Lloyd’s of London reviews operations after losing $2.6 billion

People walk outside Lloyds of London's headquarters in the City of London. (Reuters)
Updated 01 August 2018
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Lloyd’s of London reviews operations after losing $2.6 billion

  • Lloyd’s plans number of “workstreams”
  • Issues include costs of doing business, use of technology

LONDON: Lloyd’s of London is reviewing all aspects of its business, including its centuries-old structure, to ensure it is cost-competitive and responsive to both clients and members, especially after Britain leaves the EU, industry sources said.
The review, coming after a £2-billion ($2.64-billion) loss last year and the news in June that CEO Inga Beale will step down, goes to the core of the institution’s hybrid personality, senior insurers and other officials in London’s financial services sector said.
Lloyd’s has been holding board and other internal meetings and separate discussions with broader market participants on the best way forward, the officials said. Precize details of the review have not been disclosed, they said.
“A strategic review is being worked on,” said one financial services source, asking not to be named because he was not authorized to discuss it. Another source, a senior executive at a firm that supplies services to Lloyd’s members, said he understood that included looking at its unique structure.
“The most fundamental question is, what does Lloyd’s actually want to be?” the executive said.
At present, Lloyd’s is both a marketplace for its 80-plus syndicated members and an umbrella body that sometimes acts like an insurer by getting deeply involved in members’ day-to-day practices. It also regulates the members under the auspices of the UK government.
Asked whether Lloyd’s was conducting a strategic review, Chairman Bruce Carnegie-Brown told Reuters on Monday he would not use that term.
“To me a strategic review implies some kind of crisis, where you’ve got to put everything into a big hat and end up boiling the ocean. We are not interested in that. What I think we have is a series of improvements and ideas,” he said in a telephone interview.
He said Lloyd’s was looking at all aspects of the business, however — cost structure, technology, its role as a marketplace and a regulator, and how it mutualizes risk. He said recommendations from an “annual strategy day” in June were presented to the board last week and a number of “workstreams” were being set up.
“I think what we need to do is to look at all aspects of what we do, to try to make sure everything we are doing is done better and turn it into more of an exercise to keep turning the stones over of the things that we do to figure out if we can make things more efficient,” he said.
Carnegie-Brown said he did not see Lloyd’s relinquishing its regulatory duties but said there were “whole aspects of regulation that we need to look at to make sure that we are not duplicating what is already done by other regulators.”
If Lloyd’s was a pure marketplace, member syndicates could be more innovative, accommodating short-term losses for future gains, industry sources said. Doing so would risk Lloyd’s losing the single-A credit rating that benefits all members, however.
“If it’s a marketplace, it’s for each party to come to the market, it’s for them to work out what they want to offer,” the senior executive said, while an insurer would incorporate the individual groups operating within it to form a company.
“I do not think it is being crystal clear which one it is, or wants to be.”
The UK government is keen that Britain, the world’s largest commercial insurance center, remains competitive in financial services after Brexit. Lloyd’s is setting up a subsidiary in Brussels to maintain access to Europe’s single market.
“Lloyd’s needs to ensure that London keeps its edge in insurance, which is vital for the wider financial future of London,” the financial services source said.
Lloyd’s started life in Edward Lloyd’s coffee house in 1688. The futuristic look of its 14-story headquarters in the City belies an emphasis on customs and tradition.
Most business is still conducted face to face. Underwriters and brokers use briefcases or suitcases to carry paperwork around the building; some marine insurers record the sinking of ships with quill pens. The requirement for men to wear ties was relaxed only recently.
The market was almost brought to its knees by asbestos-related claims in the 1990s, which wiped out many of its individual investors, known as “names.”
Members include small underwriters as well as listed UK firms like Beazley and Hiscox and units of global insurers, specializing in complex commercial risks such as marine, aviation and niche energy markets.
Julia Graham, deputy chief executive at insurance buyers’ association Airmic, said Lloyd’s has set up a working group with her client organization to discuss improving their relationship. She said Airmic regularly met Lloyd’s at board level but that a meeting this month was “a bit more intimate.”
“The main point is that they asked us,” she said. “Lloyd’s is still a leader. It’s important that it remains relevant.”
Last year’s two-billion-pound loss, the first in six years, followed a record year of insurance losses from natural disasters globally. London also faces competition from rivals like Bermuda and Singapore.
Lloyd’s will be looking at ways to cut members’ costs, which have ballooned as a result of increasing regulatory and compliance paperwork and rising commissions from brokers, industry sources said. The high costs of operating from London and administrative expenses have also weighed, they said.
A new electronic processing system introduced by Beale, the first female chief executive of Lloyd’s, was unpopular with smaller brokers and underwriters.
“If you are pushing it through an electronic system, there will be little scope for enhancements or individual treatment, which is what a lot of people come to Lloyd’s for,” said industry veteran Andrew Bathurst, director of London and Dubai insurance broker PWS Gulf and a director of Mystic Capital.
Whether to continue implementing the new system at the current pace — 30 percent of all business this year rising to 80 percent next year — is likely to be part of the review, two insurance sources said.
Lloyd’s insurers have an expense ratio of 40 percent, according to ratings agency AM Best, which Paul Merrey, a partner specializing in insurance at KPMG, said is about 10 percentage points higher than competitors.
“The costs of operating are getting out of hand” due to increased regulation, said one senior underwriting source. He agreed the biggest question mark was over structure, however: “What is Lloyd’s? Is it a market or is it an insurer?”


Gulf of Oman tanker attacks jolt oil-import dependent Asia

Updated 15 June 2019
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Gulf of Oman tanker attacks jolt oil-import dependent Asia

  • Iranian threats to close the Strait of Hormuz have alarmed Japan, China and South Korea
  • Japan’s conservative prime minister, Shinzo Abe, was in Tehran when the attack happened

SEOUL: The blasts detonated far from the bustling megacities of Asia, but the attack this week on two tankers in the strategic Strait of Hormuz hits at the heart of the region’s oil import-dependent economies.

While the violence only directly jolted two countries in the region — one of the targeted ships was operated by a Tokyo-based company, a nearby South Korean-operated vessel helped rescue sailors — it will unnerve major economies throughout Asia.

Officials, analysts and media commentators on Friday hammered home the importance of the Strait of Hormuz for Asia, calling it a crucial lifeline, and there was deep interest in more details about the still-sketchy attack and what the US and Iran would do in the aftermath.

In the end, whether Asia shrugs it off, as some analysts predict, or its economies shudder as a result, the attack highlights the widespread worries over an extreme reliance on a single strip of water for the oil that fuels much of the region’s shared progress.

Here is a look at how Asia is handling rising tensions in a faraway but economically crucial area, compiled by AP reporters from around the world:

WHY ASIA WORRIES

The oil, of course.

Japan, South Korea and China don’t have enough of it; the Middle East does, and much of it flows through the narrow Strait of Hormuz, which is the passage between the Arabian Gulf and the Gulf of Oman.

This could make Asia vulnerable to supply disruptions from US-Iran tensions or violence in the strait.

The attack comes months after Iran threatened to shut down the Strait of Hormuz to retaliate against US economic sanctions, which tightened in April when  the Trump administration decided to end sanctions exemptions for the five biggest importers of Iranian oil, which included China and US allies South Korea and Japan.

Japan is the world’s fourth-largest consumer of oil — after the US, China and India — and relies on the Middle East for 80 per cent of its crude oil supply. The 2011 Fukushima nuclear disaster led to a dramatic reduction in Japanese nuclear power generation and increased imports of natural gas, crude oil, fuel oil and coal.

In an effort to comply with Washington, Japan says it no longer imports oil from Iran. Officials also say Japanese oil companies are abiding by the embargo because they don’t want to be sanctioned. But Japan still gets oil from other Middle East nations using the Strait of Hormuz for transport.

South Korea, the world’s fifth largest importer of crude oil, also depends on the Middle East for the vast majority of its supplies.

Last month, South Korea halted its Iranian oil imports as its waivers from US sanctions on Teheran expired, and it has reportedly tried to increase oil imports from other countries.

China, the world’s largest importer of Iranian oil, “understands its growth model is vulnerable to a lack of energy sovereignty,” according to market analyst Kyle Rodda of IG, an online trading provider, and has been working over the last several years to diversify its suppliers. That includes looking to Southeast Asia and, increasingly, some oil-producing nations in Africa.

THE GEOGRAPHY AND THE POLITICS

Asia and the Middle East are linked by a flow of oil, much of it coming by sea and dependent on the Strait of Hormuz.

Iran threatened to close the strait in April. It also appears poised to break a 2015 nuclear deal with world powers, an accord that US President Donald Trump withdrew from last year. Under the deal saw Tehran agree to limit its enrichment of uranium in exchange for the lifting of crippling sanctions.

For both Japan and South Korea, there is extreme political unease to go along with the economic worries stirred by the violence in the strait.

Both nations want to nurture their relationship with Washington, a major trading partner and military protector. But they also need to keep their economies humming, which requires an easing of tension between Washington and Tehran.

Japan’s conservative prime minister, Shinzo Abe, was in Tehran, looking to do just that when the attack happened.

His limitations in settling the simmering animosity, however, were highlighted by both the timing of the attack and a comment by Iranian Supreme Leader Ayatollah Ali Khamenei, who told Abe that he had nothing to say to Trump.

In Japan, the world’s third largest economy, the tanker attack was front-page news.

The Nikkei newspaper, Japan’s major business daily, said that if mines are planted in the Strait of Hormuz, “oil trade will be paralyzed.” The Tokyo Shimbun newspaper called the Strait of Hormuz Japan’s “lifeline.”

Although the Japanese economy and industry minister has said there will be no immediate effect on stable energy supplies, the Tokyo Shimbun noted “a possibility that Japanese people’s lives will be affected.”

South Korea, worried about Middle East instability, has worked to diversify its crude sources since the energy crises of the 1970s and 1980s.

THE FUTURE

Analysts said it’s highly unlikely that Iran would follow through on its threat to close the strait. That’s because a closure could also disrupt Iran’s exports to China, which has been working with Russia to build pipelines and other infrastructure that would transport oil and gas into China.

For Japan, the attack in the Strait of Hormuz does not represent an imminent threat to Tokyo’s oil supply, said Paul Sheldon, chief geopolitical adviser at S&P Global Platts Analytics.

“Our sense is that it’s not a crisis yet,” he said of the tensions.

Seoul, meanwhile, will likely be able to withstand a modest jump in oil prices unless there’s a full-blown military confrontation, Seo Sang-young, an analyst from Seoul-based Kiwoom Securities, said.

“The rise in crude prices could hurt areas like the airlines, chemicals and shipping, but it could also actually benefit some businesses, such as energy companies (including refineries) that produce and export fuel products like gasoline,” said Seo, pointing to the diversity of South Korea’s industrial lineup. South Korea’s shipbuilding industry could also benefit as the rise in oil prices could further boost the growing demand for liquefied natural gas, or LNG, which means more orders for giant tankers that transport such gas.