Ladies and Gentlemen,
It is a great pleasure to be here today and I must thank the VNAB for inviting me, particularly because it means I get to visit the stadium where ADO the Hague are performing such miracles this season.
When I heard that they had dispatched both Ajax and then Einhoven, I asked the new Dutch representative, Ralph Van Helden, what was the secret for this miraculous turnabout in ADO’s fortunes. He replied that they have an “unbelievable” new manager. So, as a long term Chelsea fan, I wonder if Mr Abramovic is paying as close attention to what it happening in this stadium as I am.
ADO is an abbreviation of Alles Door Oefenen, but that’s easier for you to say! In English, I understand that the abbreviation stands for “Everything through practice” and I would like to think that those words characterise the Dutch and the British insurance markets. In fact we’ve had over 500 years of practice between us.
The Dutch are perhaps closer to the British than any European nation. We are both former maritime powers who for centuries have looked not just to Europe but also to the rest of the World. We both come from countries which have traded and competed. And this is also the case for the insurance sectors in both countries. Like the UK, Holland is a brokers market, which continues to benefit from high levels of competition.
I have been asked to talk today about the future of the Insurance Industry but before I do that, I would first like to say a few words about the past.
Holland and the UK are both old established markets. At Lloyd’s, we like to think that we practically invented insurance, but before I came on this trip, I was told that Amsterdam merchants were trading in risk on the canal side in the mid 16th century a hundred years or so before Edward Lloyd opened his coffee shop in the City of London in 1688.
We are proud of our history, and I am sure that you are too, but the question many people ask is whether it is relevant to the future. We know that we cannot trade on our past. The reason why Lloyd’s has stayed the world’s leading specialist market for over three hundred years is because we are able to adapt to the present.
Is a subscription market – where insurers can share large risks – relevant to today’s world?
The first point which I want to make about the future of insurance is that the subscription model is not just alive and well –it is thriving. Lloyd’s made record profits in 2009. Throughout the financial crisis, it maintained A+ ratings. Over three hundred years, it has never failed to pay a valid claim.
My analysis for the renaissance of the subscription model is three fold.
The first reason is security. Perhaps we have the financial crisis to thank for this. But I believe that people will seek out insurers who have a strong track record in maintaining their financial security. And the Lloyd’s market, being partly mutualised, possesses an additional layer of security for our policyholders. People don’t want risky insurers, even if they offer lower premiums, and Lloyd’s, which has stayed committed to a prudent, conservative investment policy, offers high levels of security.
The second reason why the subscription market has a bright future is the complexity of the risks we face today. I do not believe that the world is a riskier place today than it was one hundred, two hundred, or three hundred years ago. I am sure that those Dutch merchants huddling under canopies on the canal side would have had riskier lives and a shorter life expectancy than you, their 21th century successors, face.
But I do believe that the pace of innovation is faster than at any moment since perhaps the industrial revolution. And it is a real challenge for underwriters to keep up with globalisation, with new scientific discoveries and, particularly so, with the IT revolution. This puts a premium on professional underwriters who understand their areas thoroughly and are confident about pricing new, complicated risks. A market like Lloyd’s, where hundreds of underwriters compete daily for business, breeds this kind of professional excellence. And I believe, above all, that skill will be recognised by the policyholder.
The third reason why we are optimistic about the future of the market is globalisation. Lloyd’s thrived in the 20th century because we opened up our business in the US at the end of the 19th century. What started off as negligible business, almost an experiment away from big British ships to start a sideline in American airplanes and motorcars has resulted in the US becoming our largest market at over 40%.
This US business remains valuable. But we need to learn from our past, and that means penetrating the new economies, so in the past few years, we have opened up offices or sought licenses in Brazil, China and shortly Russia, to name just a few places.
Lloyd’s is thoroughly international. We work in over 200 territories and hold licences to operate in 80. Companies trading at Lloyd’s have access to this network. In a globalised economy, where businesses source goods from one half of the world and sell products to the other half, our global reach is a real advantage. It isn’t just the conglomerates who have an international reach. Increasingly, the backbone of the European Economy, the small and medium size enterprises, are becoming international traders. I saw this very clearly when I visited Germany last week, and expect to hear a similar story in the Benelux countries.
This enlarges our natural client base in Europe. Traditionally, we dealt with the big blue chip players – and we will remain close to them – but smaller companies, who perhaps a few years ago didn’t need either the specialist underwriting services we offer, or the international edge, are changing. They have become international businesses, even if they remain small. So we are working with smaller brokers and coverholders – particularly in Europe – to explain how they can access the Lloyd’s market. And we are particularly interested in the Netherlands. Not least because I understand that the largest binder in the world, with capacity of over $600million, is here.
So, in summary, I believe that the subscription market will not simply survive, but that it will prosper.
What about the rest of the Insurance world. Does it too have a bright future?
Well, I believe that depends on how we real with the recent rise of two phenomena. The first is China. The second is regulation.
The new world no longer refers to North America. The new world is China and its Asian neighbours. And the rise of these Asian powers is relevant to us in the insurance industry. Probably more than most of us recognise. I think we are all used to being told that China is a coming economy, but not everyone has grasped that the legacy of this financial crisis will be the undisputed arrival of China at the top table.
China is now the second largest economy in the world. It produces more cars than the United States. It imports more fine wines from Bordeaux than Germany.
I sit on the board of the second largest bank in the world. It isn’t in London, or even in New York. It is in Beijing.
China is not something that will happen.
It has happened.
If you don’t believe me, ask the 7300 billionaires living in Shanghai.
So have we done enough work to identify the impact on the great European insurance companies?
We need to examine how the insurance market in China is evolving. At present it is small. There are under 400 brokers in China handling 1.8 billion Euros in direct premiums. Only 10-20% of multinationals have risk managers.
But the potential of the market is huge.
So China represents an opportunity for the mature, and talented, European Insurance companies.
It also represents a threat, because the Chinese financial sector is growing at a pace. Shanghai wants to become a global financial centre. Indeed, Lloyd’s is advising the Shanghai authorities on this.
And that brings me to the second issue which has risen up the agenda of insurance companies at a phenomenal pace:
Is Europe pricing itself out of the market, by imposing too much regulation on the financial services industry?
Europe needs to dispel the sense that it is a continent of the past, unable to compete in the future.
In particular, it needs to guard against imposing excessive regulatory burdens which make us less competitive than other continents. Whilst it is understandable that regulators want to protect the consumer, particularly since the financial crisis, I believe that the central aim for European politicians is not regulation, but growth.
All we need to do is ask ourselves the simple question – does Europe have too few rules or does it have too little growth?
The sad truth is that too much regulation will leave the regulators with nothing to do, because there will be no businesses left to regulate. They will be somewhere else, enjoying a more business friendly climate.
For all of us here, we also need to ensure that the specific qualities and needs of the insurance industry are respected. We must be seen as a partner in managing systemic risk – rather than inherently risky ourselves.
We are all busy working on the implementation of the biggest regulatory change in a generation – Solvency II. This initiative predates the financial crisis, and we simply do not need further regulation. As it is, the cost of implementation is a significant drain on profits and this needs to be understood.
Solvency II needs to work for the consumer and the business. Our aim over the next couple of years will be to ensure that it performs both roles.
More worryingly, if European insurers need to take in significantly more capital, or file more reports to regulators, will it drive clients away from us? The challenge for insurers, and their regulators, is the same: to find the balance between security and a decent price.
Any insurer can offer a lower premium rate. But he might not be around to pay the claim. Which is of no value for the client.
Equally, any insurer can offer the highest rate, but he may well find that the client either finds an alternative, or decides to self insure.
The insurance industry has a great story to tell. For centuries, we have protected individuals and businesses from external risks. Often we have been pioneers. Lloyd’s insured the first cars and the first planes. We popularised re-insurance. More recently, we have insured some innovations in space exploration and have a large percentage of the renewable industry market.
The point is, that without insurance, new inventions which benefit society and the wider economy, would not see the light of day. We have social value. And we need to be more confident at telling our very positive story.
Ladies and Gentlemen,
The acid test for the European Insurance industry, the question which will determine whether or future is bright or cloudy, is simple. Will we harness the great opportunities of globalisation, or will we be broken by it?
This is going to be harder than it was in the 1990s. Globalisation mark II includes a powerful China, an India which is growing in confidence, a Russia which understands the strategic advantage of holding huge natural resources and a host of other countries who, thanks to the IT revolution and the fall in trade barriers, have more sophisticated needs and demands.
The instability on the Southern shores of the Mediterranean is a reminder to European business of how dependent we are on global trade flows, particularly in the energy and other resource markets. We are seeing the reality of that now in Libya.
Indeed, one of the products which Lloyd’s offers to customers covers the risk of governments expropriating assets, or currency transfers being blocked.
We have started to see some of the risks of globalisation. But it is too late for retreat. We need to engage with the rest of the world. And that will bring new risks.
That is the 21st century challenge which the European Insurance industry must meet. We must help our colleagues in wider industry trade in a global environment with confidence.
So my vision for the European insurance industry is that we have the tools and structures which allow us to thrive in this increasingly competitive world. That we exploit the opportunities of globalisation and not be overwhelmed by them. If we do this, we can not only be proud of our past, we can be confident about our future.
