Insider View: The Standard Syndicate run-off

Earlier today this publication broke the news that The Standard Syndicate is being placed into run-off.

First, a few observations.

This is a major event that is sending shockwaves through the London market. It will have far-reaching and long-lasting consequences.

It is a forceful start for CEO John Neal and his still relatively new performance management director Jon Hancock.

The unambiguous message is that Lloyd’s is deadly serious about dragging the performance of the whole market upwards. No ifs, no buts and no excuses.

In realistic terms it also confirms what this publication has strongly hinted at for some time now – that Lloyd’s is currently closed to start-ups.

By start-ups we mean 100 percent new entities with no existing book and absolutely zero business or income on day one. Entities that want to transfer existing profitable portfolios may come and have a chat if they want – and if they can prove beyond doubt they will bring business – but anyone else can wait.

Regardless of the caveat about firms with transfer books, any manager of a well-run business with a profitable portfolio at this stage of the cycle will get the message and stay away of their own accord. The timing is wrong and Lloyd’s has other priorities.

The news is also very bad for the London labour force. The briefest of searches on The Standard’s website lists 117 London contacts. And even though we can assume that not all of those people will go, clearly a lot of those jobs are under immediate threat.

There are other Lloyd’s businesses in the same situation, inching their way nervously through the minefield of the 2019 business planning process. If they didn’t understand how high the stakes were before, they certainly do now.

The Standard Syndicate run-off also goes to the very heart of the fundamental question of what Lloyd’s is supposed to be.

Is Lloyd’s an exchange where trading entities do business and, provided they put up enough collateral to cover their margin calls and don’t do anything to jeopardise the financial stability and integrity of the exchange as a whole, are largely left to their own devices?

Or is it a more cohesive entity than that? One where laggards must not be allowed to drag the whole down, where collective underwriting profits are as important as individual returns – and therefore a place where controls and safeguards must be far more intrusive and prescriptive?

It used to be very clearly the former, not the latter.

But the world in which Lloyd’s operates has changed fundamentally.

It previously didn’t have a credit rating. It didn’t need one because trust in the chain of security was absolute. Today two out of three of its ratings are on negative outlook.

These days ratings agencies factor in assessments of underwriting prowess and operational and enterprise risk management into their models. Solvency II brings similar assessments into play from a regulatory standpoint.

The harsh fact is that the Corporation’s hands are more tightly tied than they have ever been. It has to act in the interests of the market as a whole. Downgrades would damage the franchise.

But this episode also begs a major question of judgement and fairness.

Knowing all of this and knowing the state of the market in 2014, why on earth did Lloyd’s approve a business plan for The Standard Syndicate? With hindsight was that fair?

It did not require much analysis. Anyone in Lime Street would have told you that the timing was wrong and that the nascent business would be almost guaranteed to be loss-making for many years.

Why allow something in, let it grow and employ staff and then effectively – if not in point of fact – shut it down a few years later before it is anywhere near reaching critical mass?

Such behaviour is incoherent at best, schizophrenic at worst.

Back in the 2009-11 era and even in 2005 before KRW, Lloyd’s had an iron focus on underwriting profit and cyclical discipline was writ large in of all of its strategic communications. In 2009-11 it was a major theme on these pages.

New entrants slowed to a trickle. Then something changed and the flow increased significantly.

But now the taps have been firmly shut.

Stop-start, boom-bust, feast-famine.

Lloyd’s must do far better at articulating exactly what it wants and what sort of a partner it will be for risk takers and their capital providers.

Losing a notch on your rating is one thing, but losing a 300+ year reputation for consistent and transparent dealings and sound judgement would be far more damaging.