Mr. Catlin was commenting about the recently released Lloyds consultation document, which lays out a radical program of change that includes a proposed move to a franchise structure.

The franchise structure is designed to “create a disciplined marketplace of distinct, independent businesses, and will place clear obligations on the franchiser to promote the overall profitability of the market,” according to the document developed by the Chairmans Strategy Group. (See NU, July 15, page 6, and July 22, page 6 for related articles.)

A properly run business is not going to feel any serious impact arising from the franchise contract, Mr. Catlin told the National Underwriter.

The franchise proposal wont kill the entrepreneurial flair at Lloyds, he said. “It wont stop entrepreneurial people; it will stop the gambler,” according to Mr. Catlin, who is also chairman of Catlin Underwriting Agencies Ltd., a London-based Lloyds managing agency.

“This franchise concept is going to be a challenge for every business in Lloyds, as it should be in my view, because we need to raise the standards and we need to get to prospective quality control, not retrospective quality control, which is what weve had heretofore,” he said.

“As a business in Lloyds, and one which has raised quite a lot of capital in the last few weeks, Im not interested in staying in the Lloyds marketplace if Im going to have competitors who over-trade, so that when it goes wrong I have to pay for their mistakes,” he explained, noting that Catlin would rather leave Lloyd's and trade outside of the market than let history repeat itself.

Since beginning operations in 1985, Mr. Catlins agency has made money, he said. And he emphasized that he doesnt want people to think that he wants or plans to exit the market.

“I happen to think that the Lloyds platform is a wonderful trading platform to work from,” he said. “Its a great place to write global specialty risks, but we no longer can sit around and allow the weaker brethren to trade on the back of essentially our capital, take giant profit commissions when its going well, and leave us to pick up the pieces when it goes wrong.”

He said the World Trade Center losses demonstrate clearly what he is saying. “Ive looked at some of the line structures that people had in terms of WTC exposures,” he said. “I just cannot believe the extent to which some syndicates have over-traded. Their aggregate gross exposure was far too high, as was their net exposure and their exposure to individual lines. Some syndicates took on risks that were in excess of what their capital base could sustain, which therefore means if it goes wrong, it falls straight on to the Central Fund,” which covers for those who can't pay claims.

Most of the losses at Lloyds over the last three years have been caused by syndicates that were “absolutely appallingly managed,” according to Mr. Catlin, noting that this became clear to him when he was elected chairman of the LMA two-and-a-half years ago.

From the 1997 to the 2000 year of account, the market lost about 4.5 billion ($7.2 billion, at current exchange rates), excluding the World Trade Center losses, he noted. (Some WTC losses might end up being registered in Lloyd's 2000 year of account, if that was the inception year of the affected policies. WTC losses for all years of account at Lloyd's are estimated to be slightly under 2 billion, or some $3.2 billion.)

“My personal view is that if were going to maintain the brand name of Lloyds, if were going to maintain a rating that is of value for the marketplace, we cannot afford to lose that kind of money in the next soft market,” he said.

Mr. Catlin explained that the franchise initiative will assure that managing agencies have proper business planning process, underwriting controls, actuarial analysis of back-year numbers, rating models and premium level adequacy–mechanisms that many loss-making syndicates had failed to institute.

Another consistent theme for loss-making syndicates is that they lost money not just in one year, but in three years. While people in the market were aware that these syndicates were not in very good shape, “nothing was done about it until there were three years of bad underwriting,” he said. “One year of bad underwriting is quite enough.”

The franchise initiative will enable immediate action to be taken, with the possibility that a managing agency could lose its license if corrections are not made to underwriting behaviors. “The franchise creates the structure for a strong Lloyds specialty market,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 5, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.