On Going Global

 

Shuzo Sumi, Chairman of Tokio Marine and architect of their international expansion

Shuzo Sumi, Chairman of Tokio Marine and architect of their international expansion

The Japanese fiscal year drew to a close at March end with all three major insurers posting stronger 2013 earnings. This despite a weaker contribution from domestic non-life business hit hard by the February snowstorms. No surprise therefore that the stand-out performance was from Tokio Marine whose profitability increased by 42% largely on the back of executing a more aggressive investment strategy internationally compared to its peers. That differentiator might not last long; the lure of offshore profit streams is attracting the other two Japanese giants to step up expansion overseas in order to reduce their dependency on a stagnant local market: last month Sompo, part of the NKSJ Group, completed the acquisition of Lloyd’s underwriter Canopius in a deal just shy of $1 billion.

Such is the unrelenting pace of economic globalization; commercial insurers will lose out if they are not in a position to service clients beyond the borders of their home territory. Building, acquiring or even renting an international network is increasingly becoming a must-have for any underwriting business attracted to customers beyond the SME and mid-market audience. Tough therefore for RSA who out of financial necessity are doing the reverse of the Japanese in selling off this year a number of overseas businesses: the first their Baltics subsidiary in April. RSA‘s other assets under the hammer in Europe and Asia are unlikely to be especially large or profitable (those were sold the last time the company was in trouble) but as insurance portals contributing to a broader proposition for globally inclined firms, the company will sorely miss them.

All the more interesting, therefore, is the international strategy emerging out of Lloyd’s in 2014. First in February was the decision to open an underwriting platform in Dubai, a ‘hot potato’ with certain London-centric brokers, but suggesting a renewed desire to engage with multi-national customers in a few more corners of the world. Then last week, at odds in tone to his Chairman’s support last year for the yes/no referendum, a public reminder by Lloyd’s Chief Risk Officer Sean McGovern that it was in fact very much in the market’s interest for UK to be part of the EU.

Put together, there is a sense that after a brief lull the Lloyd’s market is now steering with more vigour down the path of international expansion. This might not be popular with die-hard London based traders but companies like Sompo, Mitsui, Tokio Marine and other corporate investors in the market will surely endorse such an approach if it provides more responsive servicing options to their broader commercial multi-national client base.

Advertisements

On Innovation in the Workplace

New methods needed: Data studies have shown that teams talking with others outside their group are more successful

New methods needed: Data studies have shown that teams talking with others outside their group are more successful

With a little help from Brad Pitt on the way, arguably it was Michael Lewis who first introduced ‘big data’ into the public consciousness with the publication of his book Moneyball more than a decade ago. His account of how a baseball club assembled a competitive and ultimately successful team despite its weak financial situation revealed to a global audience the power of analytical, evidence-based metric approaches in developing winning strategies.

As consumers, we might not always like or fully understand it, but we have mostly come to terms with the knowledge that our purchasing decisions and behaviours are collated into mega data sets and pored over by those that sell us things. After all firms like Netflix and Amazon have built global business empires largely based on recommending films and products to us derived from our earlier interactions. However, our acquiescence about retailers collecting and using the data our actions generate might not extend to our employers doing the same. Yet this is exactly what is set to happen; the world of work is about to get a makeover, at least that is the prophesy of Tim Adams writing brilliantly in this weekend’s Sunday Observer.

According to Adams, job interviews could be a thing of the past as companies use ‘big data’ to predict the best candidates to employ. For example, by analyzing a vast volume of on-line dating digital records (of all things) one researcher has developed an algorithm that is predicting with 95% accuracy, the ranking of teams in business games based solely on a 25-question application form. He is now encouraging companies to use his techniques to identify and engineer the careers of their high performers

More controversially, Adams believes that soon it may be commonplace for employers to electronically monitor their staff. An MIT professor, Alex Pentland has persuaded employees to wear sensory badges to collate the tone and range of their interactions and body language in order to use the data to determine what makes a successful team. Interestingly he has found that experience, education, gender or even personality-type matters less than a willingness to talk to lots of people: open engagement was the major explanation of differences between high and low performing teams in his studies.

If the insurance industry is viewed as essentially the fusion of financial and human capital, then the willingness to embrace data analytics is strikingly uneven. On the one hand the latest models and computer simulations have been eagerly embedded into processes designed to preserve financial resilience. Yet at the same time modern technology has mostly been ignored as a means to manage human resources better. Insurance leaders are fond of taking pride in their people but in reality have invested little in innovating the way we are recruited; how our careers are progressed; how we are rewarded; or where and how we work. Just like the Oakland Athletics in Michael Lewis’ book, there is a similar prize potentially for an insurer who dares to be different and shakes off long held beliefs about how to create a contented and successful workforce.

On Hostile Takeovers

John Charman, orchestrating Endurance's takeover bid of Aspen

John Charman, orchestrating Endurance’s takeover bid of Aspen (www.endurance.bm)

Punctuated only by the news of increasingly desperate efforts to find a missing plane in the Indian Ocean, the market awoke from a soporific start to 2014 on 14 April when Endurance launched their $3.2 billion bid to acquire fellow Bermudian based specialty insurer Aspen. In addressing their offer directly to Aspen’s shareholders without the support of the company’s board of directors, Endurance set the scene for an increasingly bitter exchange of words between the two firms that have grabbed the headlines since. That the deal was orchestrated by Endurance’s CEO John Charman, one of the industry giants of the last few decades but no stranger to controversy, has added further spice to what has already become a very rowdy affair.

Hostile takeover bids are comparatively rare and according to the Financial Times the number has fallen to a decade-low, representing under 5% of all M&A activity. The majority of them also fail. The two sectors in more recent years where aggressive acquisition tactics have found a home are in mining and pharmaceuticals. Where the target’s value substantially comprises its mineral extraction rights or drug licenses and patents then one might argue that the means of acquiring these assets can justify the ends: in other words it does not matter especially how friendly the approach is.

Of course insurance is a different story and particularly so at the specialist end of the industry. The evolution of risk modelling has lowered barriers to entry. The value of a brand in attracting and retaining business flows has also diminished. More than ever insurance is a “people business” and even in large companies like Aspen, the firm’s profitability is dependent on the skills and capabilities of a relatively small cadre of senior employees who are highly mobile. The risk of losing the on-going loyalty of the target company team is the principal reason why we have seen so few successful hostile takeovers in the insurance industry. The battle for the hearts and minds of Aspen’s underwriters is as important as it is to persuade the company’s shareholders of the financial merits of the offer on the table. The most deadly poison pill of all to swallow would be to end up owning a company stripped of its key underwriting talent: a point Endurance are sure to be cognizant of as the rhetoric escalates.

On the Digital Revolution

Developers & engineers look over data at Flood Hack [photo bbc.co.uk]

Developers & engineers look over data at Flood Hack [photo bbc.co.uk]

There are certain truths hidden in plain sight that occasionally demand a dusting-off and exposing to the light. Denis Kessler, the CEO who has worked miracles at SCOR, speaking last week to the London Insurance Institute did precisely that. For him all the transformation we are experiencing in the industry is down to one thing: modern technology. Barriers to market entry have crumbled because computer models now allow capital investors to replicate the skills that underwriters have honed over centuries. Due to global connectivity, the insurer no longer has more or better information than the customer; evaporating asymmetry adding to the pressure on insurers’ profit margin. That Kessler was addressing the London Market, seen as antiquated in many quarters unresponsive to change, added a frisson to his comments.

If the digital revolution gathers pace and continues to reshape the industry, as Kessler predicts, then to remain relevant, London has to urgently embrace and harness the power of technology. With such a patchy record on reforming process this seems a tall order. Perhaps, however, a part of the answer might ironically be very close to hand. Formed in 2010 and located less than one mile from Lloyd’s, ‘Tech City’ now comprises 1,300 digital companies clustered around the so-called silicon roundabout. Fast becoming a world centre for enterprise and innovation, crusty insurers might cast more than a wary eye northwards to what the bearded ones are up to in Shoreditch.

Last month UK Government Data Services and the Environmental Agency opened flood level data to over 200 developers and engineers meeting at the Google Campus for a daylong event ♯Floodhack. 16 teams then pitched their digital solutions to aid communities hit by the recent severe weather and floods to a Cabinet Office judging panel. As an exercise in collaboration between the public sector, big and small companies and start-ups, ♯Floodhack was impressive. Apps such as ‘FludBud’, ‘Don’t Panic’ and ‘MyState’ were amongst the shortlist selected, all reaching out to an insurance buying community, but without any input from insurers in their development. A wake-up call for sure.

In a knowledge-based industry, the physical proximity of talented people who can share ideas and emulate each other is a powerful dynamic. It is as true of Lloyd’s in EC3 as it is in Tech City, E1. If each community put aside their sartorial and hirsutal differences to co-venture genuinely inventive approaches to product development and customer experience, the outcomes could be exciting. Insurers need innovation and the digital masters want capital. This might be the sort of virtuous partnership to fend off the challenges Denis Kessler highlighted to his audience last week.

On Renaissance Men

Nick Prettejohn: shortly to pursue a future outside regulation

Nick Prettejohn: shortly to pursue a future outside regulation

This week the Bank of England announced that Nick Prettejohn is to step down from the Prudential Regulation Authority (PRA) board. Since he had only been there for a few months, the news was unexpected although the reason given that he is ‘to purse a future outside regulation’ perhaps less so. A management consultant originally, since leaving Lloyd’s as CEO in 2005 Nick has held senior leadership positions in Prudential, Brit and L&G in addition to non-executive interests at the BBC and Royal Opera House amongst others. His is an example of a fast paced high-flying career fashioned on skills and talent honed in a wide range of roles in markedly different types of organisation.

Nick is one of  a rare breed. Those whose expertise spans a variety of subject areas and bodies of knowledge, the ‘Renaissance Men’, are struggling to get a look-in at the industry top table these days. It is not hard to see why. For an unschooled outsider, even if intellectually gifted, taking the reins of a modern insurance company is an immense challenge. The business has become highly complex, technically demanding and immensely arcane. Instead insurers have mainly been conservative in their selection of bosses; mostly favouring long-term insiders, turning to external bankers and accountants out of necessity and rarely dipping their toes into a corporate gene pool beyond the borders of their comfort zone.

Unsurprisingly insurance leaders are starting to appear a bit grey, all cut from the same cloth or at least that is a view commonly held in the media and particularly by politicians. Improving the gender and ethnic mix in the upper echelons of the industry has been one response but despite some progress it is clear that genuine diversity in the workplace, especially at a senior level, will take some time.

Of course safe pairs of hands are required in the boardroom for companies to preserve what they have and respond to the here-and-now, protecting investor and consumer interests along the way. Whether the same sorts of chiefs can tackle the bigger long-term industry challenges which are global, climatic, demographic, technological and societal in nature is an interesting question as yet unanswered. One suspects it will be difficult unless ‘new polymaths’ are attracted into our world who can bring insight, vision and invention to the solution.

On the Innovation Challenge

Novae's 'Looking Forward', we innovate or we wither on the vine.

Novae’s ‘Looking Forward’: we innovate or we wither on the vine, say the industry leaders (www.novae.com)

Lloyd’s underwriter Novae published an interesting thought piece last week. They commissioned some independent researchers to pose a series of questions to a panel of industry leaders and manfully collated the responses into an essay ‘Looking Forward’. Their main conclusion, that innovation and specialisation are the keys to the industry’s future development, may not be ground breaking but is certainly something to reflect on.

These days we hear a lot about London outgunning the opposition via its creativity but invention is not coming easy to a market currently enjoying a rare run of profitable years. Underwriters may have just got too used to peddling the same products in the same style because it makes money and it is easier than doing something different. New lines of business like cyber and reputational harm are growing but remain as tiny corners of the industry.

Not only have the good times fostered inertia but the process of industry consolidation has also contributed to a sluggish approach to innovation. ‘The future is big’ say the contributors to Novae’s research and in an insurance world whittled down to just a few insurers, reinsurers and brokers, undersized players will struggle. Unfortunately it is resourceful and entrepreneurially spirited smaller companies that normally outperform larger and intrinsically risk-adverse corporations when it comes to monetizing new ideas.

Of course scale brings with it advantages, not least financial security, access to capital and commercial leverage; all of which are pretty important too for those aspiring to develop new products and markets. The modern-day challenge, therefore, seems to be for larger organisations to harness the power that their size affords whilst nurturing an internal ethic which encourages and incentivizes small teams to think and act with freedom. The regulators might not be so keen but firms whose structure allows some liberty to those in the business are likely to be the ones who answer Novae’s clarion call for innovation.

On a Party Over

Is a 'Generation Soft' underwriting community up to the task?

Is a ‘Generation Soft’ cadre of young underwriters up to the task?

The 2013 results reporting season is now under way and as anticipated all the major insurance firms in London and Bermuda are delivering superb numbers; most benefiting from the especially low cost of catastrophe claims last year. For those risk carriers operating at the specialist end of the market, the good times have rolled on and on for more than ten years which is an unprecedented period of profit by historical standards. Yet the champagne soon to be quaffed in the wine bars around Lime Street and on the Hamilton beaches will have a sour aftertaste given the rapid slide in premium rates over the last few months. We might be experiencing the last hurrah before the downturn according to Insurance Insider reporting last week on an interview with veteran industry analyst Chris Hitchings.

The party might well be drawing to a close but a headlong drop into a loss-making gutter can be averted and the signs are encouraging. With few opportunities for anyone to grow profitably, Beazley have set the tone in returning to its owners a special dividend representing a big chunk of its 2013 profit. Others will follow suit. Giving back unwanted cash to investors speaks to a prudence sorely missing in the old days when insurers hell-bent on growth wasted their surplus funds on disastrous takeovers and outlandish punts. Today the widespread adoption of technical modelling and improved levels of financial sophistication have introduced a new floor to market conduct that should deter reckless activity. At least that is the theory

However, news from the coal-face might not be so reassuring. Writing recently for Insurance Day, an underwriter from Aegis Tom Cole suggests that the indiscretion and inexperience of an increasing cadre of young underwriters could be the undoing of the market. He observes too many older, wiser underwriting heads seemingly incapable or unwilling to mentor their protégés and out of this schism the value of training and technical skills sacrificed. Tom’s ‘Generation Soft’ are tempted into short cuts, poor decision making and dangerous ventures outside of their area of knowledge. The industry should be worried. If this is true now then as competition intensifies further and income targets become more unrealistic, the pressure on these underwriters will make the situation even worse.

Insurance firms have taken giant leaps forward in managing their capital, investing heavily in financial expertise, analytical systems and controls. Yet in doing so some may have neglected to promote and incentivise good underwriter behaviour or nurture a supportive environment in which their teams can operate responsibly. The danger for the industry is obvious: all the positive strides in developing corporate resiliency will be undone if leaders fail to connect with the trading floor.

On Lloyd’s in Dubai

Dubai: a regional insurance hub soon to be home to Lloyd's

Dubai: a regional insurance hub soon to be home to Lloyd’s

In announcing plans yesterday to set up an underwriting platform within the Dubai International Financial Centre (DIFC) Lloyd’s were at pains to point out that the decision amounted to straightforward economics; securing cost savings from the DIFC through the provision of shared services to the handful of Lloyd’s related businesses already there and a few that might be on the verge of joining. In reaction to the many challenges in fulfilling their Asia strategy, especially China, the Lloyd’s leadership have been publicly down-playing ‘boots-on-the-ground’ international expansion so the sensitivity is understandable. Maybe they should not be so touchy.

Lloyd’s business in the Gulf States, mostly underwritten in London, is highly profitable but is stagnating if not declining in volume even though the regional markets are developing fast. The reason is not so hard to fathom: underwriting capacity and broking expertise, mostly based in Dubai, is rapidly evolving in the key lines of business: oil and gas, construction and terrorism. Increasingly clients in the region have less cause to endure the cost and hassle of placing their business in London when they can achieve the same outcome dealing with people on their doorstep. Lloyd’s should be enthusiastic therefore, not reluctant or apologetic to ‘go local’ in this part of the world.

Yet the hesitance is palpable and the reason is the state of the markets in the Gulf and Middle East region. With virtually no catastrophe exposure present, technically modelled pricing barely exists; reinsurance capacity is abundant and premium rates in many classes of insurance are either in decline or free-fall. Regulation is getting tougher but remains immature by Western standards; poorly capitalised local insurers behave more as intermediaries than risk-taking entities, adding to the pressure on underwriting margins. With no sign of relief in sight from this malaise, London-based underwriters may struggle to build a strong enough business case at this point in the cycle to invest in Dubai. Those that are willing to take the plunge will probably focus on nice areas where their expertise and capacity are more lucratively rewarded. In other words, Dubai looks set to be a ‘slow-burner’ undeserving of the hype that has accompanied such plays in the past.

So a cautious and atypically low-profile period of preparation at Lloyd’s can be expected in the coming weeks and months leading up to the ‘go live’ date in October. Ironic that in a town like Dubai, know for its bling and excess, the arrival of the new underwriting platform may in fact be largely unheralded; deliberately so.

On Impaired Vision

Lloy'ds China Day in Beijing: a small step on the long journey to Vision 2025

Lloyd’s China Day in Beijing: a small step on the long journey to Vision 2025

Less than two years ago Lloyd’s revealed to the London insurance community a vision of itself in 2025 enthusiastically endorsed by Prime Minister David Cameron. At its heart was a repositioning of the market to take advantage of the opportunities in the world’s high growth economies. Since then the Lloyd’s hierarchy have sat at the front of the bus on some high-profile overseas trade missions sending a serious message about their global ambition. Few of course doubt that the strategy is long-term requiring guile and patience in equal measure.

Lloyd’s conceded at the outset that much of the work in realising their vision will fall to the underwriting and broking businesses whose appetite to grow in new markets will govern the success of the plan; and there perhaps lies the biggest challenge. Released from the grips of recession advanced nations like US and Japan now look like more attractive bets than the higher-risk developing countries where growth is faltering. The BRIC economies have a hit a wall. Investors are fleeing markets from Latin America to Asia, tanking currencies and stocks as they head off. Interviewed last week even the Chairman of Lloyd’s conceded that the it would be the established markets of North America and Continental Europe that would offer the best prospects in 2014.

Were it just a cyclical slowdown, insurers might be less deterred than others. The true source of the business opportunity in the developing world is in fact the very low level of product penetration, the small percentage of GDP spent on insurance, rather than the rate by which GDP grows. Unfortunately the problems appear to run a lot deeper. Writing recently in Time Magazine, Michael Schuman blames the complacency of overconfident governments in China, India and Brazil for the evaporation of investor interest; in particular their failure to press on with reform; fluffing the chance to liberalise and reshape tapped-out growth models.

This is an assessment that will resonate with insurers. If the weaker economic outlook and declining premium rates were not enough to contend with, restrictions on overseas ownership and licensing; rules preventing offshore reinsurance and the preferential treatment of state-connected enterprises are just some of the factors that are further souring underwriters and brokers taste for expansion. No surprise therefore that Lloyd’s is set to initiate a ‘market access’ project next month to strengthen its global licensing and trading framework in the emerging economies. Their success with this and their lobbying with local regulators for freer open markets may ultimately determine whether the market resembles the Vision by 2025 or maybe some years later.

On Market Misery

the cost of catastrophe events in 2014 would have to be massive to harden the market

The cost of catastrophe events in 2014 would have to be massive to harden the market

We are a pessimistic lot by nature but the mood in the insurance market as full trading resumes this week is more gloomy than usual for this time of year. Reinsurers were battered on price and treaty conditions during the recent renewal season; the patchy rally in some US commercial rates has come to an abrupt halt; and premium levels in almost every other geography and product line continue their journey south. Already many companies and syndicates will be worried about not achieving business plan levels of growth and profitability in 2014.

To outsiders all this may seem hard to fathom. The global economy is showing genuine signs of life following a prolonged downturn. The politicians are reminding us that the recovery remains fragile but a return of business confidence is now palpable. Our friends elsewhere will be embracing 2014 with more enthusiasm and not for the first time the insurance cycle looks out of step with the world beyond its borders

Healthy, expanding businesses will demand more policy coverage which should be good news but unfortunately growth is tapering off sharply in the developing world where low levels of market penetration provide the biggest opportunity for insurers. Worse still, as ever, on the supply side of the industry the mountain of surplus capital sloshing around continues to exert huge negative pressure on pricing.

Received wisdom is that the shake-down following the payment of a huge catastrophe event claim, or series of them, offers the best prospect of burning off capital. A couple of windstorms in 2014 of the ferocity of Typhoon Haiyan or Cyclone Phailin smashing into more densely insured coastlines would undoubtedly hit the industry’s balance sheet hard. Yet the losses would have to be real whoppers such is the volume of excess capacity in the industry.

An alternative theory of the modern time is that the new-style pension and hedge fund providers of capital will retreat from insurance with their money when higher interest rates make traditional asset holdings more attractive. Unfortunately, according to the Bank of England November inflation report an increase is unlikely before mid-2015 or much later than that according to many economists. There is little of immediate encouragement here either therefore.

Of course a soft market like the inclement weather currently is only an issue for those who get wet. It is mostly loss-making companies who cut-back and when enough of them do so sentiment does the rest and prices go up. Earnings pressure can reverse a market and with RSA and QBE joining the likes of Tower in reporting significantly lower levels of profit and balance sheet impairments in the last few weeks, some early signs of margin strain in the system might be evident.

A safe new-year prediction is that we shall see more insurers getting into trouble, paying the price for over-expansion. That there will be enough of them, sufficiently pained, to harden up the market in 2014 is a much longer shot. Sadly the agony etched on insurers’ faces looks set to continue for some time.