that its head-office move from Chicago to a massive new office tower in London was made “in part to be closer to Lloyd’s.” The megabroker’s relocation to “the cheese grater,” a stylish building now under construction on a site adjacent to One Lime Street, provides encouraging evidence of this customer support. It follows the relocation of Willis to a new tower on the site of Lloyd’s 1958 building, and—somewhat earlier—the relocation of Marsh to Tower Place next to London’s 11th century Tower of London. Meanwhile, the purchase last year of the small Lloyd’s underwriting agency Jubilee by former Aon chief executive Pat Ryan is another example of close connections between the broking and underwriting sides of Lloyd’s.

Attracting new international capital under the vision is not intended to squeeze out the few remaining traditional “Names,” the typically wealthy investors who assume insurance risk through the market and traditionally trade with unlimited liability. Their importance has dwindled, but Nelson sees a future for them. Names’ capital “needs to be invigorated,” he says. Nelson has asked the few remaining members’ agents, the firms that manage Names’ underwriting interests, to streamline the system for private capital provision and find new ways to recruit.

Nelson laid out his Vision 2025 expansion strategy early. It reveals his intention to leave a distinct mark on the market, even if, as he predicts, a newly internationalized Lloyd’s does not completely come to fruition during his tenure. If it works, it will be a major achievement.

“Don’t underestimate the power of this,” he warns. “I thought it was important to develop a long-term market strategy. We enabled it, but we wore out a lot of shoe leather talking to people in the market about it.”

Thus, Vision 2025 is a clear and safe plan in the competitive and fractious environment of Lloyd’s, where proprietary ideas have a tendency to scuttle initiative and where garnering consensus on anything is about as difficult to achieve as fire cover for a sawmill without a sprinkler system.

It has a vague waft of familiarity about it, too. Back in the 1990s, Lloyd’s was going to lead the charge into the nations of the former Soviet Union, as a new, capitalist insurance culture evolved there. Later, continental Europe unified under a single currency, which politicians thought would create the promised land of growth. But those territories have proven harder to crack than early optimism anticipated. Early success in the Far East, however, hints that Nelson’s vision could deliver more.

Meanwhile, Lloyd’s core English-speaking markets have continued to yield large and generally profitable results, as brokers around the world rely on its huge underwriting capacity and its willingness to grapple with difficult risks. Approaches to those traditional markets require some tweaking. So do the legacy systems, which provide the electronic infrastructure on which the Lloyd’s market reluctantly must lean. These exist, incongruously, alongside the daily and surely anachronistic practice of forming an orderly lineup of brokers at the box, waiting, often impatiently, to see a man about a risk.

Nelson-the-chairman heaps praise on the face-to-face negotiation that characterizes the Lloyd’s market, but you get the impression that Nelson-the-banker would sweep away this ancient and inefficient practice. But then, he isn’t an insurance man.