On Digital Transformation

Lloyd's CEO Inga Beale opens the 2015 Multaqa Conference in Qatar

Lloyd’s CEO Inga Beale opens the 2015 Multaqa Conference in Qatar

Prompted by an invitation from the organizers of the Multaqa insurance conference to join a business leaders’ roundtable earlier this week in Qatar, a couple of frantic hours reading up on the subject of our discussion, the digital transformation of the insurance industry, turned out to be time very well spent.

Of little surprise was to learn the extent that the Internet has transformed consumer’s buying patterns and preferences in the more mature markets of the world. Not least in UK where these days over two-thirds of private motor insurance is sold on the phone or via web applications and price comparison sites. Even beyond highly commoditized products, there are signs of digital innovation. One of several interesting examples is ‘Bought by Many’ (www.boughtbymany.com) where individuals with hard-to-find insurance needs form larger buying groups online to access coverage from suppliers at more competitive rates. These might be owners of rare animals or parents of children learning to horse ride.

However more impressive than this is what is happening in the developing economies where the needs of the many are a bit more fundamental than arranging cover for the pet bulldog or Jemima and her pony. Taking the lead from the banking sector, micro-insurers are partnering with mobile phone companies to access low-income groups to provide easy to understand insurance essentials (e.g. life, accident and sickness policies) at premium levels the rural populations can afford. By simply offering tranches of coverage to mobile phone users each time they top-up their SIM card, has bought an estimated 500 million people into the African and Indian insurance market who would otherwise have remained unprotected.

Returning to Qatar, the roundtable discussion understandably turned to the Middle East and Gulf region. Reportedly 40% of all local insurers have not yet even built a website but we know the landscape in a digital age can change very quickly. That digital transformation was selected for discussion in the first place suggests that interest is growing in new innovative channels to improve insurance awareness and penetration, which is good for the customer and the development of the local industry.


On Victims of Love

Albert Benchimol, to be the new head of Axis and Partner Re.

Albert Benchimol, to be the new head of Axis and Partner Re.

Love is seemingly in the air in 2015 with the engagement of Axis to Partner Re recently announced hot on the heels of the betrothal of Catlin to XL. Guessing who will be next up the aisle is the favourite game in the coffee shops and wine bars of the London Market. Few doubt that by the end of this year, more companies will get hitched up.

There is more to this wave of coupling than true romance of course. The hard market gallivanting has come to an end because companies now yearn for the security of a long term partner to survive the austere times ahead. Declining premium rates almost everywhere; distribution concentrated into an ever-decreasing group of global producers; and a burgeoning industry cost-base are making many companies feel very vulnerable, hence the desire for scale.

But for whose benefit? Who wins and who loses in a world of fewer, bigger insurance suppliers?

Such is the way of the modern times, it is a given that the CEOs and senior management who fashion these deals tend to do alright. However, for the investors that they represent, the upside is less certain. Handled badly the execution of a merger can be disabling and expensive, eroding shareholder value rather than adding to it. That is why the announcement of a takeover is invariably met with a sell-off not an uptick in the stock market for one of the parties concerned. Ever since the Royal Sun Alliance merger in the 1990s, which was a complicated affair, analysts have been sceptical about insurers’ ability to pull off integration effectively, explaining their jaundiced view.

For the customer, consolidation has advantages. Financially stronger companies with broader product and geographic capabilities can offer more security and arguably respond with improved effectiveness to the emerging mega risks that are shaping the world today. Equally, on balance regulators probably like strongly capitalised, more solvent companies better equipped to meet customers’ needs. Yet a market place where there are fewer and less agile players, lacking individualism has its disadvantages too. Clients searching for a wider range of choice may end up disappointed. A narrower range of homogenous suppliers competing for business, all doing the same thing, might please the regulators less, especially if a systemic risk of failure creeps into the system.

It is a mixed bag perhaps for investors and customers at either end of the current bout of merger frenzy. While one hopes that it is not the case, however, the employees of some companies involved could be the real losers in the love triangle. Where the underlying driver is cost reduction, the pressure to cap out or reduce headcount will be intense. In an environment where talent is a differentiator this might be shortsighted. Nonetheless as we approach St. Valentines’ day, some insurance workers will be waiting for the mail to arrive, with trepidation rather than the usual anticipation: the victims of love.

On Charlie Hebdo

Je-suis-CharlieThe murder of eight journalists in a monstrous terrorist attack at the offices of French satirical magazine Charlie Hebdo has understandably triggered global revulsion. Other atrocities of this scale have typically been condemned because citizens going about their daily life have been injured and killed.

What happened in Paris was different. Instead journalists were targeted because of what they published. The human tragedy is of course equally as shocking but in its aftermath the people are also responding to a greater sense of violation that took place last Wednesday.

In recent years confidence in press integrity has been severely tested, not least by the revelations of excessive invasion into our privacy. Frankly the media has been hard to love. Yet the violence in Paris has awakened an instinct deep-rooted in the public consciousness.

Under attack, we have perhaps surprised ourselves just how strongly protective we are of the freedom of expression we usually take for granted and think little. If there is a crumb of comfort to be digested following this outrage it is the genuine outpouring of support not just for the journalists killed and their families but also for the principle of free speech they stood for and represented.

In some respects the attack also demonstrates the enormous power and influence of the modern media. It seems to us beyond reason that a group should wish to silence a small magazine, read by relatively few, in such a savage and horrific manner. Yet the rolling coverage of the crime, broadcast in real-time to billions of people, channeled to all corners of the world is the pay-off that the killers crave. The hideous irony is that the callousness of the terrorists is rewarded with a global media platform from the news networks whose freedom to report is the very principle that the perpetuators sought to restrict by their terrible actions.

The industry should take the time to reflect on the loss of Stephane Charbonnier and his team at Charlie Hebdo. We should also remember Jim Foley, Steven Sotloff and the other newsmen murdered in Syria and Iraq. It is an ultimate price that they have paid for the freedom that allows us, in the all the insurance and reinsurance markets around the world, do what we love to do.

 Je Suis Charlie.

On Diversity and Inclusion

Inga Beale, Lloyd's  first female CEO, 'being more diverse is good for business' (Insurance Times 27.08.14)

Inga Beale, Lloyd’s CEO: ‘being more diverse is good for business’ (Insurance Times 27.08.14)

Over the course of this year, a number of organisations in the London insurance market have publically committed to Lloyd’s Diversity and Inclusion Charter. A steering group of inclusion champions led by Aon’s Dominic Christian will be issuing guidance in 2015 on how signatories can get started on policies and practices to promote positive change in our industry. High on the list of priorities will be protocols to tackle gender inequality so the insightful ‘Women in Financial Services’ report published on Friday by consulting firm Oliver Wyman (www.oliverwyman.com) is a timely exploration of why men dominate top positions in our sector and how we might improve diversity at these senior levels.

Those of us working in city based insurance businesses can see with our own eyes the gender imbalance yet the statistics still paint a stark picture. According to the Oliver Wyman survey of 150 of the world’s major financial services firms, just 13% of executive committee members are women, mostly managing compliance and support functions. Few lead profit generating lines of business, the traditional path to the apex of the pyramid, so it is unsurprising therefore that only 4% of CEOs are female. Indeed, in over a third of the companies studied, the executive leadership was entirely male. When one considers the high proportion of women working in financial services, the degree of female under-representation at the top is, as we are all aware, simply staggering.

The encouraging point is that a tangible impetus to take the subject seriously is evolving. In raking over the coals of the global financial crisis, regulators were alarmed at the macho-culture at the heart of our financial institutions. The banks’ model of aggressive and dominant styles of leadership that excluded most women and men not fitting an ‘alpha-male’ stereotype ultimately drove markets over the cliff in a cloud of testosterone. With the encouragement of policy makers, therefore, companies are starting to ditch some of those masculine leadership traits that were important in the past, so says Oliver Wyman. Their research revealed that ideas about what a leader looks like are beginning to change, recognising that a combination of gender-neutral and feminine characteristics makes that individual more effective. In other words he/she may be patient, intuitive, understanding and trustworthy as well as competitive, ambitious and analytical.

Fixing the industry (rather than fixing the women) might be the key to increasing diversity at senior levels but as Oliver Wyman are also quick to illustrate, there are plenty of other initiatives we might adopt to accelerate change. Amongst those, good companies overcoming biases by placing more high potential women into business line roles with profit & loss experience is one of the most intriguing. Only a handful of active (chief) underwriters of Lloyd’s Syndicates are women (let alone from a non-White ethnic background) so the diversity and inclusion steering group have an obvious place to target their first round of guidance in the new year.

On Wholesalers Endangered

The heydays of wholesale broking into the London Market may be over

The heydays of wholesale broking into the London Market may be over

The increasing dominance of the global brokers and the economic leverage that this provides is a strategic challenge for all insurers dependent upon them for significant premiums flows. Responses in the industry have varied but a growing number of companies are re-engineering the way they procure business from the big three; either paying to obtain data services or participating on proprietary risk placement platforms and in some cases offering automatic facilities to capture portfolio slices, or all of these things.

The big boys are making no bones about their desire to radically shorten the list of carriers they use so being viewed as a ‘strategic partner’ is becoming a necessity for insurers if they are to avoid being commercially marginalized. Yet in the London Market many underwriters enthusiasm to wholeheartedly embrace the big three has been tempered by a loyalty instead to the independent wholesale broker network. At least that was arguably the case until recently but attitudes may soon change.

In October it was reported by Insurance Insider that wholesale broker Miller, strongly independent in character, was in advanced discussions about selling to the Willis Group, the world’s third largest broker. This followed the news that JLT, a large but predominantly wholesale business was re-entering the US retail market to get closer to the customer. Those clinging on to wholesaling for their revenue are recognizing the need to scale up in order to survive as evidenced by the tie-up deal that RK Harrison and Hyperion are reportedly working on. This rush of activity led Tom Bolt, Lloyd’s Performance Director speaking at the Xchanging conference last week to declare the heyday of the wholesaler to be long gone and not coming back any time soon.

In a world of cross-border connectivity, enabling technology and stricter customer conduct regulation, the pressure to engage more fully with the end-client and deal directly with their retail broker is likely to lure underwriters away from wholesale and towards shorter channels of distribution. To the extent that this might also repair a perceived cost disadvantage of trading with London, then it is a trend that most will find hard to objectively argue against. However, the problem for underwriters is that there is a vast amount of specialist product expertise, market acumen and deep relationship history residing within the independent business producers. If the market moves too aggressively away from wholesaling, the danger is that a key source of competitive differentiation for London and Lloyd’s may disappear along with it.

On Power to the People

He might not be turning in his grave but Marx might enjoy the tussle between those that own and those that deploy the capital in our industry

He might not be turning in his grave but Marx might enjoy the tussle between those that own and those that deploy the capital in our industry

A little out of fashion of late but there is still much to be learned from a bit of Marxist analysis. As students of the great bearded one’s work will know, he saw human evolution as a massive class struggle between the small number of bourgeoisie who own the means of production and the rest of us who toil away to produce their goods and services. According to Marx, because we do not own the means of production we must enter an exploitative relationship with the capitalist in order to earn the necessities of life. We can choose which capitalist to work for of course but work we must, otherwise we starve. The illusory nature of this voluntary employment arrangement results in us all becoming alienated from humanity. Not many laughs with Marx.

So much for the theory: in practice the inherent tension in the owner and worker relationship has proven to be more reconcilable than Marx predicted and in reality much of what he foretold has not come to pass. Yet as events in the London insurance Market spectacularly demonstrated this week, the shifting battle for control between, in our industry, those that put up the capital and those that deploy it; the shareholders and their underwriters and brokers, has some surprising resonance with the worldview Marx presented all those years ago.

Especially in the London Market where small groups of individuals have significant influence over business flows, insurers and broking firms have taken increasingly strident steps in recent years to shore up the interests of their shareholders. They have been pinning down key employees to lengthy notice of termination periods, in some cases of up to twelve months, and preventing them to solicit for business post-departure by adding pages of restrictive covenants to their employment contracts. It has been one-way traffic mostly with only occasional pushback when the enforceability of the more punitive of these sorts of measures has been successfully challenged in court.

But the goings-on at Lloyd’s operation Hardy, acquired this year by US insurer CNA, as reported in the Insurance Insider might be seen by some to be a rare victory on the employee side. According to the Insider, in merging their two businesses, CNA complied with the so-called ‘TUPE’ labour regulations designed to protect staff transferring across companies. However, in the process the insurer unavoidably terminated the notice obligations of the Hardy employees, allowing a number of their key underwriters to quit and start unencumbered at a competing syndicate, literally the following working day.

The audacious exploitation of the TUPE ‘loop-hole’ by the Hardy defectors could be imitated by others in similar circumstances but maybe with less impact now that the element of surprise has been lost. Whether the play signals a wider trend towards greater freedom for underwriters and brokers to switch firms is nevertheless unlikely given the competitive state of the market and the determination of firms to protect their business at all costs. Those demanding ‘power to the people’ might therefore have to wait a little longer.

On Hearts and Minds

The Scottish independence referendum on a knife-edge

The Scottish independence referendum on a knife-edge according to latest opinion polls

The Scots finally decide tomorrow whether they want independence following intense campaigning on both sides of the argument energized by recent poll results suggesting that our friends north of the currently symbolic border might indeed do what was thought impossible: exit the UK. At the time of writing the outcome of the referendum is on a knife-edge. If the Scottish electorate votes yes, it will be despite of increasingly forthright appeals from many business leaders urging them to do the opposite. With economic opinion apparently weighted against independence, the lure for the Scots of going it alone seems to tap into a deeper calling than simply the notion that they would all be better off financially.

If the Conservative Party wins the next general election and sets up the referendum it has promised in 2017, the business grandees will return in force to put forward another economic case, this time on UK membership of the European Union. Already Lloyd’s has come out publicly in favour of staying in Europe and Sean McGovern, the market’s spokesperson on the subject, is encouraging more insurers to enter this side of the debate. Like the Scottish question, however, a compelling economic reason to stay in the EU may not be enough to persuade voters. The emotional tug in the other direction, currently exploited very effectively by the anti-Europe party UKIP, could be too strong to resist.

As more parts of the world submit to ‘tribalism’, the way that the business community, insurers included, view and respond to international events requires a rethink. In recent years the citizens of Iraq, Egypt and Ukraine all voted in governments in fair elections that failed to bridge religious and ethnic divisions, deciding instead to promote solely the interests of the faction that put them into power with disastrous consequences for the populations and their economies. Whereas previously the extension of political freedom led to new markets for goods and services, as was the case in Eastern Europe after the collapse of the Soviet Union, the current trend has been for liberalization to be followed by periods of huge instability eroding rather than creating wealth.

Fortunately in UK, notwithstanding the current referendum excitement, we are lucky to live in relative harmony both at home and with our neighbours. Nevertheless, businesses do need to factor in Scottish obduracy, English parochialism and these sorts of feelings into their commercial strategies. Attitudes and aspirations are shaping modern society and the geo-political landscape as much as, if not more than, straight economic logic.

On Leaving Europe

Sean McGovern, Lloyd's Chief Risk Officer and General Counsel, leading the EU 'Yes' campaign

Sean McGovern, Lloyd’s Chief Risk Officer and General Counsel, in favour of UK remaining in the EU

True, emotions were running high over the exorbitant costs of implementing Solvency II, widely seen as a project poorly mishandled in Brussels, but in adding his signature to an open letter to The Times in January 2013 supporting David Cameron’s yes/no referendum strategy on UK’s European Union (EU) membership, Lloyd’s Chairman John Nelson may have sent a hawkish signal to producers on the Continent whose business many of us in the London Market have fought hard to cultivate. Far better, therefore that this position has since softened to the point that Sean McGovern, Lloyd’s executive spokesperson on the subject, has now declared the market to be unequivocally in favour of UK staying in the EU apparently regardless of whether the negotiations promised by the Conservative Party after the next election deliver anything at all from our European partners: and quite right too.

In his most recent article in the London Insurance Institute Journal, Sean sets out the implications for the UK insurance industry of leaving the EU and they are wretched. In a nutshell becoming a ‘third country’ in Euro-parlance means UK insurers would lose their automatic access to business in 28 countries with an audience of 500 million people and worse still remain completely bound to a regulatory framework with little or no influence on how it evolves. With £6 billion of premiums from the Continent at risk, the potential damage to the world standing of the London Market is very serious. The ever-jovial leader of the anti-Europe campaigners UKIP, Nigel Farage, needs to understand that in our industry an EU exit is not a laughing matter; countless insurance jobs could be lost if his party has its way and we retreat to within our own borders.

Unfortunately, even if the Tories lose the next election so the referendum does not take place or there is a referendum and the electorate vote yes, the current period of uncertainty which will continue for at least another three years could in itself damage the flow of business from Europe. All the more reason therefore that insurers in UK should follow Sean’s advice and contribute to the debate on EU membership so that the views of our sector are heard not just by the voting public domestically but also across the channel where clients and brokers need reassurance that London is still committed to European business development.





On Insurance Fat Cats

Retiring boss Bob Benmosche, one of five AIG employees in the top fifty highest paid insurance executives 2013 (pic: www.aig.com)

Retiring boss Bob Benmosche, one of five AIG employees in the top fifty highest paid insurance executives 2013 (pic: http://www.aig.com)

Eye-watering as ever the recent annual survey of executive remuneration revealed, in the words of its publisher Insurance Insider, that our leaders “are some of the best rewarded captains of industry, beating averages within commercial banking and almost on par with the petroleum industry”. Indeed the top fifty highest paid insurance bosses in 2013 pulled in an average of $10m each. Most of the fat-cats on the list seem to reside in America or Bermuda but there are plenty of CEOs doing very-nicely-thank-you on this side of the pond as well.

Executive compensation is nowadays tightly geared to company returns so the amounts that these guys (they are all men) earn have been substantially boosted in recent years by the bonuses generated out of their employers’ strong trading results. Not to everyone’s taste it should be added: in recent months shareholders at Endurance, WR Berkley and Hiscox have all reportedly expressed their displeasure over the generosity of their firms’ remuneration policies. As the market now enters a cyclical downturn and margins contract, we can expect even more owner scrutiny of how profits are distributed to employees.

But it is not only investors turning up the heat on the high levels of executive pay. Last month the UK Prudential Regulation and Financial Conduct Authorities issued their joint consultation paper on remuneration in the banking industry that included new rules to defer and claw back bonuses for periods of up to seven years. Strengthening the alignment of risk and reward and holding individuals to account are key cultural shifts that the regulators will be enforcing across the financial services sector, including insurance.

The implication is quite obvious. For the last decade or two, industry compensation at senior level has been driven (up) by outcomes: the more profit that companies have generated, the more their management have been rewarded. The end has been the important factor and not the means. Yet if the regulators get their way, it shall be the corporate behaviour of the executive team towards customers and other stakeholders that will have a growing influence on their pay. In other words how the profit is generated, not simply it’s amount.

In the years to come, the Insurance Insider list of highest paid executives will be an interesting chart to track. Regulators will want to see some evidence of restraint in setting pay for sure. However, they will also be keen to see only ‘good’ companies on the list and not just the most profitable ones.

On thanking the Regulator…really

Based in Canary Wharf, the Financial Conduct Authority supervises the conduct of 50,000 firms

Based in Canary Wharf, the Financial Conduct Authority supervises the conduct of 50,000 firms

Since the financial crisis in 2008, the insurance industry has seemed transfixed, even paralysed at times by regulation-anxiety. The dash to introduce Solvency II; an expensive sprint to a finish-line, ultimately stretched by the EU rule makers, led to some rancorous exchanges between insurance leaders and those setting the policy as the full implications of compliance emerged. The chatter now in the market is about the cost of meeting the higher standards of consumer protection demanded by the Financial Conduct Authority (FCA). Although this new shock to the system is a challenge, arriving at a point when trading conditions are turning for the worse, good companies may soon embrace this project with far greater enthusiasm than they could muster for Solvency II.

With the break-up of the Financial Services Authority in March 2013, the FCA picked up the mantle predictably enough; taking steps to ensure that suppliers were treating their retail customers fairly at the point of sale focusing on poor value ‘add-on’ products. However, to the surprise of many this year they shifted their gaze rather sharply to the wholesale sector, investigating the outcomes of customers buying policies from Managing General Agents (MGAs) via delegated authorities in the London Market.

The robust approach of the FCA has clearly galvanised those affected into action. Lloyd’s have just released for consultation their proposed new minimum standards and guidance relating to conduct risk. Most underwriters with an interest in MGA cover-holder business are working flat out to introduce processes, demonstrable to the regulators, which prevent financial or service detriment adversely affecting their customers due to a failing in their distribution chain.

Yet, not in any way to diminish the scale of the huge task ahead for many companies, it would be a pity if the industry fixates solely on the cost, resource usage and management stretch of meeting the FCA’s requirements. Handled appropriately, improvements to the way that delegated authorities are managed will be widely beneficial and arguably are long overdue. The market should be reducing its reliance on paper-based records; utilising modern technology effectively; updating its audit framework and acting upon management information that is more timely, accurate and instructive about an MGA’s interaction with the policyholder.

At the core of Lloyd’s Vision 2025 is a call to action; for us all to ensure that the London Market remains relevant as a global business partner, responding inventively to emerging risks in particular. If the enforcement of FCA regulations also prompts a cultural shift within the wholesale sector leading to greater engagement with and understanding of the end-customer and their needs then the conduct improvements might be viewed as an important stepping stone towards making that vision a reality. Indeed in years to come we may well be thanking not criticising the regulator for directing us down a path to a more sustainable and responsive industry model that is built upon greater intimacy with our customer audience. Thanking the regulator: now there is a thought.