Ladies and Gentlemen
It is a real pleasure to be here, at the FT’s first “Future of Insurance” conference.
I’m particularly pleased this event will be uploaded to the FT website, although I do hope I’m not tempting fate by saying that at the start of my speech, rather than at the end!
The FT has, of course, always been at the forefront of the new media revolution, and I for one, am an FT App convert on my iPad, so I’m pleased today’s event forms a part of that tradition of modernising.
As a printed newspaper, the FT was one of the first papers to earn more revenue from readers than from advertisers, upturning a model held sacrosanct for centuries.
Then, as a digital paper, the FT was one of the first to introduce a paywall, as far back as 2001. This strategy stemmed from the recognition that consumers were, in fact, willing to pay for content – provided that content was unique and high quality.
For the FT, these risks have paid off handsomely.
Indeed Forbes concluded that: “this 126-year-old institution… has broken free from its stuffy; British gentlemen’s club reputation…and established itself as a global digital media leader.”
Lloyd’s is, of course, some 200 years older than even the FT.
So I wanted to talk to you today about how we, as another elderly institution, are meeting the challenges of the digital age.
So, first, a little about who we are – because Lloyd’s is rather unique.
We started, in 1688, in a London coffee house, as a way for merchants to share maritime information and shoulder financial risk.
Lloyd’s still operates as a market-place today. In fact, we remain the world’s only market for specialist insurance and reinsurance.
We are home to some 58 insurance businesses, or managing agents as we call them. And between them they manage some 96 syndicates. These syndicates compete – and sometimes collaborate – to cover complex, bespoke risks.
Lloyd’s is a varied market – we contain huge international businesses such as AIG and Munich RE. But we also contain much smaller niche players. These can be highly specialised, concentrating on, for example, space risks or nuclear power.
And we are still a fully brokered market. Lloyd’s has no sales force as such and indeed has outsourced distribution to brokers. Brokers have been critical to Lloyd’s development over the centuries bringing to London risks from all over the world.
We also have another source of distribution where syndicates delegate underwriting authority to Managing General Agents, or MGAs, who are also a very important part of our distribution arm. Their understanding of our client’s risk map is the foundation for the services we provide.
The clustering of broking and underwriting expertise is what gives Lloyd’s our unique edge.
We are famous for innovation. We created the first Earthquake cover; the first cover for cars and planes; the first satellite cover; the first D&O liability cover; and, more recently, we are leading the world on new risks such as cyber or supply chain disruption. I will come on to that a bit later.
But we also combine this innovation with prudent oversight.
In the Corporate centre of Lloyd’s, we are guardians of a very special feature of the Lloyd’s market – a central mutual fund that sits at the centre of Lloyd’s.
In order to protect this central fund we approve all syndicate business plans and also set the level of capital that is required to back those business plans. Each member at Lloyd’s has to deposit a certain amount of capital as Funds at Lloyd’s – which means it can only be used to pay liabilities to Lloyd’s policyholders.
Syndicates also have to make a contribution each year to the central fund which is there to pay out if one of the syndicates doesn’t have enough capital to fulfil their policyholder liabilities.
This mutual aspect of the market makes Lloyd’s totally unique. It also provides the financial strength so desired by our customers. All syndicates at Lloyd’s are backed by our excellent ratings – A+ from S&P, A from A.M. Best, and AA- from Fitch.
So that’s who we are and so – how are we doing?
The Lloyd’s market as a whole made £3.2 billion profit in 2014, the combined ratio was a very healthy 88 per cent and overall Return on Capital was close to 15 per cent.
We have out-performed our competitor group consistently for the past five years.
And we are known for our unbroken promise to pay valid claims – from the great San Francisco earthquake back in 1906, to the tragic 9/11 event in 2001, through to the Christchurch Earthquakes in 2011.
So I think we are doing very well.
But we aren’t complacent. The world is changing like never before, and we need to respond to that.
I know that several speakers will spend time unpacking the challenges facing our industry, so I won’t go into too much detail.
But I think it is fair to say there are three big challenges.
The first is the long-tail economic and political response to the 2008 Global Financial Crisis. Interest rates are at record lows, reducing our investment returns and also attracting a surge of new capital into the industry, as investors seek the higher returns that insurance offers. That capital can be put to good use – which I will come onto. But it is also putting pressure on pricing.
The second challenge is the move from “the West” to “the Rest”. By 2030, the E7 economies will be larger than the G7. And the pace of growth is pretty astonishing.
By 2025 Tianjin, a city in Northern China, will have a larger GDP than Sweden. But how many of us could even place Tianjin on a map? And of course I’m taking for granted that all of you can place Sweden on a map!
But this lack of knowledge of some of these new rising economies in the world is something we need to rectify.
Emerging markets accounted for 43 per cent of commercial insurance premium growth over the past 3 years.
And yet London, that traditional global centre of insurance, only managed to capture 0.5 per cent of that growth. And that’s because new regional centres of excellence have been emerging: Bermuda, Singapore and Dubai.
Being an optimist I see plenty of opportunity there – but also a pretty big competitive threat for London.
The third and final big challenge is the digital revolution, and all that comes with it. The exponential growth in cheap, fast computing powers means that, to quote the founder of Netscape, “software is eating the world.”
New products and services exist which were unimaginable a decade ago, from private rocket company SpaceX through to mobile banking for the bottom billion of the population by mPesa. Driverless cars feel like something from “Back to the Future”, but are already with us today.
Just think of Uber, the world’s largest taxi company – and a taxi company with no taxis, or drivers. Uber didn’t even exist five years ago. It is now worth around $50 billion – that’s more than 405 other companies in the S&P 500.
So, what does the Digital Revolution mean for insurers?
I think the impact is threefold.
First: data modelling is getting ever more refined for some of the less complex risks – motor insurance being a prime example. That is good news for us, but also poses a challenge as previous areas of expertise become more commoditized.
Second, whilst we have more data in some areas, we have a paucity of data for emerging risks – those complex, intangible risks which have arisen as a result of globalisation and rapid technological change.
Where once we provided cover for hurricanes, now we are asked to provide cover for hacking. Only a fortnight ago, a cyber-attack grounded a Polish airline – the first such attack of its kind.
And no longer are events a local issue. The 2011 floods in Thailand proved that the local has truly gone global, halting, as it did, car production in America.
These emerging risks are complex; they are unquantified; they are difficult to price.
In fact, one CEO told us that as much as 90 per cent of the risks that trouble him are uninsured – because the right products don’t yet exist.
So we have too much data for some risks, resulting in commoditization; and not enough data for others.
But a third disruption facing us is to the insurance business model itself. Technology is already changing distribution; modelling and pricing.
If you look at reinsurance, ever-better data modelling has given investors from outside the insurance industry the confidence to invest in Index Linked Securities such as Catastrophe Bonds. You’ll hear more about all of this at the panel discussion later on today.
Alternative capital provides us with an opportunity to pull in efficient capital – which we will certainly need to solve some of the mega risks which are now emerging, such as cyber.
But alternative capital also means that insurers can no longer rely on two previous sources of competitive advantage – large reserves and a specialist understanding of certain less-complex risks.
We have already seen the impact of better data and new, straight-to-consumer platforms in motor insurance. The first online motor insurance broker entered the UK in 2000, and now 20% of the market is via online platforms .
Can we expect this sort of disintermediation to happen in other commercial lines? Absolutely. Last year, Walmart and Ikea started writing insurance. Google has obtained a license to write insurance across America. And we have even seen the first peer to peer insurance products offered.
Let me be clear – I am in no doubt at all that less complex risks will become commoditized. Insurers will be Uber-ised unless we find new ways to add value.
So the insurance industry is facing down some significant mega-trends, from the rise of emerging markets through to the data revolution.
What does this mean when it comes to future-proofing Lloyd’s?
First, in a world of increased competition, we need to get the basics right.
Placing a risk in the London market still requires a plethora of paper.
Back office systems are unable to communicate with each other.
We operate a subscription market – that means that there is multiple entry of exactly the same data into numerous operating systems.
And our syndicates are unable to mine their own data effectively, losing a huge potential source of competitive advantage.
So this needs to change. We need a 21st century infrastructure to support a 21st century market.
Lloyd’s is working with the whole London market to develop this future operating model, the core of which will be streamlining electronic data, entered once only, using global standards.
There’s been much talk over decades about the need to modernise with limited results. You may well therefore ask – so what’s so different this time?
It’s different because the market is driving it. Brokers, syndicates and company carriers are the ones designing and building this new model.
I think we all recognize that this model will do more than just save us time and money. It will allow us to better understand our business and the risks our clients face.
It will free up time to provide value added services to customers – and to have time to look into those product gaps that those business CEOs have told us about.
And this brings me to the second plank of our growth strategy at Lloyd’s: a recognition that content is king.
In 2001, the FT took the important decision to focus on “unique, differentiated content” rather than race to the bottom on pricing.
It is clear, to me, that insurers need to do the same. We need to focus on covering the complex, bespoke and innovative risks that no one else can – because the less complex risks are going to become commoditized pretty fast.
I think that Lloyd’s is well-placed to capitalize on these changes because our unique market structure supports a wide range of specialist talent.
Take cyber insurance, for example.
90 per cent of large organizations suffered a cyber-breach last year, according to the UK Government.
A serious breach can cost hundreds of millions as companies struggle to notify those affected; pay damages in court cases and face regulatory action. Cyber-attacks can also hit not just data but physical assets, shutting down power plants and factories. And, of course, there is the reputational fallout, which can be irreversible.
Despite these risks, KPMG found that just 13 per cent of large and medium-sized UK companies have cyber insurance .
So why is the protection gap so cavernous?
I think that both companies and insurers are struggling with how best to assess and implement this sort of complex, multi-faceted cover?
At Lloyd’s, I won’t pretend we have all the answers – this is a new and fast-moving area.
But we do have a cluster of expert brokers and underwriters and they are developing innovative products, encompassing everything from IT support through to reputation management.
The fact that we are a subscription market means that our syndicates not only share risk, allowing them to be more bold. It also means our syndicates are able to share information, allowing them to be more innovative.
For example Tom Ridge, the first US Head of Homeland Security, is partnering with five of our syndicates. Tom is just one example of the kind of specialist talent that finds a home at Lloyd’s.
41 Lloyd’s Syndicates are now writing some form of cyber insurance and 15 per cent of global cyber insurance is now written through the Lloyd’s market.
And now let’s take another very different example – closing the global protection gap right around the world.
Under-Insurance is, I think, one of the biggest problems facing emerging economies.
China’s Sichuan Earthquake in 2008 resulted in estimated damages of $125bn. But just 0.3% of that was covered by insurance.
We estimate that the global protection gap – the gap between insured and actual economic losses – could be as much as $168 billion a year.
Again, I think Lloyd’s is well placed to support closing that gap.
I’ve mentioned our market’s specialist expertise and our strong risk appetite. Those attributes are important in emerging markets because data is often very patchy and risks are poorly understood.
But we also have some additional attributes which matter, too.
As a global insurer and reinsurer, our syndicates are able to support local communities recover by taking costs out of the country if disaster does strike.
As an institution with centuries of history, our clients know we will not disappear if the going gets tough and large calls are made on our capital. That really matters in emerging markets which are new to insurance.
And, finally, as a market-place, we have a reputation for building capacity in local markets. Lloyd’s is a platform, open to capital and underwriters from right around the world. We are not afraid to support the growth of local markets or local players and, indeed, have played an active role in supporting that development.
That matters because many emerging markets have a history of protectionism. Regulators and policymakers need proof we are in it for the long haul. And Lloyd’s most certainly is.
A few months ago I was in Singapore, which I think offers an interesting case study.
Since Singapore’s Monetary Authority opened the insurance market in 2000, premiums have quadrupled and Singapore has overtaken Hong Kong as Asia’s regional insurance hub.
Lloyd’s has been very much part of that story.
At a time when it was needed, Lloyd’s brought brand name recognition to Singapore; expert underwriters; A-rated paper and, perhaps most importantly of all, a network of trusted relationships.
I think that the fact Lloyd’s is able to help build the local markets we enter makes a difference for us in the decades ahead.
And, of course, Lloyd’s will need an increasingly local presence as new financial centres continue to emerge.
The FT is undoubtedly a City of London brand – but it is also a global presence. That is the model we are pursuing for Lloyd’s.
London will remain our preeminent hub – the concentration of underwriting and broking talent in London is unparalleled; we have access to the City and we also have time-zone advantages.
But we also recognise that businesses will not want to fly into London at the drop of a hat. There is also a demand for policyholders to access insurance in their local market, demand to deal with brokers and underwriters who know their business and can speak their language.
So, at Lloyd’s, we accept the need for a greater presence in local markets.
This year, Lloyd’s opened offices in Beijing, Dubai and Mexico; Colombia is next on the list. And we are building relationships in Brazil, China and India.
Again, this is not just a one way street. We also want to internationalise the Lloyd’s London market-place. For example, at the start of this year China Re set up its own syndicate – the first time in our 300 odd year history that a Chinese firm is writing directly out of Lloyd’s of London.
That was a moment I really welcomed, because we need that internationalization of Lloyd’s if we are to build the local knowledge and new relationships we will need to succeed in a globalised world.
And that brings me to the final part of the puzzle – talent. We need to hire the right people.
We don’t just want smart, dedicated people.
We want smart, dedicated people from a wide range of backgrounds and geographies.
Otherwise, we will all think as we have always thought, and do what we have always done – and that is not good when it comes to innovation.
Last year, I saw reference to a study which really brought to life the value of diversity.
New York’s Center for Talent Innovation found that teams with a diverse range of members were 45 per cent more likely to expand their existing market share.
And diverse teams were 70 per cent more likely to capture new markets altogether .
So there is a business need to get cracking with this and, at Lloyd’s, I think we are putting in place a good foundation for the years ahead.
We are working with senior leaders and have created a market-wide initiative to improve diversity and inclusion – which we call Inclusion@Lloyd’s. And, wherever I can, I want to give the message to young men and women of all backgrounds that insurance is exciting, it is socially valuable and it is a welcoming industry.
That’s why events such as this, which use a digital platform to provide wider access, are so important.
So I hope I’ve given you a whistle-stop tour of the challenges facing the Lloyd’s market – and how we plan to embrace those challenges by creating a global presence; and specializing in those risks that no one else can touch.
I don’t want to pretend the future is easy. The brave new world of new risks, new markets and new business models will undoubtedly lead to casualties in our industry.
But, as insurers, risk is our business. So we need to, as an industry, rise to these challenges in the decades ahead.
For my part, I am optimistic that the Lloyd’s platform will be agile enough and innovative enough to more than manage the challenges ahead.
Thank you for listening.
I’m very happy to take any questions.