The 102nd Insurance and Financial Services Conference of the U.K.’s Chartered Insurance Institute wound up proceedings in London last Friday on an upbeat note. President Andy Homer told delegates that the industry “needs leaders that will actually lead.” He also admonished Britain’s insurance community that facing and overcoming the challenges and opportunities of the changing insurance market is ultimately their responsibility.
The two-day conference, which began with the induction of new CII members Wednesday afternoon, heard from an impressive line-up of speakers, who addressed concerns that are both local and universal. In his keynote speech Lloyd’s CEO Nick Prettejohn stressed the need for the industry to reform itself (See IJ Website Sept. 19). He stressed both the need to overcome the cycle of “peaks and troughs” that dominate the history of insurance and the need to use technology to modernize how the industry operates in order to control costs – issues that also concern Lloyd’s Chairman, Lord Peter Levene.
At a press conference following his speech Prettejohn voiced the heretical notion that in order to control the cycle it might be necessary to simply maintain Lloyd’s present capacity (around £20 billion – $31.8 billion) or even reduce it. “I wouldn’t be disappointed [if capacity stays the same],” and we avoid losses.” Lloyd’s may be in a position to do so as its unique structure makes implementing a business plan more feasible. It will be interesting to see if the rest of the industry can achieve the same goal.
While those priorities are generally shared on a global basis, the U.K. insurance industry is also worried by the impending regulations established by the Financial Services Authority (FSA) that will come into force in October 2004 with full enforcement becoming effective in 2005. According to a CII straw poll 23 percent of the delegates said it was their greatest concern. The new rules designed to regulate the financial services industry and will require a great deal of increased reporting and transparency, especially regarding investment products.
Insurers are concerned not just about the costs involved, but also the adverse effects the new rules may have on the industry. “The rules on capital requirements are very complex and potentially very burdensome,” said Pierre Lefèvre, CEO of France’s Groupama. “They could undermine the competitiveness of the industry. ” He also warned that they could drive new companies out of the U.K. to places like Gibraltar in a quest to avoid their impact.
Capital was also the subject of a lunchtime address by Swiss Re CEO John Coomber, the first Englishman to head the world’s second largest reinsurer. He pointed out that while loss events such as 9/11 and the U.S. financial scandals had cost the industry around $40 billion, the meltdown in the equity markets had been far worse, effectively withdrawing some $180 billion in capital. He reminded the delegates that “insurance is a pooling mechanism,” and the withdrawal of such a large amount curtails the industry’s ability to perform its role in society.
He also inveighed against the notion of “unlimited liability,” pointing out that it was inherently “a promise that can never be fulfilled.” Coomber stressed that capital should be used to establish companies and attract the skilled people to run them, not to pay claims. He also echoed Prettejohn, expressing disapproval of setting prices by premium level, rather than by the level of risk, and indicated that in some areas, such as terrorism coverage, the industry was simply “not equipped to cope,” making government backup a necessity.
According to the straw poll only 11.9 percent of the delegates considered “consumer trust and industry reputation” their chief concern, but judging from the discussion the topic received it was uppermost in the minds of most of them. The topic cuts across the entire industry and has had a far-reaching effect on the adoption of the FSA’s regulations. Courts and regulators have levied fines and ordered reimbursements running to billions of pounds against life and pension insurers as a result of “miss-selling” policies, mainly “with profits” investment vehicles and “endowment mortgages,” that lost a great deal of their value when the equity markets declined. Even though most of the blame falls on the financial services sector, the reputation of the general insurance industry has suffered through contagion.
As a result the industry has a big image problem, and several discussions focused on ways to improve it. To its credit the CII invited Dame Sheila McKechnie, thge outspoken head of the U.K.’s Consumers’ Association and Mick McAteer, the organization’s Senior Policy Advisor, to address the delegates. Dame McKechnie, whose oft quoted remark that the financial service industry consists of “wide boys [slang for gangster or hoodlum] in white collars and suits being no better than common thieves,” was unfortunately ill and could not attend.
McAteer, a deceptively soft-spoken Irishman, more than held his own in the panel debate he participated in and the lunchtime debate on the final day with CII General Director Dr. Sandy Scott. No one really openly disagreed with his observation that restoring consumer confidence should be a priority. He observed, however, citing remarks by former British Prime Minister William Gladstone in 1864 on his low esteem for the insurance industry, that the problem was not a new one. It’s taken on increased importance, however, because the public’s need for insurance services has grown dramatically, as government pension schemes are being curtailed and risks covered by general insurers multiply.
Martin J. Sullivan, AIG’s Vice Chairman and Co-Chief Operating Officer, was more than happy to tell delegates about his company’s capital position – around $58 billion, $56 billion of which represents retained earnings and some $622 billion in assets. He pointed out, however, that the industry’s capital is stretched thin (except of course for AIG), and stressed the need to consider capital strength when placing policies.
Homer, who stepped down after the Conference concluded – his successor, Rick Hudson, is group risk director at Royal & SunAlliance -recapped conference highlights in his closing remarks. He echoed Prettejohn and others in stressing that insurers “should be prepared to give up market share in order to maintain [low]} claims’ ratios.” He also noted the duty the industry owes to society, the need to recruit and train good people, and the desirability of having regulations based on principles rather than simply a lot of rules – something U.S. companies, with 50 different state insurance commissioners looking over their shoulders, can surely appreciate.
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