'We must seize this opportunity to set Lloyd's up for success'
John Neal delivers his first public speech as Lloyd's CEO at 'The Lime Street Perspective', hosted by the Insurance Insider.
This is my first public speaking engagement since I took up the post as Lloyd’s CEO almost four months ago - plus or minus 100 days if you give me Christmas Day and Boxing Day and New Year’s Day off - which as anyone who knows me will tell you is an awfully long time for me to keep quiet! So, I am going to make the most of my opportunity this morning to be reasonably noisy.
And I am very pleased to be able share the initial results of the work my team and I have been doing to set Lloyd’s up for success in the short, medium and long term.
From a personal perspective, it is an unbelievable honour to be the CEO of Lloyd’s and to serve the market at such an important time in its history. I have always cared deeply about Lloyd’s; indeed my first job in insurance saw me underwriting in the old Room in 1985 - I still have my Lloyd's stamp - and I do feel the deep sense of responsibility to the market that we all do to ensure Lloyd’s continues to be the world’s specialist, commercial and corporate insurance and reinsurance marketplace and, in so doing, that we provide the best possible service to our customers.
After listening to the feedback from many of you in the room today and other stakeholders around the world over the past few months, I am utterly confident that the support, the desire and the means are in place to achieve that.
Before I go into any detail on the future, I just wanted to reflect on why Lloyd’s has not performed to the best of its potential over the past few years. This is by no means to criticise previous regimes but just to understand why the Corporation and Lloyd's need to rethink our approach.
Looking in from the outside as I did running an insurance company, and an insurance company that ran a Lloyd’s business, I've noticed for some time that Lloyd's has been reacting to changing market conditions very differently to others in the sector.
To some degree I think that should be expected – the market doesn’t act in the same way as an insurance company and of course the business underwritten at Lloyd’s is different in scale, geography and type. But from about 2012 onwards Lloyd’s was notably diverging from where I think the best in the insurance company market were heading.
Back then, the conditions we are familiar with today – the reality of a low-price environment caused by an influx of capital seeking returns in a low interest rate economy – were starting to bite. And there was growing evidence that the market cycle that had always dragged our sector back into a hard pricing environment was waning – or had potentially changed forever.
On the surface everything at Lloyd’s seemed ok. Between 2013 and 2016, and in a softening market, Lloyd’s grew by about 14% - actually, with FX it was an awful lot more than that.
But below the waterline the underlying trend was one of declining profits, so the accident year combined operating ratios through that period were 95%, 97%, 98% and then in 2016, 103% . But that doesn’t tell the whole story because that period 2012-2016 was the lowest cost of catastrophe claims for 180 years. If you normalise those combined operating ratios with an appropriate allowance for cat loss, every one is more than 100%.
Perhaps we were all guilty of sticking our heads in the sand because we were all making a profit. But my impression at the time was that the best in class in the world of insurance and reinsurance were starting to react to the changing marketplace that they found themselves operating in to address performance challenges.
But while they were factoring in the end of the market cycle, the role and use of alternative capital, tackling costs and cutting back business where necessary, Lloyd’s was expanding into new territories, watching costs increase and growing its business, even though it was becoming less and less profitable.
It shouldn’t have been a surprise then when the Lloyd’s market posted a 2016 underwriting result that was a quarter of that of the previous year . Nor indeed that 2017 delivered an underwriting loss. The above-average Harvey-Irma-Maria losses made it worse but even if you normalised the cat activity the combined ratio was 106% . We’ll see in March what 2018 actually looked like.
For an organisation of Lloyd’s stature, these results – and I am sure everyone in the room would agree – are totally unacceptable.
This is not where we want to be.
It’s not where we should be.
Our place is at the front of the flotilla setting a course for others to follow, not sailing in the wake of our peers and trying to catch up.
Our long-term track record actually demonstrates the market’s ability to be agile and adapt to the prevailing winds – to know when it needs to tack and change course as Lloyd’s has done time and time again. But on this occasion, we didn’t do it hard and fast enough.
I took this job on with one simple aim and that was to make sure we never find ourselves in that position again.
I am determined – and with your help because this is a collective responsibility – to make sure we succeed.
We will - I wouldn’t be standing here if I didn’t think that was the case.
What’s done is done; now is the time to move on and face our future with genuine optimism. There is enormous opportunity ahead for the Lloyd’s market – we just need to put ourselves in a position to seize it.
How we do that is what I want to talk about now.
The first step was to get Lloyd’s back on track.
This was the focus of the Corporation and the market’s work that was carried out last year - much of it under way before I arrived - including the performance review work carried out by Jon Hancock and his team.
This was undoubtedly a tough process and we all recognise that, but it had to be done this way because as I referenced earlier we were trying to correct years of under-performance and do it in one go.
I think it was a fair process. It’s not acceptable that between 2015 and 2017 unprofitable syndicates have eroded 87% of the market’s profit. That’s unfair on those syndicates that are writing good business and generating healthy returns. The view that it will “all come out in the wash” has been harmful for the collective. The old adage that every business has a price is wrong: bad business is simply bad business, and it shouldn’t be happening in this marketplace.
I think Lloyd’s earned a lot of respect for addressing our performance challenges in the way we did. People saw we were taking a stand and applauded that - and that the market was actively addressing issues that were not only impacting Lloyd’s but many others in our sector.
And let’s not forget that we have ended up with a good result for Lloyd’s. It’s a result that, provided the market delivers on its plans for 2019, will deliver sustainable and profitable growth, and within the plan there is genuine opportunity for new business and new innovative business.
2018 also saw good progress on modernisation, with PPL use increasing – albeit driven in part by the market mandate; the distribution opportunities through technology are changing and will make us easier and more effective to do business with; and the European business opportunity I think, post the establishment of Lloyd’s Brussels, will be a benefit to us.
This is work we had to do to catch up to where we needed to be.
My focus since being appointed is on what we must do next - the changes we must make to the Corporation and the market to ensure Lloyd’s can thrive today, tomorrow and in the insurance market of the future – whether that’s three years out, five years out or 10 years out.
This is a collective endeavour so it’s really important everyone has a say in that future.
With that aim, and over the past few months, my team and I have been listening to hundreds of market stakeholders around the world - everyone from policyholders and global carriers who operate outside of the marketplace to carriers and brokers large and small that operate within the market place.
We still have a lot of people to meet – these meetings will be carrying on throughout February - but we have already gained some valuable insights into what Lloyd’s does well and where we could improve.
One thing you can always rely on, and I’m beginning to find this out, is that everyone has a lot to say on Lloyd’s and they are very willing to say it!
The headline so far is that there is a real passion for the Lloyd’s market and that passion is universal. The sense of loyalty and pride in Lloyd’s comes through in almost every conversation we have. People want Lloyd’s to succeed, they care passionately about its future and they want to develop businesses within the marketplace.
Of course, we have a large variety of stakeholders, and that means we are hearing different things from different groups, each of them highlighting things they value most. One or two examples of that include:
- Our global licence network, which means Lloyd’s underwriters can support insurance and reinsurance business in 200 territories worldwide, is seen as a particular strength by both carriers and brokers.
- Our concentration of broking and underwriting expertise attracts business to Lloyd’s and London.
- Our reputation for writing specialist business is a major reason that large, multi-platform carriers buy Lloyd’s entities.
- And the fact we pay billions in claims every year – about £200bn since 2000 - is respected by policyholders and nations around the world.
These qualities – and more – are what power the Lloyd’s brand. And what a powerful brand we have – we are, without doubt, the best-known insurance brand in the world. It’s one of our greatest attributes and we must never forget that.
These unique characteristics are what sets Lloyd’s apart from the rest. And these are the foundations on which Lloyd’s future must be built.
We are hearing your frustrations too – the lack of progress on digitisation, high costs, lower line sizes compared with our competitors, inefficiencies in the subscription model, the way the Corporation is set up – these are all some of the areas that you and others are telling us could be improved, and we are listening.
These valuable insights are informing our approach as we roll out our strategy through 2019.
The strategy has two elements – the short to medium term and medium to long term.
The short to medium term is about making sure the Corporation is set up to deliver the market’s business aspirations, so this year:
- We are working with the market to ensure its underwriting, and the way it assesses and price risk, is world-class. This year’s business planning process, with further performance review work included as part of that, is supporting this goal.
- We are looking at underwriting P&L. We need to identify and strip out the costs that are harming Lloyd’s competitiveness. The Corporation’s review of total acquisition costs this year is part of this process.
- We are continuing to modernise the market by delivering on our original promises for the TOM.
- We are putting in place a new geographical focus. While it has been prudent to gain a foothold in what will be the main growth markets of the future – China and India, for example – we will now deploy our resources more tactically. This means concentrating on those developed markets that have the greatest potential for further growth - such as the US and new opportunities in Europe through Lloyd’s Brussels - and those emerging markets where we are likely to see the best return on our investment.
- We are looking at how we can make better use of alternative capital.
- To deliver all this, we are appointing a high-performance executive team, and we will be making announcements on this in the next couple of weeks.
We are also reviewing how the Corporation operates, so that what we offer and how we work fully supports the market’s development over the next few years.
- This means focusing on where we add value and getting rid of unnecessary red tape and duplication.
- It means making sure the way we work is responsive, agile and bespoke.
- And that we have the right skills in the right areas.
- It means investing in technology.
- And all of this under the appropriate governance structure.
The medium to long term strategy is about transforming the market and the Corporation of Lloyd’s.
Without doubt over the next decade we are going to experience fundamental changes to the way insurance works - the rise of customer expectation will be fundamental to that expectation, the role of technology as we all recognise is important, and the risks that our customers are looking for us to insure will be very different.
We must have the business model, the technology, the talent, the products and the distribution channels to seize the opportunities everyone in our sector will be competing for.
My vision of what Lloyd’s must become to succeed in this new world is two-fold:
- We must be the global marketplace for commercial corporate and specialty (re)insurance.
- And we must be the world’s most technologically advanced marketplace that delivers outstanding value and products for our customers.
We must be the go-to market that combines the best of Lloyd’s – our risk expertise, our broker and underwriter relationships, our global network, our claims track record, our talent, our brand – with the transformative power the digital world has to offer.
Ambitious, yes – but the changes our sector are facing are so fundamental we must set our goals with appropriate and imaginative aspiration.
To start this process, we will publish a prospectus with Lloyd’s aggregated full year results at the end of March that will articulate this vision in more detail. We will be asking for our stakeholders’ views on what we are proposing and using them to shape the prospectus into a blueprint to transform the market and the Corporation.
This is not revolution, it is natural evolution.
This is necessary change that will be carried out in a structured and thoughtful way.
It is a process that will scrutinise what we do and consider, with all our stakeholders, how we could do it better.
Everything - everything - is up for discussion:
Distribution, capital, Lloyd’s structure, technology, talent, the role of the Corporation – you name it, we are looking at it because we have to consider everything if we are going to make the most of what we think is a one-time opportunity to secure a successful and profitable future for Lloyd’s and our customers.
This feels like a pivotal moment in Lloyd’s history.
Yes, Lloyd’s remains the strongest insurance and reinsurance brand in the world, a market that for hundreds of years has shouldered the risk of nations, businesses and communities, and helped them recover quickly after disaster has struck.
But, as the chastening market results of the past few years remind us, longevity alone is no guarantee of future success.
Never again must we must we allow our hand to slip from the tiller and let the market drift into stagnant waters.
Now is the time to muster the pride and passion we all feel for Lloyd’s to restore its place at the head of the fleet.
Now is the time to set our new course and move forward with the confidence that comes from a renewed purpose and a clear vision of where we are heading.
Now is the time to seize our opportunity and work together to secure the market’s legacy for many, many years to come.
Let’s get on with it.