Good morning. I am delighted to be here today, and would like to thank you all for coming.
Today, our minds are very much focused on Iraq. Our thoughts are with those in the region and their families-especially those families in your country and mine who have lost loved ones. Once again, circumstances have generated instability that touches all our lives and the insurance industry finds itself in the economic front line.
This morning I would like to talk about two things.
First, the role that the insurance industry, and we at Lloyd's in particular, play in the US economy, and given current global geopolitics, I would like to touch specifically on war and terrorism risk.
Second, I believe that the approach to insurance regulation should be changed, to allow us to better serve and better respond to the needs of American clients and reinsurance buyers better. All insurers, including Lloyd's, operate in a global market place in a fast-moving, highly competitive world. Regulations must reflect that, and should not unnecessarily constrain how we operate.
Let's start briefly with a few facts you may or may not know:
- 93 per cent of the Dow Jones companies have policies at Lloyd's .
- Lloyd's US business virtually doubled in volume in the four short years between 1998 and 2002. At over $8 billion it means that this country now accounts for about forty per cent of our overall business.
- And, Lloyd's capacity to unite business is now a record $23 billion, showing an increase of 20% over the past two years .
The Lloyd's market first sprang up in a coffee shop during the 17th century and business was done on the premises. Lloyd's quickly became the security blanket for inventors, investors, traders and pioneers around the world. While Orville and Wilbur Wright were still developing their aeroplane, Lloyd's wrote the world's first standard aircraft insurance policy. When flying became a business, transporting people and goods, Lloyd's underwriters were there, insuring the new companies.
Where you find people creating new products, testing new devices or building new businesses, you also need insurance. This might explain why we, at Lloyd's, have such profound ties with America, the land of enterprise. As if to prove the point, we still have a coffee shop on our premises - only today the coffee is supplied by Starbucks!
Why do Americans come to Lloyd's? For the simple reason of trust. Our reputation is built on our history of honouring our word and fulfilling the first role of insurance - to rebuild and repair when things go wrong.
It was the aftermath of the 1906 San Francisco earthquake that first marked out the extraordinary commitment of Lloyd's to the US economy. The earthquake and the fire that followed it destroyed 28,000 homes and cost insurers $180 million - a huge amount at that time . Lloyd's, unlike some domestic insurance companies, stepped up to the plate immediately. While other insurers quibbled as to whether the losses were covered by policy wordings, Lloyd's paid up swiftly and without dispute.
And then, of course, came the horror of September 11, 2001.
In the wake of this barbaric crime, Lloyd's suffered a greater share of the loss than any other US domestic insurer, or any other carrier around the world.
Indeed, with losses covering all lines of business from aviation to property and liability, some commentators questioned that we would be able to meet our obligations.
Of course they were wrong.
September 11 was the greatest single loss in our three hundred year history and we have now paid out $3.36 billion in September 11related claims and are still paying out. We keep our word - it's that simple.
With the war in Iraq and the constant threat of terrorism, the risk environment for American businesses is more challenging than ever, and America needs the support of insurers such as Lloyd's more than ever before. Lloyd's is the world's leading war risk insurer, and with 25% of the global capacity for stand-alone terrorism risk , Lloyd's has a strong role to play in supporting the economy against terrorism too.
Allowing people, businesses and goods to keep on moving during times of instability and war is now critically important. American shipowners want cover for their hulls and their cargoes. As do commercial airlines. Lloyd's is taking on these risks, allowing organisations to get on with running their business. In fact, Lloyd's now accounts for 12% of the global marine market, and 29% of the global aviation market .
September 11 taught us much about the shifting terrorism risk. It demonstrated that the tragic loss of human life is no longer the only impact. Economics have changed that. Take business interruption, for example, where properties are forced to close as a result of damage or as a consequence of resulting police action. Lloyd's estimates that the insurance cost of business interruption accounts for a staggering $10 billion - roughly 25% - of the overall September 11 loss . And the wider economic impact on a company could be even greater. In today's global business environment, the forced closure of just one Manhattan office of an international company has immediate global repercussions.
In fact, nothing proves better than September 11 the importance of America having free and fair access to the global insurance market. September 11 losses were spread across the world's insurance sector. As a result, the US market was not saddled with the bulk of the loss, and the US insurance sector was able to trade on. Of the 10 insurers facing the highest losses, only two are American. Lloyd's suffered the largest loss, highlighting its key and integral role in the US economy. And of the other seven, one is Bermudian, two are Japanese, and the remaining four are European .
We all hope that the current war will soon be over. I am pleased to say that the last Gulf War did not have a significant impact on Lloyd's or the insurance market. A short, contained war in the Gulf is not expected to do so this time either. But in time, wars will spring up elsewhere, and even when the guns in Iraq fall silent, the threat of terrorism in the US and elsewhere, will remain.
The Challenge for the US regulatory system
Ladies and Gentlemen, what I am endeavouring to describe to you today is the inextricable linkage and unwavering support for more than a hundred years which Lloyd's has provided to the economy of the United States.
However, it is here in America, the bastion of free trade, where we face one of the greatest obstacles to trade. Despite our integral role in this economy throughout the past 150 years, Lloyd's remains under US regulation as an 'alien' insurer and reinsurer.
As an alien reinsurer, we are required to hold collateral in the US, either by way of expensive letters of credit or cash, in non-working trust funds. These funds amount to 100% of our gross liabilities, plus a substantial margin. US reinsurers are not subject to these onerous requirements, funding liabilities on a net basis, and taking credit for reinsurance purchased. Lloyd's is not permitted to take credit for any reinsurance purchased, and currently has around $9 billion tied up in such funds. I repeat, we are required to deposit $9 billion cash, regardless of the amount or quality of reinsurance protection we have bought, much of it from US companies. This represents massive and needless overfunding of our liabilities.
These US regulations prevent market forces from operating freely - meaning that insurance is not priced as competitively and economically as possible.
We incur costs in setting up the funds and we also suffer the opportunity cost of not being able to invest capital in other areas. Ultimately that cost is passed on in the price insurance companies are charged for reinsurance cover. Insurance companies in turn must charge ordinary policyholders a premium that takes into account the cost of their own reinsurance.
Of course, I realise that there are concerns here in America about taking reasonable and effective measures to verify that reinsurers will fulfil their obligations to their customers in the US. Undoubtedly, there needs to be a mechanism to ensure that sub-standard carriers, which have not the expertise or financial strength to offer real protection, are not allowed to operate.
But demanding that all foreign reinsurers, whatever their size, strength or claims-paying record, lodge 100 per cent collateral in the US, does not account for the fact that carriers like Lloyd's are already subject to detailed regulatory oversight in their home country.
The current US rules display a lack of understanding of the strength and security of the Lloyd's market. It treats all overseas insurers in the same way. What is the reason for it? How can this make sense?
The current system of US regulation is so indiscriminate that neither our reputation, nor our financial strength, nor our unrivalled claims-paying record can be taken in account. This is unreasonable and results in adverse effects for American businesses and consumers.
We are heartened by the reaction that some US regulators have given to our argument. They appreciate the global and international dimensions of the reinsurance industry and the important role that Lloyd's plays. We hope that this understanding will soon be translated into action - namely, that the US law is reformed and our position within the US market is fairly acknowledged.
A Global Threat, A Global Response
In today's uncertain world, we need strong, financially secure insurers and reinsurers operating in our insurance markets.
Prudent regulation will sustain a robust, secure marketplace where risk is spread effectively, avoiding undue concentration of risk in any one insurer, sector or country. Prudent regulation will also create a fair, healthy and vibrant marketplace where the world's strongest reinsurers are willing and able to play an active part, and where they fulfil their obligations to clients. Prudent regulation will allow funds to be used to their best effect, and not tied down by excessive and needless regulation in one country. Only then can we build a global umbrella of insurance, which can protect us all - our nations, our people and our property - from the new risks we face.
Lloyd's is ready to play its part. We hope that US regulators will too.
Sources
1. FTSE 100, Dow Jones IA, Fortune Global 500 & Lloyd's statistics, November 2002
2. All business statistics in this paragraph relate to gross premiums. Source: Ins-Sure report LEG 720: end of year reports 1998-2002
3. Lloyd's Member Services Unit, February 2003. $1.61=£1 at year end 2002.
4. New Risks, New Frontiers, published by Lloyd's, 1998
5. Lloyd's 01G XCS monthly report, March 2003
6. Hiscox, January 2003.
7. Direct and facultative business. Source: Statistics Relating to Lloyd's 2001.
8. Lloyd's US CFO survey 2002
9. Aon WTC Bulletin July 02 / Benfields WTC Bulletin Nov 02 / MS Sept 11 Edition
