Lloyd’s CEO Richard Ward is stepping down from the post at the end of the year. He will be missed, but, despite the catastrophes of 2005 and 2011, the two costliest years in the industry’s history, as well as the financial crisis, he leaves Lloyd’s with capital, reserves and subordinated loan notes at £20.873 billion [$33.4365 billion] as of June 30, 2013.
He dealt with Hurricanes Katrina, Wilma and Superstorm Sandy. “There were also a lot of things in between,” he said; “let’s not forget the financial crisis of 2008, the collapse of Lehmans, the bailout of AIG; then we had [hurricanes] Ike and Gustav in 2008 as well.“ 2011 was the “costliest year on record for the Lloyd’s market – the Australian floods, the Christchurch earthquake, and the Tohoku earthquake in Japan – devastating, tragic – and also the Thai floods.”
During those nearly eight years Ward, who did not have an insurance background before he joined Lloyd’s, said he now has “some things to draw on. Firstly the strength we are in today, the position we’re in today, is far better than the one we were in in 2006. Financially we’re stronger from a market and a market oversight perspective in terms of underwriting discipline; capital management we’re better.
“In terms of our reputation and brand, it is stronger. In terms of our license network and our reach, it’s stronger.” He is justifiably pleased “with all the things we’ve achieved” during his tenure. “But the one thing that I’d really sort of focus on,” he said, “is the approach we take to market oversight in terms of underwriting and capital that has delivered the strong profits that the market has shared throughout quite a difficult period.”
Established in 2003, Lloyd’s Franchise Board, headed by Rolf Tolle, its first “franchise performance director,” and subsequently by Tom Bolt, the current Performance Management Director, has been instrumental in achieving those elusive goals. Ward explained that when he first arrived at Lloyd’s there remained some “uncertainty and concern” in the market as to “what our role should actually be, and how we would work with the market.”
Through the efforts of Tolle and Bolt, “we’ve established a great relationship with the market; it’s seen as a commercial/business relationship,” Ward said. As a result that market has confidence in the oversight, which includes approving business plans and setting capital requirements. “We now have more people wanting to join [Lloyd’s] than ever before; we’ve seen a significant influx of new syndicates….from a market regeneration perspective that’s very important.”
Taken together, all of those developments indicate to Ward “that the insurance market that we operate is seen as good place to do business.” Although it changes frequently, there are now approximately 87 syndicates operating at Lloyd’s and around 54 Managing General Agents (MGA’s).
He also explained that the Franchise Board has a number of “components.” As indicated, Tom Bolt’s title was changed to reflect his mandate – overseeing business plans and underwriting. Other areas include capital, risk management, licensed networks and market infrastructure.
The concrete evidence of Lloyd’s strength and progress was severely tested in 2011. Lloyd’s paid total net claims of £12.9 billion ($20.55 billion) for that year, including £4.6 billion ($7.33 billion) of catastrophe claims. “In terms of loss reporting, it wasn’t a huge loss,” Ward said. “At the end of the year it was roughly half a billion pounds loss we reported to the market, roughly three quarters of a billion dollars.” He added that despite that figure Lloyd’s continued to build its financial strength. “Not one single commentator questioned our financial strength, questioned out ability to pay our claims; on the contrary we continued to improve our financial position.”
Turning to alternative capital, Ward said: “We’re all concerned about additional capital coming into the market, unless it’s matched by additional demand. It’s a simple supply and demand equation. Whether it’s alternative capital, or traditional capital, the “reality is it’s still capital, and if there isn’t a demand to match that capital; i.e. a demand for our insurance products, then it puts downward pressure on rates,” which he characterized as an “underlying concern.”
Lloyd’s challenge “is to see how we can create a demand for our products, creating a demand where people actually need our products.” Ward noted that the insurance industry, unlike the banks, doesn’t want to create the kinds of products for which there’s no need. “What we have to do,“ he said, is to “focus on our value added service, where we do provide a real service to clients to help them manage their risks, and we need to go round and help people understand how they can use insurance and reinsurance to manage that risk.”
Lloyd’s is working on that by “finding new areas of risk.” Ward said: “These are risks that our clients face today that they’re asking us to help them manage, and that’s the important thing. We’ve got to listen to the risks our clients face and help them understand how they might use insurance to manage those risks.”
He also pointed out that Lloyd’s has been “doing cyber risk for 20 years.” Now, however, it seems to be coming to the top of everyone’s agenda “because of the focus on it; so, yes we have to help businesses understand how they might manage that cyber risk, using the kind of products that we can offer. But, more importantly, how can we redefine our offering to help them manage that risk?
“We come out with a risk index every two years,” he continued. “That’s a survey of CEO’s around the globe, roughly 500 CEO’s across the globe. We ask them which risks they rank in terms of priority.” Cyber risk has risen from around number 20 three years ago “to number three today.”
It’s not the only risk, however on the list. There are some of them, such as reputational risk, that you “can’t necessarily manage easily using insurance products.” The risk index therefore “throws the gauntlet down to our industry, saying these are the risks our clients are worried about; how can we develop products to help them manage that risk?”
Turning to emerging markets, Ward sees them as opportunities, as they are “fast growing markets – China, India, Brazil, Turkey. They have risks that they need to manage, particularly China and Turkey that face significant natural catastrophe exposure.”
He cited the Sichuan earthquake in 2008, where the economic losses were around $100 billion, a phenomenal loss. But in terms of “how much of that was insured, it was [only] a few percent. So there’s a phenomenal opportunity there for the insurance industry to help Chinese people, Chinese businesses, manage that risk.” He’s also not worried about Chinese growth, as it’s still around 7.5 percent, a figure Europe, the U.S. and the UK would love to have.
Lloyd’s has an operation in China, established in 2007 with a reinsurance operation in Shanghai. It now “has a direct license to operate out of Shanghai, and we’re now looking to expand our presence by opening up a branch for reinsurance in Beijing,” Ward said. He described the process as “establishing a presence” that is “a long term play,” rather than to start making money immediately. It’s important that we build up our reputation, our brand; that the local market understands what we can do to help them, and over time we’ll see more business flow through into the Lloyd’s platform. By 2025 China will be the largest economy in the world, so we’ll need a presence there.”
Lloyd’s is following the same strategy in other emerging markets, such as Brazil, where it has a reinsurance presence that “is now the second largest in Brazil. We’re looking to see how we can establish a presence in Turkey with that market growing as well.” Lloyd’s also has a “very large presence in Mexico.”
India, however, is a country where it has difficulties, as does everyone else, due to the apparent inability of Indian politicians to change restrictive laws concerning insurance, which would allow insurers and reinsurers to “operate onshore,” i.e. to establish a presence in the country, rather than just handle some of the business coming from India outside the country. Ward is somewhat optimistic that some enabling legislation will get through India’s parliament – eventually.
In conclusion he described the Rendez-vous as the “one event in the year that everyone comes to, so the opportunity to meet CEO’s from reinsurers, insurers and brokers in one place is just fantastic. The networking, the business meetings that you can have here are far more productive than anywhere else I’ve known. If I wanted to meet all of the CEO’s of the major European reinsurers, the U.S. reinsurers, the brokers, you can do it here, and you can do it in a day.”