It is a great pleasure to be back in Frankfurt. I am full of admiration for the resilience which has been shown by the German economy. Germany’s bounce back from the financial crisis was fast and dramatic – posting stronger growth rates in 2009 than at any point since reunification and recording the lowest unemployment levels since 1992.
But it is not business as usual for anyone in the financial services industry. Governments and international bodies are still grappling with how to deal with the issue of systemic risk. We can see that very clearly in Frankfurt. Since I was last here there have been two new additions to the City’s institutions. First, a new department of the Goethe University – where I spoke earlier today - dedicated to insurance regulation. And of course, the European Insurance and Occupational Pensions Authority (EIOPA) the new European supervisory authority which started work earlier this year.
It is no surprise that this is a boom time for regulators. Since the collapse of Lehman brothers, the reputation of the whole financial services industry has suffered across the world. But to me, this is unjust. Insurance is not banking. Throughout the crisis, the insurance industry, as a whole, stayed strong. There was, of course, one exception, AIG. But it failed because of its non insurance activities. At Lloyd’s, we posted record profits last year, and our continued A+ ratings confirm that our structure and operations are sound.
The current myriad of proposals to fix banking regulation often confuses insurance and banking. Politicians around the world are feeling the enormous weight of public expectation to do something. But it is not enough just to do something. You have to do something good. Something worthwhile. Above all, something that will fix the problem. That doesn’t mean more regulation, it means better regulation.
The reason why we need careful, considered regulation is because Europe needs to compete – not just with the US, but also with the new economies, such as China, Brazil and Russia. Germany is, at this stage, the exceptional European country, which is recording high levels of growth as well as stability.
The picture is not so rosy elsewhere. Europe may need a safety net, but it also needs a launch pad for jobs and growth.
If there is one thing which everybody in this room understands, it is how to quantify a risk. The dilemma which Europe’s regulators face at present, is to get the balance right between safety and growth. Ironically, too much safety will create risks, if we lose business to the East, and to the West.
Ultimately, you cannot create a risk free business environment. The skill is in understanding and mitigating your risks. And that, of course, is the business of insurance.
As governments address systemic risk in the banking sector, they need to look at where those risks lie. And I do not believe that they are in the insurance sector. On the contrary, we play an important role to reduce risk. I would like to focus on two elements. The first is our role in taking on the risks of other businesses to enable them to grow. The second is advising businesses on how to manage both existing and future risks.
Ultimately what the market, Lloyd’s brokers and risk managers share, is not the ability to make risk go away, but to manage it, to allow firms to take the risks they need to grow with a sense of security. And that is critical in today’s post recession world.
Lloyd’s understands that its role is to help businesses rebuild in times of crisis. Part of what makes the market special is the palpable pride in Lloyd’s reputation of helping industry to manage their risks. Of course we make money, we aim to make good profits, and there is nothing wrong with that. But when people talk about the great and defining moments for Lloyd’s, they don’t talk about great profit years. They talk about how we have innovated.
Behind every great inventor, there stands a great insurer. We continue our reputation for bespoke, highly expert underwriting which can price the most complex risk. For example, Germany is a leader in clean energy and we have supported many renewable power installations across the world.
At a time when the financial services industries are generally seen as having a negative effect on the community, it is worth remembering the positive role of insurance. For example, it was insurers who insisted on crash helmets for motorcyclists and fire sprinklers in workplaces.
But the greatest mark of an insurer is its ability to pay claims. Lloyd’s have a long reputation in this. Last year, it took us just a few weeks to pay out on the Deepwater Horizon oil rig which sank in the Gulf of Mexico. We have a long reputation of always paying valid claims. We did this when an earthquake struck San Francisco in 1906. We did this when the Titanic sunk in 1912 and more recently we had to dig deep into our pockets when the World Trade Center fell in 2001.
Our support to victims of disaster, is something which I saw first hand when I visited Chile after the earthquake earlier this year.
People often say to me that the role of the insurer has grown ever more complex, that the world is a more risky place than ever before. But I do not believe that is true. We have always lived in a risky world. The key question we need to ask is, could we in business have foreseen some of our risks, could we have managed them better? I am a strong advocate that risk can be mitigated and can be reduced. But this takes foresight, planning, and fundamentally, imagination and – sometimes - courage. It also, of course, costs money.
The main point about Lloyd’s is that our development, over three hundred years, from when merchants gathered in Edward Lloyd’s coffee house in the City of London and pooled their risks, has been led by the development of industry. As industries have evolved, or declined, we have had to find new products, understand new innovations and crucially, price new risks.
It is essential that insurers understand emerging risks and advise businesses on how to mitigate them. Lloyd’s is a brokers market, and we rely on brokers to tell us what their clients want. This dinner is an excellent example – where we can meet the people who hold Lloyd’s policies or who have particular risks which they want to cover.
The risk landscape constantly changes, and, along with you, we need to track it, and provide highly specialised, bespoke policies. One example, from earlier this year, was the work which one of our syndicates did on reputational risk. Following the problems at Toyota, they worked with a firm of brokers to identify ways to cover businesses against a risk to their reputation.
Lloyd’s policies are quality products. They are crafted by some of the finest underwriters. And they are backed by a highly secure capital structure.
In recent years, Lloyd’s has given a great deal of thought to issues like climate change, nanotechnology and the effect of globalisation on the risk landscape. A very strong piece of advice which I would give to brokers is to keep aware of what is happening in the world outside insurance. You need to understand not just the risks which your clients face today, but those which they will face in the future. Last year, we held a seminar in San Francisco to look at cyber risks. We have published reports in the last year on political risk, space weather and water security, to name just a few issues.
At the moment, the risk landscape is dominated by financial risks. But the problem with many risk management strategies is they focus on the current risks and not the future risks. Boards should be developing plans to deal with future energy shortages, or water shortages, to establish what their exposure might be, and what their mitigation plans are.
Brokers and underwriters can offer advice and expertise as businesses grapple with these issues. Lloyd’s has been doing this for 300 years and we want to work closely with our partners in German Industry. It is a pleasure to meet so many of you this evening
