He said while the financial services sector in the United Kingdom has been criticized in the wake of the financial crisis, the insurance side of the industry “is in good shape, and we're ready to do the job that we've always been there for.”

However, despite their strength in numbers, that doesn't mean London or any other sector has the leverage to hike rates just yet–not in this still struggling economy, Lord Levene conceded.

“As far as rates are concerned, as we said, this is a market”–one which, he noted, moves not only “according to internal, but even more due to external events.”

The biggest threat to London and other key financial markets might be a potential overreaction by government officials eager to impose new regulations to prevent another meltdown like last year's, he warned in a speech he gave last week at the Lloyd's City Dinner in London.

“Arguments are raging about limiting pay, curbing bonuses, restricting financial activities–some are even arguing that the financial sector in the United Kingdom is too big and needs cutting down to size,” he told the gathering. “That it is not 'socially useful,' and therefore we can dispense with parts of it. That the so-called 'real' economy is somehow superior and morally better.”

Lord Levene called this “dangerous talk,” pointing out that the economic crisis has been “global, not just British–and it involves only a part of the financial industry”–and not necessarily the insurance side.

Defending the London market, he added, fallout from the economic crisis is “certainly not a reason for politicians and policymakers to start undermining the U.K. financial sector–which is one of this country's great national assets. There is a very real danger that we shall end up doing irreparable damage to one of the strongest sectors of our economy.”

Regarding the market's outlook, Lord Levene told NU that while he has heard “as many people are being bullish as being bearish, this says one thing to me, which is that we're going to stay–unless something dramatic happens–not a long way away from where we are now.” Otherwise, he asked, “what's going to drive it? What's going to change things?”

Andrew Kail, U.K. insurance leader for PricewaterhouseCoopers in London, observed that “we're still going to see a soft cycle. I don't see why, in certain classes, if we don't have a major loss event and there's still excess capacity, it will change.”

The reason, he said, is that in the corporate world, “the CFOs are sitting there, with many still in a recession, sales are falling off, they're laying off people–insurance is an expense.”

The pressure then flows downstream to the risk managers and chief risk officers, who are being challenged by their boards to keep costs down–including insurance, he added.

“Therefore, they're telling their brokers they need to save 20 percent. The pressure from the corporate buyers is to soften the cycle and take expenses down,” he said. “While that is the case, brokers are going to be representing their clients by looking to take costs out of the industry.”

While some organizations may run the risk of being underinsured, he said that for many risk managers, it makes sense to buy insurance based on employee head count for some coverages. Property coverage wouldn't change unless some company locations are closed, but “the pressure is still there to buy less,” he added.

Mr. Kail said an insurer unable to get a rate increase might instead improve its return by taking on less risk. So if a client wants to take out 20 percent of its premium costs, “the only way the insurer can do that is to effectively provide less insurance.”

Regarding the outlook for 2010, he said, “my sense is that, even if the economy is the same, we're technically uncertain the economy is coming out of a recession. We're still in an economic downturn and that will reduce demand, and I don't see insurers escaping from that.”

What's more, he noted, “we're seeing an industry that's done very well in terms of surviving the financial crisis and is still well capitalized. I don't see where the real hardening of the market comes from, unless you have an industry-changing event–that would need to be many tens of billions before it would change the outlook. From an industry perspective, it feels not particularly positive.”

There will, however, be a tipping point for insurers, he predicted, “where if they're forecasting insufficient income and no back-year reserves of any magnitude to prop up earnings, they'll need to go up on prices.”

He added that once the industry gets to that point–which will vary by class–”the brokers who are demanding rate reductions will be told, 'We're not writing it.'”

Indeed, Mr. Kail observed, “we may see–and we're already seeing in some lines, like credit insurance–that is the position.”

He noted that prices for financial lines are already going up because of concerns “about this being a much more real risk, and there is finite capacity to write it.”

As for the industry's ability to “reload,” he said, “I don't see a problem with the industry attracting capacity if it is required.”

If there was a major catastrophe, he believes the global markets would “come to the industry and provide capital in some shape or form–my view is they would. There will still be a perceived investment opportunity if there is a demonstrable increase in prices.”

Then there is the question of who would provide capacity and who would receive it.

“I think the sidecar mechanism is a very efficient way for those capital providers, if that's their preferred route,” he said. The device is generally used for short-tail exposures, but could be used for long-tail risks as well.

“Would you have a Class of 2009?” he asked, referring to a potential new group of carriers formed to respond to a particular capacity requirement. “I'd be less bullish about that–I'd question the need. Do we need a whole new bunch of startups to provide catastrophe business? Aren't there enough established businesses out there? There are cost and time delays to setting up a business that aren't there with sidecars.”

Romy Comiter, senior manager with SMART Business Advisory and Consulting, in its London office, observed trends around Solvency II, the new European regulatory scheme–in terms of operational excellence and getting more out of an entity.

“Now it's, 'we've sorted out the liability side of our balance sheet, now we have to look at the asset side.' That boils down to cash management, cash strategy and your operation–getting rid of the waste,” she said.

Rather than looking at reducing headcount, however, she advised, “look at what is not core, not value-added. What we've seen is people have bolted-on the London market reforms, rather than adapting the way they do business.”

For example, she said that in merging the required reforms seamlessly into their organization, organizations have added more people to comply.

“If people do the same with Solvency II, treating it like a compliance exercise, and either bolt-on compliance or bolt-on people to do the extra reporting, you're going to become even more inefficient,” she warned.

She explained that there have been some big moves in the market, in terms of applying lessons learned from failures in the banking industry.

“We've seen one technique out of the manufacturing side, called 'lean.' It all starts with what the customer wants. If it doesn't directly relate to customer service, it's non-core, non-value-added.”

The question, she said, becomes how to eliminate or minimize the non-value-added.

With reinsurance, this could mean looking at hard copy in a file, doing manual calculations or Excel spreadsheets, and then keying that into another system, she said.

“Then the reinsurance recoveries get processed through the broker, and there's an entire cash management, cash reconciliation process that goes on,” she explained.

“So if you were looking at something in 'lean,' you'd say, 'How do we get that information to go through the organization, eliminate all the manual handoffs–the duplication of effort?'” Ms. Comiter noted.

She said that with Solvency II and the need to manage operational risk, “this is going to have to be something companies focus on. It's a pragmatic use of technology. But it goes to the old adage–garbage in, garbage out. If you automate a convoluted, wasteful process, you're not going to get the improvements you need.”

She added that the key question is whether companies are getting the necessary information up front, as well as whether the right people are handling the information, and are you “pushing through the information you need to? So it's really getting rid of the unnecessary handoffs, the excessive lead times and the re-assimilation of the data over and over.”

The other area to watch, she said, is cash management–especially expense accounts and unallocated cash.

“It's not uncommon for it to take a number of man-hours just to go through the bank account to realize what's premium income, what's your reinsurance and what are your claims,” she said. Then the information has to be circulated through each of the respective departments to identify what the money is for.

“Again, it's pragmatic use of technology. There are ways of automating this, of setting up matching techniques, so that 80-to-90 percent of your transactions are reconciled at the point of entry,” she said. “Then the team is only left to deal with that 10-to-15 percent.”

This process would apply to insurer-broker and insurer-reinsurer transactions, as well as for making claim payments.

“It goes to Solvency II, because you need to demonstrate you're mitigating your operational risk,” she said. “And you need to understand your end-to-end process, know where the data is coming from and where it's going. This is something London is currently focusing on.”

Tightening up processes is important, she said, because “if you can free up people from doing bank account reconciliation, you can move them on to the more valuable task, which is going out and getting the business, or going out and collecting your reinsurance recoveries. So it's better use of your resources–getting that discipline into your organization,” Ms. Comiter advised.

She also cautioned that while the United Kingdom may currently be more advanced than some other Europeans on such issues, “they need to take a look at their operations, because if the Europeans take this on board and embrace it more rigorously, they will have the competitive advantage over London.”