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 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 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 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.

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 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.