London may be the home of the modern insurance industry but 2011 find its markets in a state of flux with regulatory and industry challenges galore  not to mention some debate over bribery thrown in.

Broker Aon held an analytics conference in London earlier this month and as part of the two day event hosted a dinner in the Museum of London saw part of the museum’s exhibits is one section where visitors can trace the history of the Square mile and the Royal Exchange to Lime Street the insurance market and its history figures strongly for reasons both good and bad.

There maybe those in the modern Lloyd’s market which may hanker for those bygone era where things looked to be far more simple. Risks were not really fully understood but they were underwritten all the same.

Having moved into the twenty first century haven ring fenced the asbestos issues which threatened to implode the Lloyd’s market there will have been a feeling that now was time to concentrate on what the market has traditionally done best – deliver the innovation and products which enable it to assume risks other market will not consider.

Yes there is competition from global centres, but the plans for a New York Exchange have withered in the vine and given the number of Bermudian, European and US underwriters which are in situ London remains the place to be.

The first quarter of the year will have hurt the reinsurance market but not fatally. Lloyd’s syndicates have reported their exposures to the Society and while there has been no announcement of hard and fast figures the feeling in Lime Street is that the costs will not be prohibitive.

The underwriting cycle remains in the doldrums despite the recent losses. Underwriters in London have been talking of the events in New Zealand and Japan hastening the turn but brokers remind clients that talk is cheap and that it will be a brave firm which hardens their stance while others pontificate.

It is not the core business of underwriting risk which is taxing the market and taxing may well be the most opportune term in this case.

The UK government has sought to do something to create a level playing field for London compared to its international rivals but it will not be able to compete with the taxation arrangements in other centres notably Bermuda, Switzerland and Ireland although pressure remains on the Irish to rebalance its taxation policies in the light of its need for a European financial bail out.

The likes of Brit, Hiscox and Amlin have moved offshore and Brit made it clear that its decision to head for the Netherlands was driven by a security over the taxation system.

Regulation also looms large with the demands associated with the proposed implementation of for Solvency II costing both time and money.

London’s companies and markets have been working hard to ensure they are ready for the 1 January 2013 deadline although there are growing rumours that the deadline may well be further delayed with some consultants predicting that the regime itself is in danger of unravelling in the months to come.

Investors have given the regime the thumbs down believing it will have a negative impact on businesses but underwriters in London and elsewhere have no option at present but to invest heavily to ensure they are not caught out.

The UK regulator the Financial Services Authority is also undergoing a radical change. Whether is it paying the price for the banking crisis its roles and responsibilities will be split and there will be two entities now operating in the re/insurance space which has led to fears being voiced that the market will come up a double regulatory burden at a time when losses are significant but there seems little real move to harden rates providing further pressure of firms to tighten their belts until the market turns in any meaningful way.

July sees the implementation of a new law which the London market fears may well have another profound effect on the ability of the ULK to underwrite and transact business across the world. The new UK Bribery Act will come into force on 1 July and it has been a long time coming quite simply because of the broad almost “catch all” nature of what can be deemed to be bribery in the future.

Its implementation had been delayed as UK business had sought some degree of clarification as to what would constitute a bribe given that corporate hospitality is included.

London thrives on the face to face relationships between underwriter and broker and the hospitality provided by underwriter and broker to their clients has long been an established part of the workings of the market.

But the International Underwriting association has already circulated its membership in the London company market to warn that re/insurers need to monitor a number of ‘risk hotspots’ to ensure they do not fall foul of the new Act.

The broad nature of the legislation raises potential issues for both carriers and brokers in areas including the placement of business, payment of claims and the use of delegated authorities. As a result the IUA’s Compliance Committee drafted a guidance paper to help member companies put in place effective anti-bribery policies.

“The introduction of the Bribery Act represents a significant statutory shift in the UK,” said the IUA’s Head of Market Services Chris Jones. “It creates new offences and penalties that make the country one of the toughest jurisdictions for bribery legislation in the world. The scope of the Act is really quite broad and individuals that breach it may face up to ten years imprisonment and an unlimited fine. Companies can also be hit with unlimited fines.”

re/insurers may face potential criminal liability if they do not take proactive steps to review their bribery risks and also ensure they have procedures in place to stop other parties bribing on their behalf.

For example, payment and receipt of commissions related to the placing process may raise issues relating to broker remuneration and gifts and corporate hospitality. Bribery could also take place in the claims process if a broker who receives a claims handling fee as the agent of the insurer is induced to act improperly.

The Act also makes it possible that underwriters could face liability if their coverholders, in the UK or overseas, make a bribe while performing services on the insurer’s behalf. This requires companies to consider checks and procedures around the appointment of such coverholders.

Mr Jones added: “It is clear that insurers need to be assured that their existing market practices and compliance mechanisms are adequate in light of the new Act.

“Of course the risks involved should not be overstated nor should they unnecessarily impact the efficiency of writing insurance, both in the UK and abroad.

“What is needed is a risk-based approach that will focus upon specific jurisdictions, relationships and business practices. “

Current Lloyd’s Chairman Lord Peter Levene who steps down from the role in October believes the regulatory issues are not just confined to London but that the city shares the threat of over regulation with its peers in Europe.

Speaking Germany earlier this year Mr Levene said: “ The current myriad of proposals to fix banking regulation often confuses insurance and banking. Politicians around the world are feeling the enormous weight of public expectation to do something. But it is not enough just to do something. You have to do something good. Something worthwhile. Above all, something that will fix the problem. That doesn’t mean more regulation, it means better regulation.

“The reason why we need careful, considered regulation is because Europe needs to compete – not just with the US, but also with the new economies, such as China, Brazil and Russia. Germany is, at this stage, the exceptional European country, which is recording high levels of growth as well as stability. “

He said Lloyd’s and the London market played a significant role in the market but business has to understand that its role was not to eradicate its risks completely.

“Ultimately what the market, Lloyd’s brokers and risk managers share, is not the ability to make risk go away, but to manage it, to allow firms to take the risks they need to grow with a sense of security. And that is critical in today’s post recession world.

“Lloyd’s understands that its role is to help businesses rebuild in times of crisis. Part of what makes the market special is the palpable pride in Lloyd’s reputation of helping industry to manage their risks. Of course we make money, we aim to make good profits, and there is nothing wrong with that. But when people talk about the great and defining moments for Lloyd’s, they don’t talk about great profit years. They talk about how we have innovated.

“Behind every great inventor, there stands a great insurer. We continue our reputation for bespoke, highly expert underwriting which can price the most complex risk. For example, Germany is a leader in clean energy and we have supported many renewable power installations across the world.” 

Lord Levene added: “People often say to me that the role of the insurer has grown ever more complex, that the world is a more risky place than ever before. But I do not believe that is true.  We have always lived in a risky world. The key question we need to ask is, could we in business have foreseen some of our risks, could we have managed them better?  I am a strong advocate that risk can be mitigated and can be reduced. But this takes foresight, planning, and fundamentally, imagination and – sometimes - courage. It also, of course, costs money.

“The main point about Lloyd’s is that our development, over three hundred years, from when merchants gathered in Edward Lloyd’s coffee house in the City of London and pooled their  risks, has been led by the development of industry. As industries have evolved, or declined, we have had to find new products, understand new innovations and crucially, price new risks. “

He warned that the industry had to meet the challenge of emerging  risks

“Lloyd’s policies are quality products. They are crafted by some of the finest underwriters. And they are backed by a highly secure capital structure.

“In recent years, Lloyd’s has given a great deal of thought to issues like climate change, nanotechnology and the effect of globalisation on the risk landscape. A very strong piece of advice which I would give to brokers is to keep aware of what is happening in the world outside insurance. You need to understand not just the risks which your clients face today, but those which they will face in the future”.