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London market clings to its old ways.

London Market Clings to Its Old Ways

Critics of the Lloyd's of London insurance marketplace say it has been undermined by modern means of communication. What special value is there, they reason, in a broker being able to visit a multitude of underwriters all housed in the same building? He can instead sit tranquilly in his own office and negotiate face to face with them through video display terminals.

The argument is a strong one, but there are other considerations. While in theory we all publicly welcome the boom in electronic networking and the increasing computerization of the insurance business, in practice underwriters and brokers evidently still favor the arcane and antiquated business tradition of meeting face to face. Thus, not only is Lloyd's optimistically planning for its future expansion, despite today's electronic wizardry, but there is an eager acceptance by London insurance companies of the concept of yet another centralized insurance marketplace, an insurance and reinsurance bourse.

Perhaps it is a benefit of change that even if London market practice is not greatly modified by technological advance, at least critics will not be able to point to an outdated infrastructure. So, the London market continues to transform its business structures while hankering after the old ways.

As to the future of Lloyd's, computer and communications technology has reached the point where it is possible to dispense with the paperwork for many transactions. Also, now most Lloyd's underwriters and brokers are members of an electronic networking system called Limnet, whose aim is the reduction of costs and improvement of service through the use of the most modern technology. The scope of Limnet, an IBM-based system already being used for electronic mail, inquiries on data bases, accounting and claims settlement, is not bounded by the Lloyd's market but takes in most of the London insurance company market as well.

In the European context, reinsurers have an electronic network system, Rinet, to streamline the handling of business. The system will have a pilot test this fall involving 17 insurers across Europe.

Standardized accounting information and electronic mail will be exchanged between the participants, including Munich Re, Swiss Re, Skandia and Mercantile and General. Rinet is also in discussions with Limnet about interconnection and hopes this can be achieved in the early 1990s. The more than 70 members of Rinet include 15 of the top 20 European reinsurance companies.

The idea of a new insurance and reinsurance bourse, a potential rival to Lloyd's and the Institute of London Underwriters, has been incubating for little more than a year. In the past 12 months, the idea has progressed from a proposal for a reinsurance bourse largely made up of small- and medium-sized London companies to a non-marine insurance and reinsurance exchange that has the support of Britain's largest reinsurers. Within a couple of years, London will almost certainly have a new insurance exchange that will rub shoulders with Lloyd's and the Institute of London Underwriters.

Since the new exchange is in non-marine, it will not be in competition with the ILU but will be directly competing with Lloyd's for a wide range of business. Initially the exchange will operate as a single marketplace, a gathering of different companies' underwriters under one roof. The 17 companies that are the prime backers of the exchange have each subscribed 10,000 [pounds] and given a 100,000 [pounds] loan facility toward the building which will eventually house them.

Meanwhile, Lloyd's, whose motto these days might justifiably be "constant change is here to stay," continues to dream up improvements in the hope of staying at the forefront of the world's insurance markets. Ironically, the major problem Lloyd's faces is a consequence of the system which makes it unique: the principle of unlimited liability of its individual members, the people who together, in groups, capitalize the market's syndicates. At present, there are 12,000 of the 32,000 members whose liabilities for certain past years of account are unquantifiable. Liabilities against the so-called open years total at least 500 million [pounds]. Some members face bankruptcy costs to bail out their syndicates.

Surprisingly, Lloyd's is against changing the unlimited liability principle, presumably on the grounds that this is what gives the market a special status in the United States and elsewhere. The idea originated by Lloyd's is for a reinsurance company to take over the liabilities of open years for a realistic premium. It is easy to envisage bugbears. What, for instance, would be "a realistic premium" for unquantifiable liabilities? Reinsurance is already available for Lloyd's syndicates, as for anyone else, but the cost is prohibitive for unquantifiable liabilities.

Suppose for a moment a new reinsurance vehicle is set up for the off-loading of open years' liabilities. Surely the principle of unlimited liability will be breached if the reinsurance mechanism works in such a way that for all practical purposes it will become impossible in the future for members to lose their personal fortunes. But if it does not work in this way, what is its purpose?

Chris F. Best is the editor of Foresight, a London-based risk management and insurance journal published by Risk and Insurance Group Limited.
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Title Annotation:Lloyd's of London insurance marketplace
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Oct 1, 1989
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