London 100 ForumThu 26 Jan 2017
Speech by Inga Beale at London Forum Breakfast Meeting
Speech by Inga Beale at London Forum Breakfast Meeting
There was a moment when I was at Davos at the World Economic Forum last week that felt like a moment in history – a time when I felt something had changed.
That moment was the speech by Chinese President Xi Jinping – the first Chinese leader to ever attend the WEF.
He was calm. He was dignified. He was eloquent.
And his message was not one we are used to hearing from the world’s second largest economy.
He defended globalisation passionately saying it was not the root cause of global problems. He said international financial crises were caused by the excessive pursuit of profits, not globalisation.
He said trade wars must be avoided.
“No one will emerge as a winner in a trade war,” he said.
“We should not develop a habit of retreating to the harbour whenever we encounter a storm, for this will never get us to the other side of the ocean.”
And then he proceeded to extol the importance of protecting the environment while pursuing economic and social progress, “to achieve harmony between man and nature, and harmony between man and society”.
It wasn’t what I expected from the leader of a nation that is involved in territorial disputes, exerts control over internet access and previously has been protectionist in its outlook.
The contrast between his speech and that of Donald Trump at his Presidential inauguration could not have been greater.
“We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs.”
“Protection will lead to great prosperity and strength.”
Quietly China has moved itself into position to be the power broker in world trade. That speech in Davos felt to me like the moment it happened.
But of course this has been a Chinese strategy for years.
The amount of money it has been investing across the world in the past decade is extraordinary. And it does it quietly, not making a song and a dance about it.
According to the China Global Investment Tracker, China has invested 1.5 trillion dollars globally between 2005 and 2016.
That includes 150 billion dollars in the US; 250 billion dollars in sub-Saharan Africa; and almost 230 billion dollars in Europe.
Part of this investment is in China’s Silk Road Economic Belt and the 21st-century Maritime Silk Road, also known as One Belt, One Road.
This is a project of staggering scale that aims to forge the Central Asia, West Asia, the Middle East and Europe regions into a cohesive economic area through building infrastructure, increasing cultural exchanges and broadening trade.
The Road element aims to do the same through ocean trade routes.
So why am I talking about China?
The point I am making is that we need to wake up. The old world order with the US and other established markets at the centre is changing. Maybe China isn’t the dominant global force quite yet – but it soon could be.
And other emerging markets are going to grow in influence too.
Businesses have to recognise this – we have to think about the impact on our business – when most of the assets around the world are in the hands of companies in a country that we know relatively little about.
Businesses have to react to this because history is littered with examples of industries that failed to adapt and got left behind.
One example is the music industry – which did actually live to tell the tale. But only just.
It was in the 1990s that the music business started to reel from the impacts of digital disruption. The advent of file-sharing ripped up the sector’s traditional business model and at a stroke wiped out half its value.
Instead of embracing new technology and seeking out the possibilities, music executives went to court and tried to shut down pioneering file-sharing sites like Napster.
The industry just couldn’t see how file-sharing could match its heyday, when CD sales drove its income.
Now look at where it is today.
According to the FT, Universal earnt 1.1 billion dollars in streaming revenues in the first nine months of last year— enough to offset the entire fall in sales of digital downloads and CDs. And Warner Music posted its best results in eight years, also fuelled by streaming sales.
Streaming sales grew by more than 50 per cent across the sector last year.
Each year more people are buying access to digital music; Americans streamed 431 billion songs on demand in 2016.
Services like Spotify and Apple Music have transformed the way we consume and pay for music.
And the music industry, because it, albeit belatedly, came to its senses, survived to fight another day.
The insurance industry faces the same kind of disruptive threat to its existence today, threats I am sure you all recognise.
There are challenges to distribution.
New technology is transforming the way we work – and is allowing the competition to do it better than we can.
And new markets are opening up and offering new opportunities – but access is challenging for us here in London.
I am concerned that as a sector we are sleepwalking into this new world at a time when we need to be fully aware of what is going on around us.
I am not talking about the short-term here. Of course, we need to tackle the immediate challenges thrown up by the tough market conditions – low interest rates, pricing pressure, increasing expense ratios, the rise of the broker controlled facilities – all of these, you are familiar with.
But the greater forces buffeting our shores require us to pull our heads out of the sand and look to the horizon, because it’s the long-term play we make today that will determine the success of our industry in the future.
It’s why at Lloyd’s we published our long-term strategy Vision 2025. It’s why The City UK, the trade body that represents all the financial sectors in the City, is about to publish its own “2025” strategy – determined to keep London as the financial centre of the world.
Perhaps we should take as an example the seventh generation principle practised by Native Americans that says that in every decision, be it personal, governmental or corporate, we must consider how it will affect our descendants seven generations into the future.
That might be too far in the distance for many of us to plan but the principle is a good one: we should make well-judged decisions for the long-term.
The London insurance industry needs to adopt some far-sightedness right now because those challenges I mentioned earlier – distribution, technology and market access, among others – are knocking at our door.
At Lloyd’s we addressed these in Vision 2025 and it has been helpful to have it to refer to, to keep us on our path when faced with the distractions and demands of the day-to-day market conditions.
In terms of global market access, Brexit of course is a huge challenge for us right now. From a Lloyd’s point of view, while creating a lot of work for us, it’s important that we maintain market access to Europe for the long-term. One of the key attractions of Lloyd’s is its vast licence network around the world. It’s imperative that we don’t lose 27 licences overnight.
In her speech last week, Theresa May stated categorically that Britain would pull out of the single market when it leaves the European Union, so we are proceeding on the grounds that that is what will happen.
The subsidiary model is our preferred alternative trading option, and our Brexit team is now reviewing which country within the EU would make the best location for a Lloyd’s subsidiary to be based. There are various factors to consider here and we are taking the views of the Lloyd’s market on board through our various advisory groups.
We have a shortlist which we are working on extremely hard and we continued to talk to the respective governments in Davos last week. We will announce our first choice by the end of Q1.
We will then be in a position to use this option, the exact timing of which will depend on the progress of negotiations over the coming months. We are keeping the market up to date as we move through the process.
The other key part of our market access strategy is our work on emerging markets. Of course, the established markets are important and we will always look at ways we can grow in places like the US.
But the really exciting growth numbers in the longer term are going to come from places like China and India.
McKinsey estimates that Asia and Latin America will represent 37% of the global P&C market in 2020 or 745 billion dollars.
Munich Re forecasts that China will probably be the world’s second-largest insurance market behind the US in less than 10 years, with premium volume set to triple – non life premiums in China were 126 billion dollars in 2015.
Today, Lloyd’s GWP in Lloyd’s China is a fraction of this market - so the potential for growth is enormous.
Imagine if we could achieve the same growth in China as we have seen in North America, a market that today generates 47% of Lloyd’s income. That’s our aim.
Our 15-year negotiation to get our tier three onshore reinsurance licence in India, granted last week, is driven by the same strategic impulse: it will be good for Lloyd’s in the long-term.
These insurance markets are going to grow – and grow fast. A growing middle class; high rates of technology adaption that will allow deeper insurance penetration; the insurance needs of vast construction initiatives like the Belt and Road initiative – these all suggest that emerging markets are going to be where the serious action is.
We can choose to be in them, in which case we have to secure access now, or we can watch the opportunities pass us by in a cloud of dust along the new Silk Road.
Let’s not forget that the London Matters report showed that London does not have a strong position in emerging markets, and has a declining share of business in them. It will be interesting to see whether that position has changed when the updated report comes out later this year.
It’s not just about securing the access though – it’s also about what you bring to the table when you get there.
That’s why technology is another challenge we need to address.
Our sector, like the music industry was in the 1990s, is ripe for disruption and the vultures are circling.
One website I’ve seen collects data on the amount of VC money raised by Insurtech start-ups – 13 billion dollars over the last three years.
But perhaps what’s more interesting is they say that to get this data they are tracking 1,022 Insurtech companies in 14 categories across 54 countries, with a total of 17 billion dollars in funding.
Even if that isn’t the full picture – and I am sure that they aren’t all in the commercial insurance space – it’s an indication of the scale of the competition we face.
The strange thing is we know the urgency and yet there is inertia.
At Davos, I attended the WEF innovation workstream, which Lloyd’s is part of. We had CEOs of two of the world’s largest broking houses there and CEOs from some of the major insurance companies in the world, and we were all sitting around, scratching our heads, going: we aren’t adapting or innovating fast enough, are we?
While we work out how to sort out electronic placing here in the London market, start-ups around the world are investing billions in how to fundamentally change the way insurance is sold, how claims are assessed, how risk is commoditised, how distribution can be lower cost – in other words, how the entire industry can be changed.
We can see the possibilities new technology offers our industry in the advances in artificial intelligence, and data collection and analytics. For example:
• AI could quickly and accurately assess natural catastrophe damage levels through drone footage and pay claims almost instantaneously.
• It could automate large parts of our industry. For example, AI could analyse client cyber risk levels through its own interrogation and offer both risk mitigation advice (robot-advisory) and bespoke policies (evolutionary underwriting) to businesses.
• Big data could link directly to insurance companies’ systems, creating real-time pricing and policy opportunities with the ability to turn cover on and off as required. This is already happening. Trov is a mobile-only app which allows users to log, track, and protect their assets. Users are able to turn insurance on and off for their assets, and also determine their market value.
This is just the start.
The point is change is happening so fast that if we don’t embrace new technology, we will find ourselves trapped with legacy systems that are too slow and cumbersome to compete.
That’s why I always hammer home the point about the importance of adopting the London Market’s Target Operating Model.
You have to use the new technology as it comes online. We have technology ready to go and I still hear from some players in the market: “We’re not ready, don’t move so fast.”
Don’t move so fast?!
The fourth industrial revolution is happening out there in the big wide world and yet we still find pockets of resistance holding our market back.
The TOM can build all the technology and systems to support our modernisation vision but if individual businesses do not adopt the new tools within their own organisations, the benefits to the London market - the benefits to you - will not be achieved.
So if you haven’t already, talk to your Association about how to engage with the programme to start planning your own adoption journey. This is the only way you will truly benefit from the changes we are delivering. And it’s the only way we can begin to safeguard the future of the London market.
It’s not just the bottom line or the London market that is at stake here though.
The insurance industry globally plays a critical role in underpinning economic development and growth. We underwrite human progress: without us driverless cars would be stuck in their charging pods, space rockets would be stationary on the launch pad and new infrastructure would grind to a halt on its rusty tracks.
We owe it as much to ourselves as to society to make sure that we as an industry get ourselves into position where we can do what we do best: that’s providing our customers with the products they need, when they need them, in the most efficient way – and paying claims promptly should disaster occur.
In a recent survey of insurance buyers, only a small percentage of them said their insurer was innovative. But this is where we can attack from a position of strength. This is what this market is known for – right across the world.
Of course, other markets and companies can do this too, so we have to up the ante. How do we stay relevant so that we are our customers’ first choice? And will that USP endure as the world and our competitors change around us, or do we need to keep reinventing ourselves?
For more than 300 years Lloyd’s has prided itself on selling specialist insurance from a market of expert underwriters and brokers in which innovation is one of its driving forces.
We still trade very successfully off the back of these qualities today.
But are they enough in today’s ultra-competitive, tech-driven, fast-changing world? And will they be enough in 50 years’ time when the insurance landscape is going to be unrecognisable to the one we see today?
I don’t have the all the answers but the important role that I – that we all have – is to keep asking the challenging questions and drive forward change – change that is focused on the long-term.
For as the Chinese proverb goes: “When the winds of change blow, some people build walls and others build windmills.”
We need to be building windmills.