Israel and Lloyd's

I am very happy to be back in Israel and to welcome you to this event today. The purpose of this visit is to strengthen the long standing relationship between Lloyd’s and the Israeli insurance market. Israel is in fact our biggest market in the Middle East. It is important to us. I am delighted to see so many people here today, because I believe that Lloyd’s, the world’s leading market for specialist insurance can help Israeli companies find solutions to their insurance needs.

Today, several of my colleagues from London will give you an expert view of the trends in insurance, underwriting and claims management. I know Israel, and of course Lloyd’s, well and today, I want to set out why we should work together and how we can do that, looking at some of the emerging risks that will affect us both in this coming decade.

But first, I want to talk about Israel. I have just returned from the World Economic Forum in Davos. And whilst the mood was more hopeful than last year, we still had to face a global economy that is battered and bruised, where fundamental questions are being asked about regulation, about financial management, and, to an extent about the free market, liberal economic philosophy that we have taken for granted for so long.

At Davos, discussion centred around regulation of the financial services industry. I believe that we need good regulation, better regulation, but not more regulation. The recent financial crisis showed the danger of too little regulation, but we should not forget that too much regulation also creates a problem. It can make industry uncompetitive, and that ultimately drives up prices for the consumer and even deprives them of choice.

And let me add that for too long the “financial services industry” has become shorthand for the banks – it is not – the banks have had real problems especially in terms of regulation – in insurance we have avoided these problems. So please don’t lump us all together.

So can I say, it is a real pleasure to be back in Israel, which, according to the International Monetary Fund, has “had a good recession”[1]. Indeed, over the last few months, many media stories about Israel in the United Kingdom and the United States, have focused, not on the security situation, but on the Israeli economy.

A lot of this was due to a new book, “Start – Up Nation” by Dan Senor and Saul Singer. I am sure the details of this work are familiar to the Israelis in the audience, so please forgive me for quoting them, but I think some of my colleagues from London will find some of the findings of this book as startling as I did.

Israel has more companies listed on the NASDAQ than all of Europe, Korea, Japan, India and China combined. It raises thirty times more venture capital than Europe, eighty times more than India and three hundred and fifty times more than China. It has the highest percentage of GDP invested in civilian Research and Development and, according to the authors of this book, Israel represents the “highest concentration of innovation and entrepreneurship in the world today”.[2]

Israel has a population about the size of London. It started its journey in 1948, with little arable land, no natural resources and, as we all know, a difficult political backdrop, but it is now is a home to many breakthrough technologies, in IT, in medicine and in renewable energy. This comes as no surprise to Lloyd's as our underwriters have been doing business here since 1948

Prime Minister Netanyahu recently claimed that Israel will have a “V shaped recovery”[3] something which is more a feature of the emerging Asian markets, than in this European region. Indeed, Israel managed to escape moving into recession, and indicators show that growth will start to approach 2007 levels in the next two years or so.

Several theorists have tried to pin point why, against the odds, the Israeli economy has thrived. Some have cited the constant immigration from every corner of the world, making Israel a genuinely multi-cultural diverse society. Others have pointed to liberal economic policies and proportionate regulation – something which other parts of the world might choose to remember. Others have even cited the experience of compulsory military service as a fine apprenticeship for budding entrepreneurs.

But one phrase springs to my mind and that is: “necessity breeds invention”. For example, high government spending on defence has spawned a high tech industry. I read of one Israeli entrepreneur who took the technology used on nose of fighter jets and adapted it to build small cameras used to diagnose intestinal illnesses.

Israel has had to be agile, to be flexible and to be innovative to build its economy. And I am interested in that, because those are also the hallmarks of Lloyd’s insurance markets.

We are known for insuring some of the biggest risks in the world. We provide bespoke, tailored products to people who have very big, very difficult or very unusual risks, which they may find it difficult to cover.

Our market is willing to take carefully calculated risks, and identifies the best insurance solutions. This might be a carefully crafted tailor made policy, it might mean several companies operating in the market, sharing the risk, or it might mean some careful advice on risk management Once again, necessity breeds invention.

And we have also had to be agile when it comes to our business model. The insurance world, as you all know is notorious for its cycle. One year, there may be no hurricanes, airplane crashes or earthquakes and a profit is secured. Another year, we might experience a hurricane Katrina, or the tragedy of the World Trade Centre or the Exxon Valdez disaster.

Our challenge has been to manage the difficult insurance cycle, so that we have stability to face the future. We have transformed the way we monitor the risks we take on, to ensure that we are not over-exposed to a particular risk. And we have been prudent, even cautious, about how we invest our capital. As a result, Lloyd’s too has weathered this recession. We made £1.32 bn profits in the first half of 2010, our central assets stand at £2bn and we have A+ ratings.

For an insurer, this solid financial base is crucial, because we are well aware that the capital we hold is to pay out on claims. You will hear later on this morning how we are transforming our claims processes. Lloyd’s pay out around £10 billion in claims per annum. We have a reputation for always paying valid claims, but now we are looking at how to do this more quickly and efficiently.

The key point for any business, particularly, at the moment, for many financial services industries, is to respond to criticism and to keep refining the service that you offer to the customer. Another feature of Lloyd’s is our work on emerging risks. Risk is nothing new. But risks change. New challenges are constantly appearing. Scientists in places like Tel Aviv come up with new inventions that need insurance or change the risk landscape of an industry.

Today, I would like to look at two of the emerging risks which Lloyd’s have studied, and discussed recently with business communities in London and New York.

The first, digital risks, is an issue which is particularly relevant for Israel, with its leading role in high tech industries. The Wall Street Journal recently quoted an E-Bay executive claiming that the “best kept secret” in the US IT industry was that “we all live and die by the work of our Israeli teams”.

The challenges for the digital sector is very similar to what happened in the nineteenth century during the industrial revolution. Society found it difficult to keep up with the speed of development of the new technologies and to manage the inevitable new risks.

The digital revolution has brought a wide range of new risks. Whether it is a thief breaking into your PC and stealing credit card details, an organised attempt to attack a state, as we saw in Estonia in 2007, or a simple case of the technology malfunctioning, a new risk landscape is being created.

We have been talking to businesses and governments about how to manage these risks, whether it is through insurance or simply better security measures. And given the amount of time that we all spend living and working in cyberspace, developing and extending products in this areas, will be a key feature of insurance in the next decade. Finding solutions is important to society too, as it is not in any of our interests for the IT revolution to be stopped whilst we grapple with how to deal with the new risks.

But it is climate security which presents the biggest risk to insurers, and, for that matter, to us all. Israel has had to live with the reality of scarce water since its foundation. Not far from where we are here, in Tel Aviv, lies the desert. The need to develop agriculture, and achieve food security, despite these harsh conditions, has led to many innovations. The drip irrigation developed on early kibbutzim is now seen across the globe. Every Israeli understands the need to conserve water, and you simply have to look at the Tel Aviv skyline, to see the efforts being made to use solar power.

Soon, the world’s first electric car network will be set up, not in Copenhagen, or London or Sydney, but in Jerusalem. Motorists will be able to drive 140 miles without recharging, and stations will be set up across the country, where an empty battery can be replaced with one fuelled by solar technology[4]. I will visit the Better Place electric car project later this week where I look forward to test driving one of their very smart electric cars which I can compare to the electric car which I drive in London.

Insurance has always stood behind the great inventions, because innovation always involves risk. Lloyd’s currently insures around 25% of the world’s wind farms. We are also in close dialogue with governments, lobbying to share climate data, and to see international action, not just on CO2 emissions but also on how societies that are most vulnerable to climate change can adapt their homes and their businesses. Because if they don’t, it will be our industry that picks up the bill for extreme weather as it become more frequent.

Ladies and Gentlemen,

When I visited Tel Aviv, as Lord Mayor of London, in 1998, I said that I wanted to see Israeli and British firms working together, and building more ties. That is happening. We can see it happening here at this conference. Everyone here from the Lloyd’s market wants to work with insurers here in Israel. We want to learn your views on how insurance can get better at responding to the risks facing business today. Lloyd’s is not in competition with local insurers, but we may be able to work with you to provide cover for particularly large or complex risk. Because we have the finest collection of underwriting talent on the planet. And a high level of capital security.

Once again, welcome to this conference today. I hope it will be stimulating, educational, and productive.