Insurance and the Changing World

823 views Published on 8th March 2017

There was a moment when I was at Davos at the World Economic Forum last month that felt like a moment in history – a time when something important 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.

“America first.”

“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, almost 230 billion dollars in Europe; and $140 billion dollars in the MENA region, with 15 billion dollars in the UAE.

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, Europe and the Middle East 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 all 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 what China does is increasingly affecting us all – whether we are in the UK or in the Middle East. For example, China’s four largest state-owned banks have all set up major operations in the DIFC to access the Middle East, Africa and South Asia region, as well as the South-South trade corridor. And DIFC has expressed its support for the One Belt, One Road initiative.

The successful economies, therefore, will be the ones that adapt best to the new world order, overcome the challenges and take advantage of the new opportunities.

This region, in particular, has recognised this need to change.  Since the oil price shift, there has been an accelerated programme of major economic diversification here, with technology and innovation at the heart of it.

The plans for the Hyperloop One transport system and the recently announced Fintech accelerator  are excellent examples of this. This type of forward-thinking bodes well for the region.

Insurance Industry Changes

This need to adapt is as true for the insurance industry as it is for nations, because we, too, face disruptive threats to the status quo. New technology is transforming the way we work – and is allowing the competition to do it better than we can.

New markets are opening up and offering new opportunities – but access is becoming increasingly challenging. And the gap between the products we offer – and those our customers want – the innovation gap – seems to be growing wider.

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 a long-term strategy in 2012 – we realised we needed make decisions for the future. This has been helpful to have to refer to, to keep us on our path when faced with the distractions and demands of the day-to-day insurance market conditions.

Global Market Access

One of the key parts of this strategy is global market access, because we recognise how the global economic changes I mentioned earlier could dramatically affect where we do business.

Brexit of course is a huge challenge for us right now, and is a good example of the rise in protectionism we are seeing in some markets around the world. From a Lloyd’s point of view, while Brexit is 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.

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 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 emerging markets like Asia, Latin America and the Middle East.

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. The Middle East is also a key area of interest for us, and our work to grow our business here is integral to our global market access strategy.

According to Alpen Capital, the Gulf Cooperation Council’s insurance non-life sector is set to grow by a compound annual growth rate of 14% to a total of 49 billion dollars by 2020. 

Our own experience at Lloyd’s Dubai bears this out. Since we launched the platform in March 2015, Dubai premiums are growing by 30%. We now have 11 service companies and three coverholders in the DIFC, plus a coverholder each in Jordan and Bahrain. We also have a very healthy pipeline of new and existing managing general agents who are looking to become Lloyd’s coverholders.

We are writing multiple lines of business here – including property, marine, political risk, trade credit and political violence. We have launched a Directors & Officers facility and have in place a number of broker lineslips.

We are not stopping here - we also have plans to expand into new markets. The Saudi Arabian non-life insurance market is projected to increase to 10 billion dollars by 2020, so that is interesting to us. And Iran, while more of a long-term play, also offers good growth potential.

While there has been some impact on the insurance market here from the oil-price fall – the number of construction projects is down for example – there are still major ongoing, infrastructure projects such as Expo 2020 and the Qatar World Cup in 2022, new opportunities in renewable energy, and the initiatives I mentioned earlier, that will keep driving insurance demand in the region.

And that’s what we think will happen to global insurance markets too. A growing middle class; high rates of technology adaption that will allow deeper insurance penetration; the insurance needs of vast construction initiatives like the One Belt, One 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. That’s as true for all insurers as it is for Lloyd’s.

Technology

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 the insurance sector needs to address.

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, admitting that we weren’t adapting or innovating fast enough.

While we work out how to sort out electronic placing 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 back in the UK I always hammer home the point about the importance of adopting the London Market’s Target Operating Model - the TOM. Because if you don’t use the new technology as it comes online what’s the point?  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 in front of our noses and yet we still find pockets of resistance holding the London 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 will not be achieved.

That said, last year was a breakthrough year in the sense that not only did the improvements start coming online but the market started to accept the reasons why modernisation is necessary.  Adoption is still a challenge but this year, as more developments take place, I am confident we will see the last vestiges of resistance to change start to disappear.

In terms of what’s planned for this year:

Claims will go live through the Central Services Refresh Programme, allowing brokers to process both claims and premiums in the same way they do in other markets across the globe

The new online audit management system for coverholders was relaunched this month , with full functionality ready in May. This will eliminate multiple audits every year and enable our coverholders to focus on what is important – writing profitable business and providing clients with outstanding service.

The adoption of Terrorism and Financial and Professional Lines on the e-placement platform PPL is going well, and discussions are currently under way about the pace of rollout for the Marine, Property and Aviation lines of business, Facilities and Reinsurance.

The introduction of structured data capture is also going well, following agreement with the market as to the timetable. This converts information from a number of sources into something universally acceptable, to enable straight-through processing. 

These changes aren’t going to turn us into a tech-driven market overnight – but they are the crucial first steps we need to take to bring the London market into the digital age, making it data-driven, more efficient and more cost effective for companies like you to work with us – and ultimately deliver a better service to the insureds.

There’s still much more to do of course, but we are making good progress.

Is the industry as a whole making good progress on modernisation? I don’t think so. We are quite a long way behind other financial services. We are, as I read in one insurance blog recently, “ripe for disruption.” We all need to up our game if we are to see off the competition and offer our customers the kind of seamless, efficient service they used to getting from other business sectors.

Innovation

The third challenge I want to touch on today is the changing risk landscape and insurers’ response to it. The changes are being driven in part by urbanisation, which is concentrating high-value assets in urban centres, making them more vulnerable to systemic shocks. It is also being driven by the dramatic change to the make-up of company assets that’s taken place over the past 40 years.

In 1975, the split of assets of the S&P500 market value was 83% tangible and 17% intangible. Today this has completely reversed to 16% tangible and 84% intangible. This has given rise to the Ubers and Airbnb of this world, which famously don’t actually own any cars or hotels.

This transition is driving changes to the risk landscape because intangible, digital assets are becoming increasingly vulnerable to new threats like cyber-attacks. New technology is also changing the risk landscape. Take driverless cars. Who is liable if there’s an accident? The software company? The vehicle manufacturer? The human in the car? These changes are increasing pressure on insurers to respond to evolving customer needs and be innovative.

At Lloyd’s we are well aware of that pressure. Cyber risk is a hot boardroom topic here – as it is in many other regions in the world – and Lloyd’s is responding to the different needs of customers in this business line. Lloyd’s underwriters have seen a huge increase in cyber enquiries and submissions over the last few years, and this year, 77 syndicates plan to write $1.2bn premium income, a 40% increase from 2016.

We are also responding to changes in the tangible asset space. For example, climate change, and the global response to it, is driving investment away from hydrocarbon-based energy to renewable generation - particularly relevant in this oil-dominated region. To support this change in business focus, Lloyd’s underwrites renewable energy projects here – and all over the world.

At Lloyd’s, we take innovation very seriously – that’s why it is an integral part of our long-term strategy. But are we as an industry delivering on innovation and closing the innovation gap? I’m not sure we are.

One survey of UK risk managers found that 49% believe their insurers are ‘hardly innovative’ or ‘not innovative at all’ in developing relevant covers. Only 1% views their insurer as ‘highly innovative.’ That’s not encouraging, especially when you think how fast the risk landscape is changing.

We need to do more to encourage a culture in which invention is encouraged and celebrated. We need to close the insurance gap and convince our customers that we can deliver what they want us to. 

That’s not to say our industry is doing nothing. I am encouraged to see the changes that are happening in the insurance industry in this region, for instance: markets are growing and maturing, innovation is taking place, and relationships are being built with local partners and the international business community. The insurance industry here has come a long way - and that should be recognised and celebrated.

But there is still so much more we need to do: we can all innovate faster, adopt new technology more quickly and build broader, more mutually beneficial networks.

Conclusion

Because it’s not just insurers’ balance sheets that are at stake here. The insurance industry globally plays a critical role in supporting 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 society as to our ourselves 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.

Of course, other markets and companies can do this too – and as I said at the beginning – are already doing it, 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?

This are not questions just for Lloyd’s – this are questions for everyone in the insurance industry.

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 sustainability of the insurance industry.

By Inga Beale,

Lloyd's CEO.


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