Lloyd’s Chairman Lord Peter Levene does not mince words. So, while he reflected on 2003 as a relatively benign, and for Lloyd’s a very profitable, year, his audience at a meeting of the City Forum in London sat up and took notice when he said “it is my firm conviction that 2004 will be the real test, not just for Lloyd’s, but for the entire insurance industry.”
“Certainly, 2003 was a good year for the Lloyd’s market,” he continued, noting that it had reported a profit in excess of £800 million (nearly $1.5 billion at current exchange rates). “We finally seem to be getting it right. The economics of insurance are suddenly making sense again for our shareholders.”
For all the good news, he voiced concerns over several ongoing challenges that he says the industry must face if it is to remain profitable. “There are still some dark clouds hanging over the global marketplace,” Levene noted. “First, the industry is still paying dearly for mistakes of the past. Reserve additions have continued thick and fast with no immediate end in sight. Asbestos and US casualty business underwritten at the end of 90s continued to spur a number of industry reserve additions over half a billion dollars last year (citation). At the same time, two separate reports published in the US in recent weeks suggest that price competition is now returning to the market (citation). For property business, the RIMS survey actually suggests the cost fell by 9 percent in the last quarter of 2003, the first decline for four years. No surprise then, that the rating agencies’ aggressive streak continues. Just in time for the last Monte Carlo Rendez-Vous, Standard & Poor’s chose to shroud the entire reinsurance sector with a negative outlook, and downgrades outpaced upgrades for the third consecutive year (citation).
“So, I believe that our actions now will have a huge impact on the future profitability on our industry: indeed, the way the industry behaves in 2004 could decide whether it really has a future at all. Today I want to look at four of the major challenges that I believe all of us working in insurance and reinsurance need to get to grips with in 2004 if we are to succeed. Two relate to external factors; and two to behaviour within the industry. Taken together, they highlight the need for something of a new culture revolution in insurance, and I will explain what Lloyd’s is doing to play its part.”
He listed them as follows:
• First, I want to look at compensation culture – because in terms of the global risk environment I believe it is the greatest external threat to the insurance industry;
• Second, I will talk about our collective culture, and suggest that we really must begin to work together better across the industry for several important reasons.
• Third, I will argue that we need to halt the lemming culture of insurance – this is no time to return to past suicidal behaviour and relax underwriting discipline. We need to prove that we can manage our infamous insurance cycle.
• Finally, I want to talk about the need to overhaul service culture – because in today’s environment business process reform simply cannot be divorced from our financial performance.
His attack on the “compensation culture” in general and the U.S. tort system in particular was not new. Levene has been voicing concern over the problem since he became Lloyd’s Chairman at the end of 2002. He gave several examples that it is now spreading to Europe, and must be addressed before it gains the same stranglehold on legal proceedings there, as it has in the U.S.
His remarks on the “collective culture” stressed the need to put in place adequate regulations to reign in economic and financial abuses. He noted that “Insurance plays a key role both in the economy and wider society, but we have traditionally done a very poor job of communicating these roles, and of working together collectively to advance them.
“At the heart of insurance is a very social role – the sharing of risk, whereby the losses of the few are borne by the many and individuals gain the psychological benefit of peace of mind. It also encourages greater personal independence, avoiding a culture of dependency on others, particularly important today as support from the family or community declines in many societies.”
Levene has long maintained that the cycle must be tamed, and what he termed the “lemming culture” must become a thing of the past. He cited some impressive statistics to prove the point, noting that according to estimates from the Insurance Information Institute “the US industry has collectively lost well over 400 billion US dollars over the past two decades (citation). To put it a different way, the last time the industry made an adequate rate of return was during the mid 1980s. That rate of return has been sliding dramatically since the 1970s – and averaged just 2.8 per cent in the first three years of this decade (citation). What investors in any other industry would settle for that I wonder? To start relaxing underwriting discipline now would be financial suicide.”
As both he and Lloyd’s CEO Nick Prettejohn have repeatedly stressed, Lloyd’s is dedicated to maintaining underwriting standards, to the extent that syndicates who do not observe them will no longer be welcome in the Lloyd’s market. Both men realize, however, that for this to work, the rest of the industry has to observe the same kind of discipline, and that’s far from a given.
His discussion of the “service culture” stressed the need to overcome the backward processing rituals that still plague the industry, and the necessity of integrating technological solutions to a far greater extent in order to bring the insurance market into the 21st century. He pointed out that Lloyd’s, with its new standardized line slip and its Kinnect platform, is leading the way in adopting this kind of technology.
Levene expressed his belief that most of the industry is behind him, and he’s confident that the challenges he discussed can be met and mastered. “It is a time for cultural change; change of our business processes and of our lemming approach to underwriting,” he stated in conclusion. “Time too, for us to embark on a new era of working together in communicating with those who need to understand us better and to lobby more powerfully on the issues that affect us all, from tort reform to free and fair regulation.”
The full next of Lord Levene’s remarks can be obtained on the Lloyd’s Web site at: www.lloyds.com.
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