Introduction
Good afternoon. It is a great pleasure to be here in Oslo and to see you all, including our special guests from Sweden.
This visit is, I have to confess, somewhat overdue. This my first occasion in Norway since becoming Chairman three years ago, and I understand that my recent predecessors were not frequent visitors to Oslo during their term as Chairman.
But then, because our two markets enjoy such a good business relationship anyway, such visits are rarely needed. Indeed, any Brit who works with Norwegians is immediately struck by how easy the relationship is, and by how much of our history we have in common.
We both enjoy a long, deep-rooted sea-faring tradition which has helped shape an outward, international outlook, and we share between our shores the North Sea and its rich resources. Our nations have always taken to the high seas to trade, explore and to do battle, and it is of course on the ocean waves that Lloyd's underwriters first sought their fortune.
The strength of the relationship between Norway and Britain was perhaps most strongly proven during the second World War. In 1940, King Haakon ordered that Norway's navy and tanker fleet should be placed at the disposal of the British Admiralty at a time when we were losing ships faster than we could replace them .
In turn, Britain not only provided a home for thousands of exiled Norwegians during the Nazi occupation, but also sent radio broadcasts in Norwegian to those who still had radios back home, a vital help to the underground. So, since 1947, Norway has donated a 75 foot Christmas tree each year to Britain as a symbol of gratitude on behalf of the Norwegian people .
It is a sign of the times that this Christmas tree tradition has attracted resistance from some Europeans, who regard it as a violation of import restrictions! Environmental demonstrations have been arranged around it, people have tried to cut it down, and some protesters have even been chained to it! But I am pleased to say that, despite the crazy times we live in, the symbol of our friendship continues every year in Trafalgar Square in London.
Most recent figures show that Britain is Norway's largest trading partner, with two-way trade amounting to over 130 billion kroner. The UK is Norway's single largest export market, and British companies are the largest investors on the Oslo Bors, with a particular emphasis on shipping, banking and of course insurance .
But the links don't stop there. Ever since Solskjaer secured the Champions league for Manchester United against Bayern Munich in extra time in 1999, football has united us too. Today, there are around 30 Norwegians playing for English clubs while around half of Britain's professional clubs have supporter branches in Norway. I don't know how many fans my home team Chelsea has here, but Manchester United has the largest supporters club, with an amazing 35,000 members!
In a moment I will focus more specifically on the relationship between our insurance markets, but before I do I want to update you on Lloyd's and tell you about the significant progress we have made in recent years.
Then, I would like to share my thoughts on three main challenges which the insurance industry everywhere must get to grips with in 2005.
An update on Lloyd's
First then, an update from Lloyd's. Wherever I travel in Europe I am impressed at the recognition which the Lloyd's brand enjoys - not just amongst insurance professionals but amongst the wider business community too. Of course, brand recognition is not the same as understanding what Lloyd's actually is and how it works. So today I hope to remove some of the mystery and tell you about some of the changes which have taken place within our market.
Reconstruction and renewal
Some of you may remember the troubles we encountered in the late 1980s and early 90s when the Lloyd's market suffered record losses.
It began with a string of natural and man-made disasters generating huge losses for the insurance markets everywhere, but hitting Lloyd's especially hard.
The transformation began with an overhaul of Lloyd's capital structure. 1994 saw the introduction of corporate capital for the first time - whereby companies became investors in Lloyd's - a function which had traditionally been reserved for wealthy individuals known as 'Names'.
It continued with a project called Reconstruction and Renewal in 1996. In a successful attempt to secure the future of Lloyd's, Equitas, a limited reinsurance company, was set up to handle all 1992 and prior liabilities. Equitas is a completely separate entity from Lloyd's but we are pleased to see that it has been performing well in running off its liabilities to date.
September 11, 2001, brought a fresh test to the Lloyd's market. Or largest ever single loss, Lloyd's has now paid out some 5 billion dollars in related claims . But the fact that we survived - and thrived - underlines the significant progress we had made in the intervening years in terms of managing our market better.
Franchise solution
But while all of this helped re-establish Lloyd's position, it did not, however, resolve the problem of poor underwriting performance which dogged some quarters of the Lloyd's market. After much consultation on this issue, we made the radical decision to implement a whole new structure in 2003 - which we called the Franchise structure.
This involved a new partnership between the businesses operating within the market, and Lloyd's itself which manages the market. The fact that Lloyd's had moved away from self-regulation to regulation by the Financial Services Authority in common with the rest of the finance sector, now gave us the freedom to concentrate on commercial standards instead of regulatory ones.
The key objective of the Franchise structure is to deliver strong, consistent financial performance across the underwriting cycle. Businesses which consistently underperform are no longer allowed to trade within our marketplace.
Our focus is now to ensure that Lloyd's businesses have the tools and robust processes in place which they need in order to manage the cycle. We are also collecting and analysing both the detailed market data and softer information we have gathered, in order to challenge any assumptions which don't stack up and to expose underperformance.
What it all adds up to is a commitment to drive a performance management culture right through the Lloyd's market. And one of the key individuals leading the work is one who will be known to many of you. Before joining Lloyd's Rolf Tolle, our Franchise Performance Director, held a number of senior positions with Scandinavian insurers, including as Managing Director of Norwegian insurer Polaris, and positions at Storebrand and Unipolaris. Clearly, given these Scandinavian credentials, we could not be in better hands!
Current confidence
With all this in place, the mood at Lloyd's is now a much more confident one compared to ten years ago. Last year, we announced profits of 23 billion Kroner , more than double our achievement on 2002. And, although the market has been hit by significant hurricane and typhoon losses in 2004, we still expect to report good profits for 2004 when we publish our next set of annual results next month.
Our combined ratio for 2003 was 90.7 - considerably better than most of our international peers , and the upgrading of the Lloyd's market to 'A' by two of the rating agencies last summer, which is definitely against the current trend, acknowledges the progress that has been made .
However, I must emphasise that we are not complacent, and I will allude to some of our specific concerns about current market conditions later.
Lloyd's market structure
But first, let me stress that, in the midst of all this radical change, some things at Lloyd's have stayed very much the same. One of those things is our unique market structure. It is important to remember that Lloyd's is very different from the average insurer or reinsurer. Lloyd's is a market, made up this year of 62 individual underwriting business - or syndicates . Each operates independently and each has its own set of specialities and expertise. This unique structure allows the clients and brokers access to real underwriters who can make real decisions, and it means we can provide tailor made solutions to meet specific needs.
Lloyd's is also, importantly, at the heart of a dynamic subscription market. Particularly when it is difficult to find coverage in local markets, buyers benefit from a structure where syndicates co-operate, co-insuring with each other or with other companies further afield. In this way, capacity can be added quickly to cover the largest and most complex of risks.
We also continue to operate as a broker market. Syndicates at Lloyd's receive all of their business through around 170 firms of independent intermediaries all around the world. They in turn work with local brokers of all shapes and sizes to provide a local service.
Taken together, all these features combine to make Lloyd's a very agile market, able to bring the most suitable mix of international underwriting expertise to any local challenge.
Lloyd's in Scandinavia
Here in Scandinavia, it seems to me that those challenges are growing. In fact, you have told us so. There is now less choice for buyers and at Lloyd's we have seen a surge in demand for specialist expertise recently. And it's not just the big accounts, which have always tended to gravitate towards our market, but increasingly for smaller and medium sized risks where our expertise can equally be brought to bear.
In Norway, Lloyd's specialises in marine and energy business. All exploration and production business emanating from Norway is significantly underwritten in the Lloyd's market. The overall leader for Statoil is a Lloyd's syndicate; and one of our leading energy syndicates underwriters offshore construction risks for the Ormen Lange project which will supply the UK with 12 per cent of its gas demands .
The fact that both Norway and Lloyd's are sophisticated marine markets means that we often team up on other risks too - such as your huge commercial cruise vessels and your innovative power barges.
But it isn't just marine and energy. In Norway, we also underwrite non-marine business, including personal accident and property . The same applies throughout Scandinavia, where we underwrite a range of direct and reinsurance risks from Stena Drilling in Sweden, one of the world's most foremost independent drilling contractors, through to the Danish national soccer and handball teams .
Lloyd's overall business in Scandinavia has therefore risen almost 70 per cent to reach 2.7 billion kroner over the last four years , clear evidence of our ongoing commitment to the region. There is no question that Scandinavia is an important part of our strategy to raise Lloyd's profile in Europe.
Three key challenges for our industry
Now that I've taken you through Lloyd's transformation and our current business position in Scandinavia, I want to reflect more broadly on what lies ahead this year for the insurance industry as a whole.
Looking back, there is no doubt that 2004 was an eventful year for the insurance industry. With hindsight, there were perhaps three main themes which emerged, and which are now acting together to create another challenging 12 months for the industry, including those of us in London and Oslo.
Contract certainty
The first theme was encapsulated by the Silverstein trial which followed the World Trade Centre terrorist tragedy. I don't know how closely you followed the developments here, but we were watching things carefully from London. As you may know, the court case centred around the question of whether the destruction caused by the two planes crashing into the Twin Towers counted as one event or two separate events under the insurance policy. At stake was some 7 billion dollars .
Given the high stakes involved and the sheer complexities of this huge and tragic loss, it was always likely that this would end up in the courtroom, but this high profile case was complicated by one fact. The participants had failed to reach a common, final policy wording before 9/11.
To any outsider, it must seem highly unusual that this single agreement should not be in place. Why is it that participants so often fail to agree final policy wordings for commercial insurance contracts prior to inception - or even, as here, prior to the loss?
When this happens, the customer does not get the policy they deserve, the insurer does not get the finality they expect, and such high-profile and complicated litigation can only harm the public image of the insurance sector. Improved contract certainty, including fully agreed final policy wordings, is critical to the future of the industry.
In my view, as a newcomer to insurance, I found the reluctance to change traditional practices totally unacceptable. But the good news is that contract certainty is now finally rising to the top of the industry's agenda. I am especially pleased that we are making good progress on a range of related initiatives at Lloyd's.
Last year, we mandated a standard form of slip for recording deals in the London market. Its use is improving month by month , helping to ensure that important features of the contract are documented in a uniform and clear way.
We also recognise that brokers and underwriters must exchange reliable data and agree contract details in a secure and transparent way, and are investing heavily in an electronic platform for that purpose, which is called Kinnect.
And finally, we are working directly with our regulator, the FSA to drive change forward, throughout the whole London market.
The Spitzer investigation - need for transparency
The second theme also emerged in the US, but its impact quickly spread across the Atlantic and beyond. I'm talking about New York Attorney General Eliot Spitzer's investigation into the commercial insurance market. It highlighted the lack of transparency in our industry's workings, and it showed that our practices lag behind what a 21st century business environment expects. The key challenge it creates is for us to clarify and re-define our inter-relationships. Today's businesses want to understand exactly what they are getting when they buy insurance. We need to be clear and unambiguous on who is doing what exactly, for whom, and at precisely what cost.
Now I don't know how you feel about the insurance industry's reputation here in Scandinavia, but last year I saw the results of research Lloyd's had undertaken in the UK , and it said that amongst captains of British industry, only the tobacco industry came off worse than general insurance! If the lawyers in the room will excuse me saying so, even the legal profession came out ahead of us! 2005 now provides us with the opportunity to improve that position by grasping the challenge and delivering transparency.
While the full impact of the investigation will continue to filter through the market during this year, there are strong signs of progress already. The world's largest brokers have certainly taken action and abandoned contingent commissions, but more than this, there seems to be an awakening within the highest levels across the industry that things need to change. In hindsight, the investigation has already helped to improve our industry for the future.
Natural catastrophes - a new look at risk
The third defining event of 2004 took place just over a couple months ago. I was in Malaysia, with my family on the beach, when the tsunami struck. Luckily we were able to retreat inland before the large wave hit. Within an hour, things were pretty well back to normal where we were, but to give you an idea of the force of the waves, 80 of the sun beds that were on the beach were smashed like matchwood.
We were very lucky. So many tens of thousands of others were not. In fact, the sheer scale of human tragedy from this disaster is barely comprehensible. Here in Scandinavia, I realise that the loss is particularly keenly felt.
Yet this was not the only natural catastrophe of 2004. Far from it, it was a year of improbable disasters. Together the North American hurricanes, Asian typhoons and the Tsunami all add up to a likely bill for global insurance losses of around 50 billion dollars . Swiss Re, in its report last week, talks about how "insured losses have taken on a new dimension." In fact, this all makes 2004 the worst year ever for insurance losses and it is forcing the industry to look again at how we model and prepare for risk .
There's been violent weather closer to home too. In January, much of Scandinavia and the Baltic was lashed by the most powerful storm to hit Europe since Martin and Lothar back in 1999. 14 people died and in Sweden the loss to the timber industry could be up to 30 billion kroner .
The surge in catastrophic events reminds us of the importance of pricing risk correctly. The critical role of insurance is to pay claims, to assist the process of rebuilding. But the industry can only do that if its balance sheet is strong.
As an industry we need to look policyholders in the eye and tell them that there will be sufficient funds to cover claims should disaster strike. That means they can rest in the knowledge that their insurer is still going to be around in ten years' time to pay their claim. Every insurer, every underwriter, must ground their underwriting decisions on economic reality.
I should emphasise too, as I am here in Norway, that marine and energy are two sectors where we have particular concerns. In marine hull, loss ratios in both the Lloyd's and the Norwegian markets had soared to a record 150 per cent by the late 90s . Things have improved considerably since, but the improvements are not nearly fast enough - and the returns are not yet strong enough. Or to put it another way, while the banks in Norway and Britain are now coming under fire from consumers for making too much profit, that isn't likely to become a problem for marine insurers any time soon!
That's why marine business now represents only 19 per cent of Lloyd's business portfolio compared to 27 per cent ten years ago . And there is a real danger that if competitive pressure continues and grows, the whole global marine market could unravel as players are forced to retract capacity.
Energy too, is proving to be a difficult sector. Last year may prove to be the worst year on record, with losses of around 4.5 billion dollars fuelled by Hurricane Ivan's destruction in the Gulf of Mexico. Already this year, 2005 has got off to a bad start, with a major fire at a Canadian oil platform likely to create 1 billion dollars in claims , further reminding us of the need for discipline in a volatile line of business. Yet, despite all this, amongst the business lines we underwrite, energy is one area where we have seen the most pressure on pricing.
So, at Lloyd's, we entirely support our underwriters when they tell us that they are not prepared to underwrite unprofitable business or chase market share. In the face of increasing catastrophe losses and downward pressure on pricing, they are simply basing their underwriting decisions on economic reality.
Conclusion
Ladies and gentlemen, I think that note of cautious confidence is a good one on which to conclude.
Confidence because I hope that I have conveyed a sense of how much the Lloyd's market has changed in recent years. Our market is stronger than it has ever been, and our expertise and appetite for your specialist risk has not reduced.
Cautious because we are very conscious of the challenges which face our insurance industry, and above all the need to maintain a disciplined marketplace and deliver adequate pricing.
Of course, we must be realistic about what any one of us can achieve. As Henrik Ibsen who once said ""The great secret of power is never to will to do more than you can accomplish." Yet it is up to all of us in this room, whether underwriter, broker or buyer, to each do what we can, and in working together to build a strong and powerful industry for the future.
And, whatever the future may hold, I can assure you that Scandinavia will continue to be at the heart of Lloyd's European business strategy. We thank you for your support of the Lloyd's market and we look forward to doing more business with you in the future.
Exchange rate, where used, is NOK 11.928=GBP 1 as at 03 March, 2005
Footnotes
1. Dennis MacShane, "Britain and Norway in 21st century Europe",
Norwegian EU Business Forum, 4 September, 2003
2. This paragraph: Anglo Trees website, February 2005
3. This paragraph: Norway and the United Kingdom, Royal Norwegian Institute
for Economic Affairs, August 2001
4. This paragraph: Norway and the United Kingdom, Royal Norwegian Institute
for Economic Affairs, August 2001
5. Source: Lloyd's, Claims, Reinsurance & Open Years Mgmt, October 2004
6. Source: Lloyd's 2003 results.
7. Source: Lloyd's 2003 results Combined ratio
= (net incurred claims + expenses) / net earned premium
8. A.M. Best August 2004, and Fitch Ratings September 2004
9. Lloyd's Member Services Unit, January 2005
10. Source: Lloyd's Broker Services, 2005
11. Source: Lloyd's syndicate 2020, February 2005
12. Source: Lloyd's syndicate 2020, February 2005
13. Source: IMIS, 24-01-2005
14. Source: Creechurch Underwriting, March 2005
15. Source: Market Reporting, 2004
16. National Underwriter, October 2004
17. Lloyd's slip audits, as quoted by Head of Business Process Reform,
Lloyd's, October 2004
18. Lloyd's/ MORI Captains of Industry Survey, 2003
19. Based on Swiss Re's estimate of $42 billion insured losses for 2004
(16 December, 2004) plus losses from the Tsunami
20. Swiss Re, Study on Catastrophes 2004, 1 March, 2005
21. Based on Swiss Re's estimate of $42 billion insured losses for 2004
(16 December, 2004) plus losses from the Tsunami
22. This para: Insurance Journal, 13 January, 2005
23. The Lloyd's Marine Hull Market, presentation to Hong Kong Shipowners
Association, 2004
24. DnB NOR is the latest bank to report strong earnings, 24 February, 2005
25. The Lloyd's Marine Hull Market, presentation to Hong Kong Shipowners
Association, 2004
26. Insurance Day, 17 February, 2005
27. Insurance Day, 17 February, 2005
