John Nelson, the chairman of Lloyd’s of London has just ticked off a must-do item on his list for 2014: open a branch in Beijing.
The Chinese government granted Lloyd’s, the insurance market, a Beijing branch licence as part of a series of deals following a trade summit between Britain’s chancellor of the exchequer George Osborne and China’s vice premier Ma Kai on September 12.
The new Beijing branch is part of Lloyd’s expansion into emerging markets and efforts to diversify its sources of capital, as set out in its roadmap to 2025 published more than two years ago.
“As China industrialises and commercialises it is creating more and more risk. Also China is hugely exposed to natural catastrophes, for example earthquakes,” Nelson told FinanceAsia in an interview.
Lloyds estimates that China is underinsured to the tune of $80 billion a year in premiums.
“There is a big gap to fill, so China is encouraging Lloyd’s and others to come in with specialist products,” said Nelson during a trip to Singapore, Lloyd’s single-biggest hub outside of London. Of Lloyd’s 90 syndicates of underwriters, 21 are represented in Singapore.
“Equally they are keen for the big domestic insurers to internationalise their own business,” said Nelson.
As a reciprocal measure during the trade talks, China’s biggest reinsurer China Reinsurance won permission to expand its business in Britain. China Re is also planning a Hong Kong IPO, according to market sources.
Lloyd’s wrote about £26 billion ($43 billion) worth of gross written premium last year, of which roughly 12% was generated in the Asia Pacific region.
Step-by-step
Headquartered in Lime Street London, Lloyds is not a company but a corporate body governed by the Lloyd’s Act of 1871 and subsequent acts of Parliament. It works as a market where underwriters come togehter to spread risk.
Lloyds is mainly in China reinsuring at this stage. It deals in business-to-business risk, such as catastrophe. It specialises in marine, property and aviation. Lloyd’s is one of the biggest underwriters in the Chinese aviation market.
“The Chinese carriers pool reinsurance and that market will continue to grow because the demand for air miles in China is going up,” said Nelson.
Lloyd’s was granted a reinsurance company licence in China in 2007, with that licence being extended for direct business in Shanghai in 2010.
“We decided about a year ago as part of our long-term strategy for China, we should increase our footprint further by opening a branch of that Shanghai hub in Beijing,” said Nelson.
Lloyd’s is working closely with the Chinese regulators to get the branch up and running but Nelson expects the process to take only a couple of months.
“From a reinsurance point of view it brings us closer to the major carriers who are based in Beijing. That’s the logic,” said Nelson.
Lloyd’s is looking to expand elsewhere in Asia. In terms of putting people on the ground and new licences then Malaysia will likely be next followed by Indonesia.
Collecting capital
Lloyd’s capital currently hails mainly from the US, Britain, Continental Europe and Japan. Reflecting Lloyd’s efforts to internationalise Beijing-based and state-owned China Re and Brazil’s BTG Pactual have recently joined the Lloyd’s platform. “There will be others,” said Nelson.
Lloyd’s is also looking to bring in people. “It’s very important that we diversify the underwriting base, that we train up underwriters from all these territories,” said Nelson.
Lloyds reported a pre-tax profit of GBP3.2 billion last year and a 16.2% return on capital in 2013.
Lloyd’s reports its results for the six months ended June 30 on Thursday. “They will be strong”, said Nelson.
