Lord Levene, Lloyd’s Chairman during a meeting in Dublin did a speech to the Insurance Institute of Ireland.
Good afternoon, ladies and gentlemen. It is a great pleasure to be in Dublin.
Thank you Adrienne for your kind words. May I also thank Denis Hevey for his opening remarks, and of course Anne Brady and her team at the Insurance Institute of Ireland, for organising this superb event.
The title of this talk, ‘The Future of the Insurance Industry’ lends itself to one of those ‘glass half empty – glass half full’ conundrums. Given the economic crisis we’re all still navigating, many people might view the phrase as loaded with the implication that the future of our industry is rocky – but that is not my view.
But I have always been an optimist, and I’m glad to say, despite the unpleasant economic conditions, I remain one today.
I’d like to focus my talk on three areas. First, I’ll set out my views on the current economic situation and how our industry fits into this picture.
Second, I’ll turn to the broader risk environment and how we as an industry should be preparing ourselves for emerging risks.
And thirdly, I will talk a little about the position of London and Dublin as great centres of insurance going forward.
So what of this economic crisis?
While I’m an optimist, I’m also a realist and there can be no doubt at all that we are still in the midst of the worst economic crisis the world has seen for 70 years. The sums involved in the response of governments, be it through bank recapitalisation, fiscal stimulus packages or borrowing, indicates the scale of the malaise.
There remains a lively debate about whether we have reached the bottom of the recession. The hunt for the fabled green shoots is an increasingly popular vocation.
We are at that difficult stage where one day brings a bit of good news and the next hopes are dashed with some awful figures. It’s that classic and testing mix of recession indicators, some forward looking and some lagging. In the UK, the recent quarterly rise in unemployment was the largest since records began and unemployment is at its highest level in 10 years1. In the US, it’s at an astonishing 9.5% and the OECD predicts that about 30 million jobs will have been lost globally by the end of next year2.
So how does the insurance industry fit into this picture?
Firstly, it’s important to remember that some parts of the financial services industry – thankfully including insurance – have come through the recession largely unscathed. I needn’t overstate to this audience that we insurers are, after all, selling a non-discretionary product. Even as asset values fall, our customers still need to buy cover for their risks.
The recessionary environment also increases demand for our services as businesses seek to protect their remaining assets and their bottom line. It is, after all, little known outside our industry that the insurance cycle is counter cyclical to the stock market and that the insurance industry did better during the Great Depression than for most of the boom years of the 1980s.
That isn’t to say that insurance companies have all escaped involvement in the recent calamities. The near-death experience of AIG last September should act as a warning to us all about the dangers of getting involved with products that you don’t fully understand.
But in general, our industry is in a strong position. We haven’t been subject to the devastation inflicted on other sections of the financial services industry and the wider economy. But far from merely surviving, our industry is in fact living in an age of opportunity. But success will only come if we use our resources of intelligence, expertise and entrepreneurship to anticipate future trends and to seize these opportunities.
Moving on to opportunities for the future
At Lloyd’s we have noticed several opportunities that arise directly from the current recessionary environment. The growing trend among companies to spread their risk benefits a syndicated market such as ours.
There is also in times like these a flight to quality. A recent poll found that a third of corporate risk managers and executives said they have replaced – or expect to replace – their insurance companies due to perceptions of their insurer’s financial health.
Lloyd’s success
Let me now touch briefly on some of the reasons why Lloyd’s has been able to emerge almost unscathed from the financial crisis and why I am confident in the market’s ability to enjoy future success in the years to come. I believe there are wider lessons to be learned from Lloyds’s experiences.
You will be aware that we had our own devastating problems in the late 80s and 1990s, which resulted in our ringfencing approximately 15 billion Euros of toxic debt to Equitas.
That was our near-death experience and as we emerged from it, we knew we had to take a very hard look at how we conduct our business – our culture, our processes, our priorities. Over a number of years, there have been fundamental and far-reaching changes to almost every aspect of our operations – improving the quality of our business procedures and the stringency of our oversight and supervision. During the recent boom years, we stuck to a cautious investment strategy, much to the amusement of some commentators and more bullish competitors. But it paid off, and we’re sticking with it.
We also stuck to what we know and understand best – traditional insurance and reinsurance products. In essence, we focussed on our core strengths. But we certainly did not stand still. For we like to think that the Lloyd’s brand, over many, many years, has been synonymous with innovation, flexibility and a spirit of adventure.
We remain passionate about expansion into international markets, particularly at a time when growth is more challenging closer to home. We became the first overseas reinsurer to be admitted to the Brazilian market last year and we’ve been operating as a reinsurer in China for two years now. We also recently obtained new establishment licences in Poland, Austria and Portugal.
All of this has helped us achieve profits of 2 billion Euros and to maintain a 2.1 billion Euros central fund. This is a fortunate position, but it is not one we can take for granted. There is no room for complacency in today’s fiercely competitive, global marketplace. There is no doubt that the global recession, with lower levels of economic activity and trade, means that the underwriting environment will be challenging. We are likely to face claims inflation, a fall in insured values and an increasing number of fraudulent claims. There are, as we in our industry know there will always be – continuing and emerging risks.
The wider risk environment
Which leads me to my next theme – the wider risk environment. In a world in which we have seen 9/11, the financial crisis and the Mumbai terrorist attacks, the old maxim of “thinking the unthinkable” is often rendered redundant. Nowadays, the unthinkable happens. Who’d have predicted that pirates would once again be roaming the seas, or that the retail banking systems of the world’s largest economies would come close to collapse because bad loans were made to low-income home-buyers in the US?
Our industry, and indeed all industries, must become ever better at researching, analysing, anticipating and then preparing for future risks. This is something that we do at Lloyd’s, through our Emerging Risks Team. As you may know, our 360 Risk Insight project also conducts and commissions research, bringing business and other leaders together to discuss key risk issues.
The impact of the recession on the future remains unclear. But historical precedent suggests that the effects of economic crises can often ripple out, in an often unpredictable manner, into politics and wider society. It is worth remembering that we have already seen mass protests in Iceland and civil unrest in Latvia.
We have looked at the impact of the recession on political risks. It seems that as the recession bites, the assets of companies operating and investing in emerging markets, with fragile or fractured political systems, are likely to come under increasing threat of expropriation. Piracy hotspots could also re-emerge and the tactics of the Somali pirates may well become the template for aspiring pirates in other deprived regions.
Climate Change
Lastly and perhaps most importantly for our industry is the issue of climate change. 2008 was the third most costly year ever for insurers, and while of course the terrible human cost remains uppermost in our minds, Lloyd’s alone will have to pay out over 2 billion Euros in resulting claims. This is why our teams at Lloyd’s pay such close attention to analysing and anticipating its terrible effects.
We also play a key role in driving debate on risk issues ranging from flood defence, adapting buildings and infrastructure, and development in high-risk zones. We must not let the recession become an excuse for businesses, government and indeed the public to duck or to postpone the important decisions that need to be taken now. Climate change is transforming the nature and gravity of the risks businesses bear and we must be at the forefront of understanding this.
The over-riding conclusion I draw is that our industry must always seek to become better prepared for emerging risks if we are to be able to exploit the opportunities that they present in the future. Beyond that, the very nature of our business, our pivotal role in the business and wider world as a vehicle to allow individuals and organisations to manage risk, gives us a unique insight into some of the most challenging issues facing the world. But with this insight, comes a responsibility, which Lloyd’s takes very seriously, to encourage the wider world, be it other businesses, Governments and even individuals to become more knowledgeable about these super-risks, to anticipate trends and to adapt where necessary.
It often falls to the more established companies and markets, such as those in London and Dublin, which have developed a reputation over many decades, or in our case, centuries, for probity and insight, to take a lead in this.
Which leads me on to say a few words about the insurance market in this great city, and of course, my own.
At a time when there is much speculation about the direction of national economies, the global economy and individual industries such as ours, we should consider what role insurance markets such as Dublin and London might have in this uncertain future.
As I said at the outset, I am optimistic about the prospects for our industry, even against a backdrop of tough times in the global economy. I have already set out some of the reasons why Lloyd’s has done well in recent years and why, I believe, we are well placed to achieved continued success in the years to come. We are the largest insurance market in the world, and of course the City of London is one of the world’s pre-eminent financial centres, and will remain so once the dust has settled from the recent crisis.
Ultimately, the financial centres of London and Dublin are little more than the sum of the excellent, intelligent, entrepreneurial, dynamic people in our companies. And as you know only too well here in Ireland, the ability of an economy, let alone an industry, to attract the best people and the best businesses to base themselves here, will be of paramount importance to future success.
Dublin has established itself as a centre of excellence for insurance based in large part on the strengths of this young, motivated and highly-skilled workforce. But also, the development of the International Financial Services Centre in the Docklands, has given the city a real boost.
As with London, your insurance market has clearly benefited from good regulatory architecture and also a positive working relationship with the regulators. The attractiveness of Dublin as a centre for insurance and reinsurance is such that one of our leading syndicates, Beazley, has just recently redomiciled here and sings Dublin’s praises. Some of the giants of insurance are moving parts of their operations here too. You’ll no doubt be aware that Zurich announced in May that they plan to take their German, Spanish, Portuguese and Italian operations under the control of the Irish parent company.
Dublin and London working together in future
I am often asked to comment on the competition between the cities of New York and London. I think such debates obscure the reality of the financial world in the age of globalisation. It remains my view that competition is by definition a good thing and that the success of one financial centre through innovation and hard work, keeps the other centres very much on their toes. This is certainly true of Dublin, let me say.
Our very geographical proximity means that there is more and more Anglo-Irish business interaction in our industry. We share similar business and legal environments, including those brought about through our EU membership. Indeed we face the prospect of ever greater harmonisation in the regulatory regimes in force in both countries. Ireland and Britain remain avowedly outward looking nations, whose Governments, thankfully, hold no truck with the protectionism that is in danger of rearing its head in other parts of Europe and even the US. And of course there’s our shared love of Rugby and Guinness.
And from a Lloyd’s perspective, we have a long and proud track record of doing business in Ireland. Currently we have 35 active Coverholders with 51 binding authorities and many of these are over 20 years old. We continue to view Ireland as a key European market for all the reasons I’ve mentioned and more.
Conclusion
In many ways, the prospects for Dublin as a centre for our industry are a metaphor for how I feel about the future of the insurance industry in general. Our industry survived the economic crisis unscathed, largely because we didn’t dabble overly in the dark arts of high finance, but also because recessions actually present numerous opportunities.
We live in a world which, even for insurers, seems to have become yet more unpredictable. Super-risks stalk the horizon and the ramifications of the worst economic disaster for 70 years will be felt for years, if not decades to come. But despite this, the future of our industry is bright. To ensure future success we must build on the innate strengths of centres such as Dublin and London. The enduring talent of the people who work in our companies will ensure that we continue to be well-positioned to deal with risks and to exploit new opportunities as they arise – which they surely will.
