XL Group CEO Mike McGavick asked a provocative question in a keynote speech at the European Insurance Forum in Dublin last week. How relevant is the insurance industry in today’s globalized world?
“The [percentage of] value insurance adds to the economy has doubled over the last 40 year,” he said, “from one percent to two percent.”
By contrast the “technology sector has grown from two percent of global GDP to five percent in twenty years.” Technology now plays a major role in daily life, as does insurance, but what McGavick questions is why the insurance industry’s role has not gained a great deal more over the past several decades, and in some instances has actually declined.
He said that the growth in insurance services has been “puny” compared to the growth in the technology sector. “Cyber liability? There’s been little take-up. Intellectual property? It hasn’t been that good”- are some of the examples he gave.
McGavick also said that the transformation of the cell phone into an all-purpose device has changed and will further change the way people live, work, do business and run their lives, but the phenomenon has been very little exploited by the insurance industry.
All of which raises the specter of the insurance industry becoming irrelevant. In the energy sector the gulf oil spill was one of the biggest catastrophes in recent times, but the main actor in the disaster, BP, essentially didn’t have insurance coverage for it, as its assets dwarfed whatever coverage an insurer or reinsurer could provide.
As far as supply chain risks are concerned, following the Thai floods, McGavick does see some opportunities, but as the big companies “rely on small suppliers, it’s hard to make money in the sector as it’s very complex.”
He also said “the industry relies too much on long term data sets” and needs to start gathering and correlating data to come up with “new solutions to new problems” and start recruiting as much new talent into the industry as it can in order to do so.
“If we want to be relevant, we need to figure out what problems we’re trying to solve,” McGavick said.
McGavick also considers the fact that most publicly traded insurance companies are currently trading at below their book value to be a problem that must be addressed. “The soft market is changing,” he said, “but not fast enough.” The industry will need more capital, if it is to grow, and to face the demands of new regulations, specifically the EU’s Solvency II requirements, which will make things even more difficult on the capital side.
There are some bright spots amid the gloom, however. “Regulators are necessary; they add sureness,” McGavick said, pointing to the AIG debacle, as an example of what should have been regulated, but wasn’t. “The P&C industry is very good at dealing with financial crises,” he continued. Instead of “bank regulators telling insurance regulators what they should do, it should be the reverse.”
Changing the way the industry does business requires innovation and thinking outside the box, looking for “ways to add value for its clients.” XL’s capital is around $11 billion, and it employs over 4000 people, but we are recruiting,” McGavick said. “The industry needs people, and we need to make it [the insurance industry] cool.” Now is the time to do so, as the financial [banking] sector is less attractive to graduates than it has been.
McGavick’s analysis and his suggestions are quite timely. His remarks were discussed continuously as the European Insurance Forum proceeded. If they are heeded, and more importantly acted upon, there will be some changes within the industry, and they will be for the better.