Introduction
Good afternoon. I am delighted to see so many of you here today.
Ever since the dark days of the Second World War, much has been said about the special relationship between the United Kingdom and the United States. And through the time of the Cold War up to the war against terrorism that we fight today, that relationship has continued to flourish.
Of course, that special relationship extends much more widely than just politics. Should you need any proof, then you needn't look further than Tony Blair's first personal appearance on The Simpsons, last week!
But nowhere in the economy is this special relationship better demonstrated, perhaps, than in the insurance sector. And as far as relationships go, the Lloyd's-New York relationship is a very special one, which goes back many generations.
However, it was on September 11th 2001, that our role as one of New York's leading insurers was tested to the fullest. Over two years later, we have now paid out some 4.3 billion dollars in claims resulting from that tragedy, and we are proud to play our part in rebuilding Manhattan.
And as we embark on what is sure to be another challenging year for the insurance industry, I would welcome this opportunity today to talk to you about some of the key issues on my mind, namely tort reform and trade barriers in reinsurance, and share my vision for 2004.
Over the past twelve months, we have also seen some major developments at Lloyd's that have enabled us to start the New Year in extremely strong shape. So for the second part of my presentation, I would like to talk more specifically about where we are focusing our energies in 2004 and beyond.
Tort reform
Let me start then with tort reform. If there were an Oscar awarded for the most talked about issue, resulting in the least action, then tort reform would win it. But as we enter 2004, I am as convinced as ever of the need for expedient and far-reaching change.
And it's not just me. Only last month, we were delighted to have Hank Greenberg as guest speaker at the Lloyd's 2003 City dinner in London. The dinner was attended by some 200 chairmen and chief executives of major British companies, politicians and insurance executives. He chose tort reform as his sole topic, leaving us in no doubt about his conviction of the need for reform on the three key fronts - asbestos, class action, and medical malpractice.
But 2003 has abjectly failed to deliver. So where do we need to go from here and what are the prospects of success in 2004?
Some question whether reform can now be achieved so close to a presidential election. Personally, I find it very unfortunate that tort reform is seen as a political issue. It's not a political issue, but an economic one. The negative impact of spiralling litigation on the American people transcends all political boundaries and crosses most industry sectors. And it needs an appropriate and collective response.
I was honoured to speak at Town Hall Los Angeles during the summer, and when we interviewed the senior executives there, over 90% said that the tort system is having a negative impact on their own business. And I expect the sentiment is no different here in New York .
Of course, it's not all bad news. Despite the problems encountered in 2003, there are some glimmers of hope. On class action, the fact that the reform bill lost by only one vote, means there must be a good chance of compromise and success a second time around. On medical malpractice, while there has been little progress at a federal level, there have been significant reforms enacted at state level. And on asbestos, while there has not been any real progress, the various sides have at least openly begun to state their position.
So what is my vision for 2004? I would like to see us achieve at least three things this year. First, to see leaders and influencers set aside their political agendas - and compromise on what is an economic problem, not a political issue. Second, I would like to see the insurance sector work together to achieve greater awareness of the problem by industry at large. Third, I would like to see us all step up the momentum for legislative change and give tort reform our best shot in 2004.
There is no magic wand and no single solution. But without plugging away at this cancer at all levels and all sectors of industry, the entire American economy and enterprising culture will founder. If we allow the current trend to continue and grow, the damage to the economy could become irreversible.
Having only touched the surface of such an important point, I want to move on to talk about our second main area of concern in today's international insurance market.
Free trade
Today's global companies need insurers and reinsurers who have the scale, and the know-how to take on the growing risks they face.
And just like today's global businesses that they serve, the insurance and reinsurance industries have therefore become increasingly international, operating irrespective of national borders. The tragedy of September 11th, perhaps more than anything else, demonstrates the critical importance of an international approach.
Overseas insurers and their intermediaries are generally free to trade in the UK. By contrast, in the US one of the major costs which we face is the obligation to localise funds, whether for surplus lines business or in relation to reinsurance. The American Credit for Reinsurance laws require foreign reinsurers to over-fund by enormous amounts under a gross liability system - even when they are placing retrocession back into the US market.
Such systems create complexity, and drive up the cost of doing business. Most significantly, they affect policyholders, both here in the US and elsewhere round the world. Where reinsurers are prepared to operate under that structure, the cost is ultimately passed onto the consumer. Where they are not, it means limited choice for US buyers.
Today, the US and UK are particularly important trading partners for reinsurance. The UK is America's largest customer in the world, providing premia to the US market of 2.6 billion dollars in 2002. On the outwards account, the UK is again one of the leading trading partners, receiving over 6 billion dollars of US reinsurance premium, and American reliance on international carriers continues to grow .
About half of that 6 billion dollar total found its way to Lloyd's, but today we have about 9 billion dollars tied up in the associated trust funds , much of it unnecessarily sitting there when it could be deployed much better elsewhere. All this despite the fact that we are already highly regulated in the UK.
I am not saying that any old reinsurer should be freely able to offer coverage here in the US. But what I am saying is that the current system treats every foreign insurer in the same way, and fails to take into account key factors such as financial security, expertise, and quality of home regulation. Lloyd's believes that its remarkable 300 year track record, history of standing by Americans at critical times in history, and strong home state supervision deserves recognition.
That's why we have been working with US regulators to develop a proposal which is both rigorous and fair. Under the proposal, an approved list of reinsurers would be established. Only those who meet exacting financial criteria would be granted approval, and would as a result be released from the current discriminatory requirements.
So where are we now? Well, we have spent the past year developing these proposals with regulators and have been able to clear up some of the misconceptions which have been raised by the domestic market.
We seem to be making progress. My expectation is that in 2004 we will make further, more substantial progress toward resolution. In today's increasingly global market place, I would urge all of you to lend a supportive voice. Helping us to achieve an efficient and fair system of regulation which is beneficial alike to American policyholders and those secure, high-quality, international reinsurers on which they increasingly rely
Lloyd's priorities for 2004
I would now like to move on to the second part of my presentation and talk a little more about what is happening back in London. As you probably know, Lloyd's today is the world's leading specialist insurance and reinsurance market. In fact, the cover we offer runs like a thread through the world's economies, including here in the US where more than 90 per cent of the Dow Jones companies have Lloyd's policies .
Lloyd's entered 2004 in extremely strong shape, and having posted record profits during the last year. But we are determined to maintain and improve our position further, and two key areas on which we are focusing this year are quality of underwriting, and quality of service.
Underwriting for profit
Profitable underwriting is something that has eluded the insurance industry for many years. In fact, the Insurance Information Institute estimates that the US industry has collectively lost well over 400 billion US dollars over the past two decades . To put it a different way, the last time the industry made an adequate rate of return was during the mid 1980s. That rate of return has been sliding dramatically since the 1970s - and averaged just 2.8 per cent in the first three years of this decade . What investors in any other industry would settle for that I wonder?
Much of the industry's recent problems have resulted from inadequate pricing of business during the last soft market. I hope we have all learned from our past mistakes, but history proves that insurance executives are renowned for their short memories.
It was William Wordsworth who said "In modern business it is not the crook who is to be feared most; it is the honest man who doesn't know what he is doing." Recent financial results suggest that over 200 years later, that lesson is still too "modern" for the insurance industry. But in today's increasingly competitive environment, Lloyd's is determined to get it right.
We have now taken some very decisive steps to improve the quality of underwriting going forward. Just over a year ago, we implemented a new Franchise structure and its key objective is to deliver consistent, strong financial performance, avoiding the stomach-churning peaks and troughs we have become used to. The first year of these new arrangements has helped to ensure that our plans for 2004 are grounded in the reality of external market conditions, and set to deliver this objective.
Lloyd's opened this year with a capacity of 26.7 billion dollars , matching last year's record. It certainly proves the continuing attractiveness of Lloyd's as a marketplace. It is partly the result of established market players maintaining or increasing their capacity and we have also seen a wave of new smaller "start up" businesses, including a number in the professional indemnity sector.
However, in reality it means Lloyd's has not seen a change in the level of capacity. That's because our concern is not market size and certainly not market share. Rather, our concern is that pricing and terms and conditions are at a level where there is reasonable expectation of an underwriting profit, not just at the peak of the cycle, but every year.
A willingness to manage capacity - and going forward, to shrink it where necessary - is critical to the future success of our business. The successful underwriters in our market have shown a much greater inclination to shrink their books of business than the least successful, as shown in the last down cycle.
This is just one of the key guidelines at the centre of our thinking which are making their mark as we enter 2004. We have already excluded one underwriting business from our market following consistently unsatisfactory results. And another business has decided to trade forward outside of Lloyd's for 2004 as its business plan did not fall within our guidelines. I expect, going forward, we will see more decisions like these. Not because we intend to apply the guidelines as a strait jacket, because our approach is very much one of flexibility. But these are guidelines of best practice which have been proven through the test of time, and we expect them to be followed in the absence of convincing reasons otherwise.
Service standards
Finally, then, let me touch on service standards. We have talked a lot about the need for profit, but as Edwards Deming astutely observed, "Profit in business comes from repeat customers, customers that boast about your service, and that bring friends with them." We cannot afford to become obsessed with financial issues at the expense of forgetting the customer.
Having worked in a wide range of different industries, one of the first things that struck me when I came into insurance was - frankly - how inefficient it is in terms of its processing and service delivery.
That inefficiency is why we have recently appointed Lloyd's first head of business process reform. His remit is to co-ordinate and drive through business process across the market.
We know that our service standards have not always been up to expectation - in common with many other sectors of the market. But now, at last, things are changing, in a number of key ways. There is something of a quiet revolution under way in London.
In particular, there are two new, important elements which we believe will dramatically improve efficiency and deliver higher standards for our brokers and clients.
For the first time in over three centuries, we have now mandated a standardised form to record all deals done in the Lloyd's market. Tried and tested over the last year, this new 'slip', as we call it, will make an important difference to quality of service. It ensures that the terms of insurance contracts are agreed and clear before they come into force. A small step for mankind but an important one in insurance, where certainty has sometimes been missing in the past. This clarity will make quicker and more efficient the whole process of placing insurance - and also, critically, the business of agreeing claims. It will raise the standards of insurance documentation, resulting in important gains for brokers and policyholders.
The second initiative, of which you may have heard, is specifically aimed at improving standards for American brokers and clients. A big problem for today's insurance technology is the plethora of different computer systems that it has to cope with. Those used by the different carriers and brokers all vary widely, and dealing with each of then drives up costs and takes time. But Lloyd's has developed a platform called Kinnect which is compatible with these systems, and which allows them, for the first time, to communicate and to exchange data electronically. It will reduce the enormous scope for errors , and the delays which mean a claim can take too long to be settled.
So far, Lloyd's has invested over 60 million dollars in this initiative , and amongst its users are Marsh and Willis, two of the largest brokers. Last month, we were excited when Willis passed the first risk through the Kinnect Platform, and we look forward ultimately to its adoption right across the insurance industry, saving time and money on the processing of risk.
Conclusion
In conclusion, ladies and gentlemen, 2004 is set to be a challenging year. Today's business environment is changing rapidly. But if we are serious about the future, we must work together. Tort reform is key to freeing American businesses and individuals from the fear that they will be ruined in court at the merest excuse. And free and fair regulation is critical to allowing today's American policyholders and insurers access to high quality capital.
For Lloyd's part, I hope I have conveyed a sense that our market is changing, and that our pursuit of high quality underwriting, high quality financial performance, and high quality service standards will be relentless in 2004.
As to our relationship with you, the American market, our links are generations old. And our commitment is not just rhetoric. It's backed by billions of dollars. We pride ourselves on our expertise, our innovation, our creativity and we relish the challenge of finding new ways to insure against your new risks. Above all, we value the trust that the people and businesses of New York, and the United States as a whole, have placed in us. Thank you for listening and long may our special relationship continue.
Lloyd's wishes to thank Donald Privett at the Insurance Brokers Association of New York for arranging this event.
Sources
1. Figure excludes inter-syndicate reinsurance. Source: Lloyd's office of September 11th, as at 31 December 2003
2. Survey of Los Angeles Town Hall Presidents' Circle, July 2003
3. All stats this para: US Department of Commerce, Bureau of Economic Analysis, April 200
4 . Lloyd's Global Report & Accounts, 2003
5. Dow Jones and Lloyd's statistics, November 2002
6. Insurance Information Institute figures, data relates 2002 and previous years
7. Frank Coyne, President of Insurance Services Office, speaking at Society of Insurance Research in Florida,
November 2003
8. Provisional figure announced December 2003, per Lloyd's Member Services Unit. USD 1.79 = GBP 1 at year end
2003
9. Kinnect website. USD 1.79=GBP 1 at year end 2003
