Lord Levene, Lloyd’s Chairman gave few days ago (September the 15th) a speech related to the insurance industry. The dinner took place in Sir Peter Westmacott’s residence in Paris. One year after Lehmann Brothers’bankruptcy, Lord Levene talks about the economic situation, the french insurance market and its predominant role in the UK industry.
Please find below the full speech:
Ambassador, Ladies and Gentleman,
May I welcome all of you to our dinner this evening and thank most warmly HM Ambassador, Sir Peter Westmacott for allowing us to hold the dinner in his magnificent residence. There are many beautiful buildings in this city but I think you will agree that this is one of the finest.
Peter, we are very fortunate, and most grateful.
And could I also welcome my colleague in the House of Lords, Baroness Amos, who is shortly to take up her new post as High Commissioner in Canberra.
It is a great pleasure to be back in Paris. When I spoke at this event last September we were at the start of what would become a truly unprecedented period in world history. Exactly a year today, Lehmann Brothers filed for bankruptcy. The following day, the US Government had to pledge 85 billion dollars to save the world’s largest insurer, AIG.
Autumn 2008 was a season of shocks, when the unthinkable didn’t just become thinkable, it happened so often that it seemed to become normal.
I would like to take the opportunity this evening to consider what the lasting effects of the crisis may be and what the future holds for financial services.
So where is the economy now, a year on? Autumn is not traditionally the season for green shoots, and we should be cautious about predicting recovery prematurely. Despite some recent encouraging data – more so here in France than the UK – as the Governor of the Bank of France has remarked, the situation is still fragile[i].
But one thing is clear. This economic crisis is different. The debate is not simply a question of whether we are out of recession and into recovery. Or how quickly we can get back to business. The past twelve months have built up a huge impetus for change. Discussions about financial regulation are not just happening in banks or finance ministries or tidied away in the business pages of newspapers. Regulation has become a front page story. People across Europe – and the US – want to ensure that the autumn of 2008 is never repeated. So unsurprisingly, governments and regulators have reacted.
It remains to be seen whether, in fact, the recent series of G20 meetings will be as influential as the Bretton Woods meetings in the post war era – the last time the international community gave as much focus to global economic systems.
A year on from the Lehmann’s collapse, despite a glut of views and punditry, we still lack a clear vision about the future of global financial services. In my mind, one thing is clear, this vision must tackle irresponsible risk taking and address the excessive reward culture that lost touch with reality. I know that the French government has taken a clear stance on the issue of renumeration[ii]. Perhaps one of the indicators of the extraordinary world that we are living in is that a former Chairman of the IMF is now a “pay Tsar” in the French banking system[iii].
But it is crucial that regulators remember the importance of proportionality, commerciality and workability.
Tackling bonuses is, in my view, essentially a side show. The crucial point is to ensure that risk taking is backed up by capital and careful analysis.
This brings me to the insurance industry. There are a number of dangers for us, in the face of all this condemnation of the financial services sector. The first is that our regulation gets tangled up with the banking industry. Insurance is not banking and we need to be treated individually. A key difference is the way that the two sectors have managed risk in recent years. Insurance is all about preparing for and managing risk, not about taking uncalculated risks!
A measured, conservative, attitude to risk runs throughout Lloyd’s. In the way we have managed our central reserves prudently and the way we resisted the temptation to insure complex financial products that we didn’t understand. So today, we are in good shape.
Despite this, another danger, for all of us in the industry, is that risk becomes a dirty word. I am not suggesting that anyone in the financial services should become a risk junkie, but nor should we shy away from necessary and well judged risks. Risk is an essential part of any business. If Lloyds took no risks, planes would not get of the ground, trains would not run, offices would not be built and businesses would not function.
Security is not the absence, but the management of risk. Insurers sell security when they buy risk. And without this exchange, there will be no growth, no innovation.
The trick, as the Solvency II regulators are no doubt finding, is getting right the management and control of the risk. And backing it up with capital. Lloyd’s historic ability to do this means that we can face the future with a good degree of confidence.
Confidence is something which, according to UK media sources, is booming in France. Over the Summer, I saw several articles on an old theme: Can Paris become the new London?
This reminds me of another, possibly less known example of geographical rivalry: Can Sussex become the new Champagne? According to this thesis, the soil conditions and warming climate of southern England means that English sparkling wine can reasonably bid to rival Champagne.[iv]
I am told that some of these wines have done extremely well in blind taste tests. And I do not doubt it. But I also know that any self-respecting Frenchman will tell me it takes more than the right soil or climate. The success of the great champagne houses is the culmination of hundreds of years of technical skill and knowledge of the customer.
The City of London is in the same position. Over the centuries, we have weathered many economic storms and financial scandals and we have stayed at the top because we have adapted, to change, to circumstance, to competition. And we will do so again. Most of you here this evening are pragmatic business people. So you probably share my doubt that I will be using English wine to toast Paris as the world’s new financial capital.
With this piece of neighbourhood rivalry out of the way, I can say how pleased I was to see encouraging signs that the French economy has moved into growth.[v]
This is a piece of good news for Lloyd’s. France is one of our most important markets. My main aim this evening is to emphasize how much we value our ties with you here in France. We have had an office in Paris for over sixty years, but we do not want to be too Paris-centric. France has a number of important regional financial centres with, not just the global players, but also very experienced and well organised independent brokers. We want to develop stronger ties with the provinces.
Lloyd’s can offer long experience of operating in France as well as experience – and access – to another 200 markets globally.
We offer a high quality, bespoke and disciplined underwriting service. The many syndicates operating in the Lloyd’s market offer a great deal of diversity, but they share at least one thing: a secure capital base which allows us to maintain our reputation of always paying out on valid claims and a common A+ rating.
Lloyd’s combines the old fashioned virtues of prudence and discipline with innovation and creativity. We concentrate on making every line we underwrite profitable.
The Lloyd’s brand, in many ways, resembles the Paris brand. This is a city that has dominated European history – indeed it was the global financial centre in the 19th century. Everywhere you go, you see the past, but the past doesn’t dominate. Just up the road, there is the grande pyramide – there is the arc at La Defense and, in Beaubourg, the Pompidou centre.
The Lloyd’s building of course has a family resemblance to the Pompidou centre. They share an architect. But all these Paris landmarks tell part of the story of the city – its determination not to rest on the laurels of the past, but to keep relevant, to keep surprising the visitor.
And this is what we strive to do at Lloyd’s. Let me [join the Ambassador] in thanking you for coming this evening. Before we dine seems an appropriate time to assure you that Lloyd’s still has an appetite for innovation and for risk. But it is the appetite of a gourmet, not a gourmand.
Bon Appetit!
[i] Christian Noyer, 9 September, Europe 1 radio.
[ii] Letter of Christine Lagarde to the Financial Times, 4 September.
[iii] Economist “Ca fait malus” 27 August.
[iv] Telegraph “Bollinger beware: here comes a Sussex Sparkler” 28 October 2006.
[v] Credit Agricole Economic Research Department “France; a technical rebound or a sustainable recovery” 26 August.
