Speech to Spanish Insurance Week

It is a pleasure to be back in Madrid and to be taking part in Spanish Insurance Week for the third year running.

It is almost inconceivable how much change has taken place during that time. I am determined this morning not to join the doomsayers and to try and sound a note of optimism. There is no getting away from the fact that we are in the midst of the deepest global recession for 70 years, that we are experiencing unprecedented economic turmoil and the possibility of global instability. Despite all of that we are an industry in pretty good shape. I would even go so far as to say that we are living in an age of opportunity and that we are well positioned to ride out the economic storm we find ourselves in.

So let me start with an interesting fact that puts this into perspective - the insurance industry has historically always done well during recessions. Ultimately the long-term trend in profitability is not linked to the economic cycle, with statistics showing that the industry did better during the Great Depression than for most of the boom years of the 1980s.

Now that is not to say that insurers will be immune from the effects of the recession. The dramatic bail-out of AIG, America’s largest insurer, proved this, but despite some high profile casualties, insurance remains a largely non discretionary product. While asset values will fall, businesses and individuals will still need to buy cover for their risks. In fact, some argue that the demand for insurance will be even greater as businesses seek to protect their assets and shareholders.

And as they do, we are seeing a greater desire to spread risk. For a syndicated market like Lloyd’s and for our coverholders – this is welcome news. A recent poll conducted by Oliver Wyman and RIMS 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 insurers financial health. Insurer strength and security now ranks as one of the top three issues for risk managers

This means that there is a huge opportunity for a syndicated market like ours, not least one that is in good financial health. We need to capitalise on this and not be afraid to sell our strengths.

It is worth reflecting on just how much progress we have made as an industry in recent years. A 2005 MORI Captains of Industry Survey found that banking came out as the most favourable industry (66%) with specialist insurance ranking second from bottom at 42%, just above management consultancy. How times have changed. The banks are being vilified for their more exciting image and we have been labelled a ‘relative safe haven’.

And rightly so. This is something we have worked hard to achieve. But we have to recognise that as a market and as an industry that the job is not yet done. If the current economic crisis tells us anything, it is that we must not let up in our focus on underwriting for profit and improving levels of customer service.

There is no doubt that our customers’ expectations are growing. This is partly due to another trend we are seeing - Risk Managers finally taking their rightful place on boards.

The 2008 Ernst and Young Risk Leadership Survey found that fewer than half of Chief Risk Officers or risk committees had explicit authority to influence key activities. We are now beginning to see Chief Risk Officers expanding their expertise within organisations. According to a recent survey by the UK risk manager association AIRMIC, just under two thirds of its member companies had increased its interest in enterprise risk management, and one recruitment agency is predicting that by July half of all financial services companies will have a risk professional on their boards.

There is also recognition that one-size-fits-all valuation tools are not appropriate to assess the levels of risk in complex businesses with highly individualised operations, cultures and financial structures, and that insurance solutions need to be much more tailored.

Insurers can therefore gain competitive advantage by delivering more personalised programmes for clients. As the world’s leading specialist insurance market this is something we know too well.

And of course new risks are emerging all of the time. We have recently commissioned a report on political risks and recession that will be launched in early June. Initial findings show that the recession is likely to have a significant impact on political risk with expropriation risks set to rise as the recession deepens. As pressure increases on state finances, we are likely to see growing protectionism, nationalisation and forced review of business contracts. Furthermore, civil unrest and labour disputes will inevitably result in supply chain disruption as the recent spate of pirate attacks in the Gulf of Aden demonstrates.

These brief examples only seek to highlight the extent of the insurance industry’s role in the global economy and how it is set to grow.

So how well are we positioned to meet the challenges we face and capitalise on the opportunities that are likely to present themselves in the coming months and years?

As I mentioned earlier, as an industry we are in good shape but what about Lloyd’s as a market?

Lloyd’s has so far emerged almost unscathed from the financial crisis. We have learnt from the past and transformed our business. Since our own troubles in the 90s, we have changed almost every aspect of our business – taking steps to improve the quality of our business and the stringency of our oversight and supervision.

The creation of a new franchise structure in particular has led to fundamental changes in our business model – a model which has helped to keep us on course, despite record insurance losses in recent years.

In addition, Lloyd’s has always maintained a conservative investment strategy. We expect conservative strategies to remain the rule.

Meanwhile, the Lloyd’s market has retained a focus on traditional insurance and reinsurance products. Unlike some other insurers, Lloyd’s underwriters have stuck to what they are good at, and have not sought to diversify into complex financial products and markets – such as credit insurance – that they don’t understand. This rejection of exotic products must have seemed highly unadventurous a few years ago, but now seems a prudent business model – especially when combined with our strong franchise performance framework.

This was shown in our latest set of financial results. Despite the financial crisis and the scale of natural catastrophes, we posted a market-wide profit of over 2 billion Euros for 2008, a good performance - and frankly, better than we expected.

However, I must sound a word of caution at this point. The insurance market faces the challenge of its own market cycle right now. And there is no clear evidence yet of where the insurance cycle is going to end up this year – although we remain optimistic.

According to AonBenfield, some parts of the reinsurance industry, for example Gulf of Mexico windstorm cover, have already hardened, and the market hopes to see further hardening across other lines of business in the next 12 months.

At Lloyd’s we are therefore entirely supportive when we hear our underwriters say that they will not underwrite unprofitable business or chase market share. Today this is the only prudent approach.

The insurance industry must, all the while, keep an eye on the existing and emerging international markets.

Lloyd’s success as an insurance market has always been based on our international outlook. The current state of the economy means that developing partnerships with emerging markets will now become even more important as scope for growth becomes more limited closer to home.

Just over a month ago I was in Brazil, where there was a very definite optimism about future growth prospects. Lloyd’s became the first overseas reinsurer to be admitted to the Brazilian market last year and just recently we opened our first office in Rio. Meanwhile, on the other side of the world, our reinsurance business in China has been operating for two years.

We must not also forget our European markets, Spain remains a key market and indeed it is here that we have seen the largest growth of any Lloyd's market; both in relative and gross terms. In 2006, Lloyd’s wrote approximately 145 million Euros in gross written premium, which grew to 193 million Euros last year. We have also seen a noticeable improvement in the knowledge amongst coverholders and brokers of what Lloyd's is and how one can access our market.

The Spanish market is currently the eighth largest in the world, but we feel there is an opportunity for greater growth through specialisation; with niche products providing a way for the brokers to increase their business.

Despite the shadow of recession, Lloyd’s remains stable and secure. While some may have felt that our repetition of the importance of risk management and underwriting discipline was beginning to sound like a cracked record, we make no apology for this. Our focus on these core elements has been fundamental to the market’s resilience in these exceptional times, and it will remain so as we look to the opportunities the future brings.

For our part, we will continue to work closely with clients, brokers and insurers here in Spain and around the world to capitalise on the opportunities that we are seeing.

Thank you for listening; I hope you enjoy your day and the rest of the week, and we look forward to next year.