Lloyd's must beware of the Bermuda triangle

Anthony Hilton12 April 2012

SAX RILEY, the chairman of Lloyd's of London, delivered the upbeat message on Wednesday that the insurance market could write a record £12.3bn of business next year as it takes advantage of the rise in premiums following the World Trade Centre attack. That is an increase of £1.3bn on this year's £11bn of capacity. Once again, it would appear that the market has demonstrated its ability to recover from adversity.

But without wishing to undermine Riley's claim, the picture is not quite as rosy as it looks. Since the terrorist attacks of 11 September new capital has been flooding into the insurance industry from around the globe but, worryingly, relatively little has been going into Lloyd's. Far more has gone to set up new businesses in places such as Bermuda.

Arguably, what this disparity underlines is not the success of Lloyd's but increasing awareness round the world that its cost base is too high and its structures outmoded, and it is here that Riley should be devoting his energies.

In fairness, there has been progress and through a joint venture with Xchanging, a brilliant new outsourcing company, the market is making a serious effort to bring efficiency to its back offices and claims handling. But despite endless committees, consultants and proposals it is still proving incapable of addressing the bigger problem of the costs and complications of the annual venture - the fact that each syndicate in Lloyd's has a life of only 12 months.

The few thousand individuals still in Lloyd's are clearly fans of the annual venture but the companies providing the bulk of the capital would like to see the back of it. While these two factions remain deadlocked the rest of the industry is voting with its feet and heading for Bermuda. There is a warning here to all in Lloyd's which should not be ignored - least of all by Riley.

MPC mistake

WHEN Charles Goodhart was at the Bank of England he developed a rule which said that the moment the authorities came to rely on an economic-indicator it would start to misbehave. I feel a bit like that about the monetary policy committee.

At a book launch last week the Chancellor and others sang the praises of the MPC and claimed it provided a bedrock of stability for the British economy. That would worry me were I a member of the MPC. If its success is such that even the Government is giving it credit, and if Goodhart's Law applies to institutions as well as indicators, its luck must be about to change.

Because inflation has always been seen as the threat, the success of the MPC has always been measured in those terms. But if the real threat to the global economy in the coming years is deflation rather than inflation, the 'success' of the MPC needs to be seen in a different light. The fact that not once in its four-plus years of existence has it hit the inflation target - and indeed has consistently undershot - then becomes a cause for concern. Because policy has been too tight, it has been giving aid and succour to the enemy - deflation.

We need to recognise that because the whole world's economy has stalled at once, companies have been robbed of their pricing power and face an unprecedented squeeze on margins. Volumes could be next to suffer when the rising tide of unemployment here and in America stops consumer spending in its tracks. Then deflation will really begin to bite and companies will behave as they did in the 1930s, cutting costs and employment and aggravating the downward spiral.

We have in Japan a classic example of how the authorities have been brilliant at restraining inflation, and with hindsight can see how they failed to anticipate the disaster of deflation. There is still time for us to learn from this mistake.

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