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 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 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.

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 Keeping Customers Close

Sean Murphy, President Lloyd's Canada addressing MGA delegates at Kiln's Cover-holder Forum in Kelowna, BC

Sean Murphy, President Lloyd’s Canada addressing MGA delegates at Kiln’s Cover-holder Forum in Kelowna, BC

Dragging French reinsurer SCOR Re back from the brink and restoring the company’s credibility and financial security was an achievement many in the market thought impossible. So when their CEO Denis Kessler, who engineered this much lauded comeback spoke about the emerging economies at the AM Best Conference last week, as reported in Insurance Insider, his comments were not without significance. His rallying cry for reinsurers to commit for the long term to places like China and Brazil by deploying local people on the ground to develop relationships goes some way to redress the popular perception that reinsurance is fast becoming a numbers game best left to quants on small islands far away from the audience they seek to serve.

Interestingly at the same time RSA have come to much the same conclusion in the consumer facing end of the industry. In announcing the closure of all their Indian call centres and transferring 350 jobs back to UK, a chapter of off-shoring client relations that RSA did so much to pioneer might just be closing. Judging by the comments attributed to their management, attaining a consistently excellent level of customer service has proven elusive for RSA, despite years of trying, because they failed to recreate at a distance a cultural identity with the customer.

With their history and international reach as a foundation, deepening customer relationships is a fertile source of competitive advantage for the Lloyd’s market. Hosting a Cover-holder forum recently near Vancouver was a good reminder of just how far Lloyd’s has come in Canada by carefully nurturing an impressive network of empowered Managing General Agents (MGAs) on the ground. An annual premium volume in excess of $2 billion is being generated and better still, a significant part of this is mainstream commercial business, normally inaccessible in most other countries.

Opening underwriting offices in regional hubs is a strategy that the larger Lloyd’s firms are pursuing to get closer to customers and understandably so. Where it is possible, however, cultivating MGA partnerships can compliment this direct approach and be just as lucrative. With regulation biting at home, delegating authority to third party companies is not without its challenges. The lesson we might take from what SCOR and RSA are doing though is to not let this stand in the way. Investing more time, money and effort in deepening MGA relationships to access customers is the Lloyd’s way of “going local” and over time the market’s loyalty to this channel will surely be rewarded.

On Other People’s Money

Lloyd's: A business built on third-party capital management

Lloyd’s: A business built on third-party capital management

Although there have been a few acquisitions at Lloyd’s since, none were as bold as Catlin’s takeover of Wellington in 2006 in the aftermath of Hurricane Katrina. The new enlarged syndicate immediately became the largest at Lloyd’s; a position it holds today, writing gross premiums of nearly £1.8 billion last year. Surprising many back then, in addition to acquiring the managing agency, Catlin also bought out Wellington’s 1,200 Lloyd’s names (investors); paying £ 119 million cash compensation for them to leave the market freeing Catlin to provide 100% of the capacity in the merged enterprise.

Aligning underwriting and capital under one common-ownership was all the rage then but in just a few short years attitudes have changed a lot. So much so that even Stephen Catlin, talking to analysts on the recent release of his group’s half-year results, reportedly said that third-party capital could once again feature in their 2014 business plan. Whilst Catlin and many others have for some time nurtured small special purpose syndicates and sidecars, the current frenzy of companies eager to play more seriously with other people’s money, as well as their own, suggests a profound switch in market sentiment.

For some time capital has been relatively easy to come by but until recently was mostly unneeded. Insurers and reinsurers had plenty of their own and were happy to risk it in markets where premium rates were decent enough by historical standards. However, the sharp downturn in prices this year and the threat of big shifts in the way brokers distribute business has unnerved the industry.  In response companies who would otherwise have cut-back their lines are being lured instead into offering their clients alternative forms of capital to keep relationships alive and maintain market share. Fees and commission for managing third-party pots of money will stave off the hit to profits of shrinking down the risk-bearing business. At least that is the theory.

Yet, according to AM Best, the motivation for carriers to embrace new sources of capital might not just be about plugging short term holes in their income statement. Last week the rating agency published a special report on the reinsurance sector and portentously characterised third-party capital management as the “wave of the future”. With pension and endowment funds increasingly replacing hedge funds as investors in the sector, they see third-party capital as starting to look a lot more permanent and less opportunistic. A wonderful irony, in many ways, that the wider market is potentially transitioning to a business model of managing multiple sources of outside capital that harks back to the Lloyd’s way of days gone by; shunned nearly two decades ago as being out of step in the modern world.

On the Cost of Doing Business


Will the restructuring at Endurance prompt a wider examination of the industry’s cost base?

Already 2013 has the air of being a transformative year for the industry. Over the past 12 months the usage of non-traditional sources of capital has arguably reached a tipping point that shifts the reinsurance business model possibly forever and not just in response to the low interest rate world we presently live in. Equally the quota share sidecar deal struck in March between Aon and Berkshire Hathaway looks set to soon be repeated in a fashion by Willis, perhaps redefining how specialist insurance products are underwritten and distributed; certainly in the current soft market but potentially across the longer term trading cycle.

And now by reportedly axing 30% of his senior corporate roles and targeting savings of $20m per annum at Endurance, their newly appointed high profile CEO John Charman might just be signalling the onset of a wider appraisal of the entire market’s operating cost structure.  As reported by Insurance Insider, Charman views the infrastructure he has inherited at Endurance as unsustainable but not untypical of an industry characterised by, in his words, bloated expense ratios.

At the commoditised end of the insurance spectrum, where operating margins are thinner and every dollar counts, firms are used to tackling overheads; continually searching for more efficient and cheaper ways to service their business. In recent months Direct Line and Aviva have each introduced a programme of office closures and job cuts. If Charman is correct, however, then the time has arrived for the specialist wholesale and reinsurance players to also examine their organisational structures and weed out redundant management and administrative cost.

Those operating in the Lloyd’s market might need some persuasion. Generally syndicates do not carry large operating costs relative to their peers.  With expense ratios mostly measured in single digits there is little incentive for them to aggressively slash overhead. Instead positively managing even small fluctuations in the claims ratio is seen as a much greater priority. Satisfying as it might be for some hard-liners to take a Charman-esque axe to the central Lloyd’s bureaucracy and shared-services, it might not in reality deliver a truly significant bottom-line benefit.

A key part of the reason why Lloyd’s businesses are lean is that they do not support extensive marketing and servicing infrastructure. Yet relying more heavily than most other insurers on brokers to carry out these activities comes at a price. When syndicates add the higher commission they pay to their operating expenses, many are in fact likely to be at a competitive cost-disadvantage to their rivals taking into account all the costs of acquiring and running the business.

The problem for Lloyd’s underwriters is that squeezing the pips on internal costs is only part of the answer, and probably the easiest part, to improving the economics of their business model. Unfortunately for them, to also battle down the level of brokerage they pay out, at a time when distributors retain so much leverage, might prove to be a far harder task than wielding the hatchet around the office.

On Lloyd’s and its Brokers

Lloyd's Brokers: business concentrated into fewer hands

Lloyd’s Brokers: business concentrated into fewer hands

The early 1980s was a golden era of the Lloyd’s Broker start-up. Men (they were all men in those days) with guile, flair and no shortage of talent, bored by the humdrum of working in old-school-tie broking houses, joined together to create new and exciting businesses. It was no coincidence that the focus for these entrepreneurs was the US reinsurance market where those who were smart and doggedly looked after their clients could reap handsome rewards. They had a great run but companies like BMS moved on to other things; RK Carvill closed its doors; and there is trade press speculation that Towers Watson may consider selling Denis Clayton acquired in 2002, the last remaining of those 80s start-ups.

In a world today of expensive analytics and an evolving myriad of non-traditional financial solutions, the barriers to entry for a small specialist intermediary in the reinsurance sector are so daunting that the vice-like grip of the mega-brokers looks impenetrable. It is not just reinsurance; aviation and even energy, once a fertile ground for start-ups, are also sectors where size seems to not only matter but is everything. Writing in the Insurance Day last week, its editor Richard Banks predicted a bloodbath of small and medium-sized brokers as the diseconomies of scale and regulatory burden bites.

Much is said of the large volume of business sourced into Lloyd’s from the big three and soon it will probably represent as much as 50% of the market’s volume. As the recent debate over sidecars has revealed, there is much headroom to grow even further but it is a journey not for the feint-hearted. Almost certainly underwriters will need to compromise on their accustomed approach to selecting and pricing risk; Aon, Marsh or Willis are unlikely to bend their business model to suit London’s taste.

The pity for the diehards is that to simply focus instead on the second tier is not as simple as turning a tap on. One thing to be said about the class of 1980 was their fierce loyalty to the Lloyd’s market and whilst it is true that independent producers like Miller and Tyser have mostly stuck to the faith, these firms are becoming more the exception than the rule. Consolidators like Cooper Gay and Howden have an international network and ambition that goes beyond London and the strategy of others like Lockton, Gallagher and Integro is steered from their parents in US.

Where once underwriters called the tune, it is now the distributors who have leverage and are setting the ground-rules. To fulfill its vision 2025, Lloyd’s must tailor an appeal and style of trading for different sorts of producers who these days have no particular allegiance other than to themselves and their client. Achieving this and at the same time maintaining  high standards of underwriting performance is possibly the biggest challenge that the market currently faces.

On Underwriting Endangered

Kiln Marine Workshop in Riga attracting over 60 local brokers from the Baltic States

Kiln Marine Workshop in Riga attracting over 60 local brokers from the Baltic States

The quota-share, that simplest of arrangement where premiums and claims are split by the parties in a pre-agreed fixed proportion, is losing its innocence. Traditionally constructed as a treaty between an insurance company and its reinsurer, a quota-share offers the purest alignment of interest and remains the favoured approach for those providing risk capital to risk takers. You win, we win. You lose, we lose. It generally works because the parties are pursuing a common objective; to make an underwriting profit. 

Yet from the shadows a racier version of the quota-share is emerging where capital providers are said to be contracting directly with brokers rather than insurers.  The challenge with doing that is fairly obvious. The broker’s loyalty is to his client whose interest clearly takes precedence over that of the insurer; the party taking all the risk. As any couple will testify, rowing in opposite directions is a sure route to a rocky marriage. Nevertheless, some very impressive companies are reported to be at it so the practice is a version of underwriting to be taken seriously.

The commoditisation with scale of capital delivery direct to distributers that by-passes specialist insurers is a long term trend that will unnerve the London Market if it catches on. An industry sector built upon the provision of tailored risk, product and class based underwriting might find itself heavily marginalised in such a world: all the more reason that the specialists must re-double their effort to ensure that they remain relevant and add value.

Credit is due therefore to Beazley, who announced not one but three interesting risk underwriting initiatives last week. Only time will tell whether forming a construction insurance consortium; offering an on-line cargo product to regional brokers; or opening in Miami to develop Latin American reinsurance business will prove to be worthwhile or profitable. Nevertheless in deepening product capability, using technology and extending market reach, they all are logical strategic steps towards Lloyd’s vision of 2025.

In a similar vein last Thursday a team of enthusiastic Kiln underwriters resisted the lure of the opening day of the Lords test and instead headed to Riga, the capital of Latvia. Open for business with a close affinity for international trade and transhipment, the Baltic States are high growth economies in the heart of Europe. Thirsty for product information and technical support, young and eager to learn, local intermediaries were easily drawn to the marine product seminar the Lloyd’s underwriters hosted.

Insurance remains a people business and London based players are better than most in cultivating commercial relationships that stick.  Endangered maybe, but those risk underwriters who have the desire and play to their strengths with far greater vigour, have every chance of prospering even in a world that is changing around them.