Financial Services and Markets Appendices to the Minutes of Evidence


Note by Lloyd's



  Lloyd's is a large, successful and uniquely British institution. It is the heart of the London Insurance market, attracting insurance and reinsurance business to London from Europe and around the world. Lloyd's plays a significant role in what makes "the City" in particular, and London more generally, a centre for international finance. The London Market is the world's largest international market with net premium income of £9.6 billion in 1997 and is the largest global centre for reinsurance. Lloyd's writes over half of the London Market MAT business (marine, aviation and transport) and about one-third of the London Market non-marine treaty business. Lloyd's net premium income excluding its UK domestic business in 1997 was approximately £6 billion.

  Lloyd's contributes to both the City and "UK plc" in a number of ways. First, the market it operates generates employment directly via its underwriting and broking businesses. It is also responsible for considerable employment in the many associated businesses, such as other insurance brokers, legal firms, claims adjusting and surveying firms, investment managers and accountants, which rely directly on Lloyd's. In addition Lloyd's has a long standing commitment to the people of London, where our Community Programmes have been assisting some of the capital's poorest boroughs for several years.

  Financially Lloyd's remains a major global player. Over the most recent three years reported, Lloyd's has produced a cumulative profit of some £2.8 billion, largely from overseas earnings.


  Since the market's reconstruction in 1996, there has been a transformation at Lloyd's. The global economic environment has changed, and so has Lloyd's. The market has attracted investment from a large number of international interests, most of whom are significant forces within the insurance industry. With the arrival of new capital the market has a potentially exciting future which could substantially benefit the UK in terms of financial returns and employment. Provided it is able to adapt and grow, then Lloyd's will continue to play a major role.

  Such developments have occurred against the backdrop of enhanced global competition. The booming market in Bermuda, and the industry giants created by the rash of mergers both in Europe and the US, have reshaped the insurance industry. A strong Lloyd's, at the centre of the London Market, is essential if the UK is to respond effectively to the challenges to its position as the world leader.


  Over the most recent five years, the business underwritten by Lloyd's has declined while our main competitors have achieved significant growth. To fight to regain lost market share, Lloyd's needs the freedom to reform its distribution arrangements and sufficient structural flexibility to create new alliances and new approaches to customers' problems. Efficient and effective regulation has a part to play in this.

  The 1982 Lloyd's Act is the essential basis of Lloyd's franchise. But it contains some rigid rules designed for a world that has since changed a great deal. As the political world has changed considerably since 1982, so too has the financial world. Enshrined in the Act is the requirement that Lloyd's Brokers should be the market's exclusive distribution arm. Ironically the Act also contains provisions prohibiting the most natural form of vertical integration, which is available to Lloyd's competitors. Agency relationships, an area of significant difficulty as the market moves towards streamlined structures that combine capital and management, are also set in stone in the Act.

  The Lloyd's Acts were set up through private legislation, which follows a very particular and cumbersome route through Parliament. Amending these Acts takes considerable time and resource, both for the market and for legislators. With a background of rapid change in financial markets, what is needed is a more efficient vehicle to adapt regulation—and one that reflects equal political accountability.

  Lloyd's is not seeking such change in order to give it an unfair advantage; rather it is seeking the opportunity to compete more effectively on a level playing field.

  A fuller note detailing particular areas of the 1982 Act of concern to Lloyd's is attached for your information [Annex 1].


  A short provision inserted in the Financial Services and Markets Bill would provide a practical route to the necessary flexibility. This would create an order making power, which would enable the regulatory aspects of the Lloyd's Acts to be amended as judged necessary by the Treasury, the FSA and Lloyd's. Such amendments would have to be considered by Parliament through the Statutory Instruments procedure.

  The ability to amend these outdated rules will benefit the market commercially, allowing it to continue to compete effectively internationally. More importantly it will also reflect the Financial Services Authority's current approach to financial market regulation, which is seeking the flexibility to anticipate future developments in the sector. The FSA agrees with Lloyd's that the legislation should seek to do the same.

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Prepared 14 May 1999