Ladies and Gentlemen,
It is a great pleasure to be here today. I know that Berkeley is one of the best schools in the United States. Not least because the President of Lloyd’s America, who is with me today, is a Berkeley alumnus. And he has told me that Haas is one of the best business schools in the United States because his wife is a Haas alumnus.
Today I have been asked to provide a lesson for the next generation of business leaders. However, I think that the organisation I represent, Lloyd’s, the oldest insurance market in the world, which has been trading risk for over three hundred years, is perhaps a better teacher than myself.
And looking at Lloyd’s history, it has stayed in business for all that time, because of three strong qualities. What could be called the 3 Rs for the MBA student - risk, reward and responsibility.
In the current climate, many regulators, lawmakers and the public view risk and reward as dirty words, particularly when they are applied to the financial services industry. And responsibility has, quite wrongly, been seen as a synonym for excess caution by some members of the business community.
I believe a successful business leader needs to display all of these qualities. He or she needs to take risks to earn rewards, and he or she needs to act responsibly.
The best example I can find of how this works is, gratifyingly, through the career of a Lloyd’s Underwriter – and his activities here in San Francisco in 1906. This probably seems a long way back to go for some of you you, less so for me, as Lloyd is approaching its 325th anniversary. But in many ways, the late 18th century and early 19th century are part of a golden era of American entrepreneurialism. We can all learn many lessons from men like Levi Strauss, whose ability to turn the 1849 gold rush to his advantage led not just to a global love affair with blue jeans but also to the endowment of this school.
But the man I want to talk about today, was called Cuthbert Heath. He was the son of an Admiral who joined Lloyd’s at eighteen and completely revolutionized the insurance industry. At that stage, Lloyd’s was still primarily a maritime insurer, covering ships taking goods from the UK to the East – quite the opposite of what we do today!
Heath was an innovator. He produced products which no one had thought of before. He came up with the concept of business continuity, offering insurance against loss of profits following a disaster, a fire or flood. He also offered insurance against being infected with smallpox, although the policyholder had to agree to be vaccinated – thus ensuring many people went out and got shots. It was Cuthbert Heath who wrote the first automobile policies in the US in 1907. And it was Cuthbert Heath who practically invented the concept of reinsurance, an insurer passing part of their acquired risk to another insurer. So if we assess Heath as a risk taker, there is no doubt that he ticks all the right boxes.
He also showed the third “R” – responsibility. Heath was the first Lloyd’s underwriter to develop loss records which would help to price a risk scientifically, searching for old records of windstorms and paying a hundred guineas for historic maps showing earthquakes.
But it was the great San Francisco earthquake which sealed Heath’s reputation as a responsible risk taker. 10 years earlier, Lloyd’s had been the first insurer to offer US businesses, insurance against earthquake damage.
But in 1906, earthquake damage ceased to be an insurance novelty and became a reality as San Francisco suffered a devastating earthquake which was followed by fires across the city. The sums were staggering. $500 million in property losses. 90,000 claims within days of the tragedy. These figures are considerable even now.
And, as a whole, the insurance industry did not behave well. In many cases, the industry argued that if a building had been destroyed by fire, that was alright, but an act of god was not, so disputes raged over whether it had been the quake or the ensuing fire which had caused the damage. Many insurers offered broken businesses and homeless victims a deal, take 30% less than the value of the claim and keep quiet. And the haggling reportedly lead to desperate individuals setting fire to their own damaged buildings in an attempt to activate their fire policies.
Heath showed a sense of responsibility. When he heard about the tragedy, he sent a cable to his San Francisco agent which has become part of Lloyd’s legend. It read “Pay all our policyholders in full, irrespective of the terms of their policies”.
The thirteen words – Heath’s pledge to behave responsibly - made Lloyd’s reputation in this country which now accounts for around 45% of our business.
Many would view this as a bad decision because of course it impacted on the bottom line. The loss to Lloyd’s was around $50 million, equivalent to around $1 billion today. Heath’s stance was probably driven by an innate sense of responsibility. He once told his staff that the insurer’s job was “to get a man out of trouble, that’s what he has paid you for”.
But the decision to pay out claims was a wise one financially, as well as ethically. After a big loss, what insurers’ term “a market changing event” the rates which they can charge to provide cover against that kind of risk rise, mainly because the capital supporting the risk, has been paid out in claims and needs to be replenished.
So the opportunity for insurers to make the most money comes in the first few years after a disaster. Cuthbert Heath’s ability to capitalise on this window was given a considerable boost because Lloyd’s was one of a handful of insurers who came out of the disaster with an improved reputation. Only 6 out of a hundred firms paid their policy holders in full and the other 94 found their standing had suffered, being accused of blatant dishonesty in congress hearings – not a million miles away from some more recent events.
This improved reputation translated into business profits. In 1906 Heath’s business made an average of £461 in profit for each provider of capital. In 1907, the profits increased threefold, to £1435.
I hope that this story doesn’t seem too much like ancient history. What I want to convey, is that in business, you will need to take risks. You will not be able to escape them. And reward and risk are relative concepts. The bigger the risk, the bigger the reward. This concept drove many members of the banking fraternity to make a lot of money over the past decade.
However, what I have seen time and time again, as Chairman of Lloyd’s is that the inverse is true. The bigger the reward, the bigger the risk. And this is what those bankers forgot. They failed to protect themselves, or even understand the risks which they ran. They also, it practically goes without saying, showed scant regard for their reputation and no responsibility towards their customer.
Conversely, Lloyd’s, over the past decade has re-learnt the lessons of people like Cuthbert Heath. We still pride ourselves on paying claims. Earlier this year, we paid out on the loss of the Deepwater Horizon rig within days of the tragedy. We pay claims, because that is what we are here for.
But we also want to help firms manage risks better, so we don’t have to pay out claims quite so often!
As Chairman of Lloyd’s, I often meet businessmen and women who have experienced a disastrous event. This gives me a unique insight into how businesses manage risk. People seem particularly complacent around the really scary prospects, a terrorist attack, or climate change or – as we will discuss at a Lloyd’s conference across the Bay tomorrow, a cyber attack. It is also striking that many boards think they are well prepared for these risks.
I would love to ask some of these executives, how they have managed to protect themselves so thoroughly against climate change or energy shortages or water scarcity? I am sure many businesses here in California would be delighted to know the answer.
Unfortunately, the business community spends far more time preparing for yesterday’s risk rather than tomorrow’s. And just as Cuthbert Heath paid a hundred guineas for papers recording historic storms, we spend a lot of time and effort modeling the likely impact of certain disasters – a California earthquake being at the top of our activities – so that we can price a policy correctly. Last year, we posted record profits of over $6 bn by getting this equation right.
There is also another lesson we can learn from Cuthbert Heath’s career. And that is to go where new markets are emerging. Heath founded his business, which still trades at Lloyd’s today, in 1877. That was the same year that Queen Victoria was crowned Empress of India. In other words, it was the highpoint of the British Empire. Yet Heath looked West and saw a rising sun. Something which I expect many of you, sitting here on the Pacific Coast are doing right now.
Heath’s expansion into the US market, his movement away from maritime into the industries of the nineteenth century, planes, trains and automobiles laid the foundations for our business in North America. Of course, a hundred years ago, it was a tiny percentage of our work, now it is our biggest market.
Where would Cuthbert Heath choose to look now?
The answer of course, is China. So at Lloyd’s, we have made it our business to open an office and gain a license to trade there.
At present, China accounts for a small slice of our business, but I expect that figure to grow considerably and much faster than perhaps many people are currently predicting. Over the last decade or so, everyone has said Look East, or Look West in the case of California, but no-one could have predicted the phenomenal pace of the growth in China. No large business can afford to ignore it.
There are parts of Eastern England where small villages are dominated by grand imposing Churches, a legacy of a powerful group of Wool traders who made fortunes trading with France and Holland. But little has changed in these small market towns since the 17th century. Why?
Because America was discovered and East Anglia was facing in the wrong direction. Industry moved West. California is in a good place to form the trading bridge between two giant economies and it will benefit enormously by this. America will never become insignificant, and it will always be a vast market for Lloyd’s, because the spirit of entrepreneurialism and endeavour is part of your DNA.
Ladies and gentlemen,
Lloyd’s is frequently known for its quirky or unusual risks smiles, legs, taste buds and – most recently an American Footballer, Troy Polamalu’s hair. In the thirties, we insured the legs of Fred Astaire for $75,000 dollars each. We now insure Ugly Betty’s smile.
But the reality is that we help the world’s largest businesses manage their most complex risks. From Californian wind farms to oil pipelines in Asia, over the centuries we have developed a reputation for talent and for reliability.
The risks we insure have changed, the places where we insure them have changed, but the central ethos of risk, reward and responsibility has stayed the same, and it has been a recipe for longevity.
Thank you for your attention, I am very happy to answer your questions.
