Here in London many of us have been scratching our heads about one of the apparent paradoxes of the Lloyd’s Blueprint One reforms.
Lloyd’s has laid on a banquet – a feast of ideas, concepts, frameworks and consultations.
The menu is hundreds of pages long and if written out in full the individual recipes would fill vast appendices.
When faced with such a huge document it is sometimes hard to see any overarching theme because all the minutiae cause too much interference. This makes some of the dishes seem out of place.
For instance, we wondered why at a time when immature fledgling managing agents are falling like flies, should Lloyd’s be contemplating an influx of many times their number of even smaller, even less mature businesses with its syndicate in a box initiative?
These micro morsels are the little independent food stalls of the market.
Some wonder what chance do they have of graduating into full three course Michelin-starred sit-down meal establishments, when the mid-sized affordable dining options offered by the likes of Acapella, Vibe and Pioneer have already failed to prove sustainable?
I’ll digress to remind you that my answer to this has been that if they are profitable they will be fine, regardless of size.
The myth that scale is essential has been comprehensively de-bunked, even in an environment where Lloyd’s has a marginal cost disadvantage to its peers.
Plenty of big businesses lose money while plenty of small, supposedly sub-optimal ones do perfectly well. As one reinsurance CEO summarised to me many years before this soft market had outstayed its welcome: “no-one ever went bust by having an expense ratio that is slightly too big”.
But, back to the point – and the big picture.
It was only yesterday during a long conversation with Sheila Cameron, the CEO of the LMA, that it suddenly occurred to me what the major prize of the Blueprint One reforms could be.
We were dissecting the nuances of Lloyd’s proposed Leader/Follower reforms when a large part of the whole picture came into view. Eureka!
If the new syndication and capital reforms are successful Lloyd’s will be able to remove any reason for medium, small or even micro-sized businesses to worry about lack of scale and allow them to concentrate on the things at which they excel.
Scale will automatically spring from being really, really good at what you do.
What do I mean?
Well, great underwriters should be able to start a Syndicate In a Box with only small levels of entrepreneurial capital. If they are good enough they will be allowed to graduate to become designated leaders in their class of business.
Under the lead/follow and capital reforms such underwriters will then be able to garner huge automatic and semi-automatic following lines. They will also get paid by that following capacity for the work they are doing and the value they are adding.
Their small size will be absolutely no impediment to their success.
Indeed quite the contrary, we already know how valuable nimbleness and speed of manoeuvre is. But, more importantly, the smaller the new businesses are the more meaningful the subsidy from the following market will be to them.
Imagine a small team of ten people, only able to write £10m for their own account but swiftly allowed to control £100m in annual capacity.
Each percentage point fee on that extra £90m is going to subsidise that small workforce to the tune of £90,000 a head. The economics could become very sweet very quickly.
In culinary terms it is like a little gourmet sourdough pizza van business being plugged into a machine that almost overnight can transform it into a global giant like Pizza Hut (but a Pizza Hut with much tastier pizza!).
Lloyd’s has the distribution and worldwide licensing to make it a reality.
This is one of the major prizes of Blueprint One.
Under this model you won’t need to have the heft of a Hiscox, Amlin, Beazley, QBE or Axa XL to be properly in the game - you should be able to make your way simply on the quality of your intellect and the originality of your products.
The past decade has been one in which most entrepreneurial underwriters have spurned the world of balance sheet start-ups for MGAs. Only a handful of exceptional outliers with blockbuster track records have been able to raise the sort of $1bn+ cash needed to do successful launches at scale.
These were a very select few who knew the bankers who in turn knew where to get the big bucks.
One mouth-watering prospect on the Lloyd’s Blueprint One menu is that the big bucks will soon know to come to Lloyd’s to seek out the talent and not the other way around.
Great underwriters won’t have to leak into the MGA world and neither will they have to go on roadshows seeking billions. They will stay within Lloyd’s and gain in stature and experience, until some graduate to be the Hiscoxes and Beazleys of tomorrow.
It will be the revival of a classic entrepreneurial Lloyd’s dish.
And that will be a meal worth coming a very long way to sample.