Lloyd’s CEO Outlines ‘Strategic Challenges’ Facing General Insurance Industry

April 8, 2005

Lloyd’s CEO Nick Prettejohn, speaking at the FSA insurance conference on Thursday, April, 7, outlined six “strategic challenges” facing the general insurance industry, which he also indicated was by no means a “comprehensive list.”

Prettejohn listed them as follows:
One – Stop destroying value. Change the habit of a lifetime. Make a profit on underwriting on more than an occasional basis.
Two – Change behaviour so that the process of doing business is radically improved.
Three – Use technology to multiply the positive impact of changed behaviour.
Four – Compete successfully for talent versus other industries that have historically been seen to be almost infinitely more sexy, and then nurture and train that talent.
Five – Engage with society and government – and learning from Prince Charles, relish the engagement.
And six – Extract all the benefits from regulatory change, and minimise the costs.

Lloyd’s CEO and its Chairman, Lord Peter Levene, have long been voices crying in the wilderness in the case of underwriting profits. But, as Prettejohn described it, there are apparently some in the industry who have heard them.

He noted: “In 2004, the US Property and Casualty industry made an underwriting profit. A combined ratio of below 100; the twitchers amongst the general insurance world have been treating this like the appearance of the golden eagle. The first underwriting profit since 1978. I continue to find this an extraordinary statistic, one that becomes more and more extraordinary as I repeat it.

“In our industry’s own parlance, underwriting profit has a return period of 25 years. Shortening that return period for underwriting profit has to be the major challenge for our industry.”

Concerning the infamous cycle, Prettejohn offered the following advice: “Stop talking about the cycle as though we are utterly powerless in the face of some all powerful dialectic. No one can deny the existence of the insurance cycle, but it is not an alibi for management inaction.”

Later in his address, Prettejohn summarized his hopes for a technology driven future: “So, in this vision, systems support the human activity of front and back office, to enable brokers and underwriters to enter data once, have real time access to that data, and to have a secure auditable record both of the substance of the transaction and the process that generated it. And businesses will use that data to improve process management.

“Systems will interface directly with one another or through a hub. On the one hand trading partners will recognise that different parties and combinations of parties own and invest in systems that create and use data at different stages of the business process. On the other they will also recognise that the price of multiple interfaces is too high, and will use a community hub to perform that interface function. Or they will use the same collaborative systems.

They will not all insist on using their own systems all of the time, and therefore on having to interface individually with the systems of all of their partners. Such an insistence would be expensive. It would also ignore one of the other major benefits of community platforms – that common standards are easier to enforce using common platforms.”

Prettejohn also echoed one of Lord Levene’s major themes – the seemingly out of control U.S. legal system. “The boundaries of risk are being constantly redefined by society, and especially the legal system,” he stated. “Governments, judges and juries define a substantial amount of the risk that is assumed by our industry. The most spectacular examples of this come from the United States where the tort system costs an increasing amount of money so that it is now an appreciable (around 2 percent) proportion of GDP [U.S. GDP in 2003 was around $10.99 trillion, according to the CIA Factbook, or $37,800 per capita, meaning the tort system cost every American $756 in 2003]. A disturbing benchmark for a world that tends to follow US trends.”

Discussing “Risk Management, Prettejohn indicated that it should really be re-designated “Good Management”. He explained: “When you strip away the regulatory and consultant jargon, it means understanding what could upset your business, figuring out how worried you are about it and taking the appropriate preventative action.

“In the same way, there is no point in regarding regulatory requirements as an inconvenience that must be compartmentalised and kept separate from the day to day running of the business. Those regulatory requirements must be fully integrated into the management fabric of the business. Nowhere is this more obviously the case than in assessing risk and translating that assessment into the capital requirements – the Individual Capital Assessment process that the FSA has introduced and which is consistent with the general thrust of Solvency 2 [The ongoing introduction of international accounting standards applicable to insurance contracts – also called ‘phase 2’].”

In conclusion Prettejohn warned: “The biggest strategic challenge we face, therefore, is ourselves. And it was ever thus. But the external pressures upon us to meet that and the ensuing challenges are now considerable. Those pressures come from a number of sources. From capital that is mobile and demanding; the capital markets will be increasingly intense in their scrutiny and I believe, less, tolerant of poor performance. From policyholders who want stability and transparency. And from regulators and enforcement agencies who will be unyielding in their scrutiny.

“Those pressures must be channeled constructively, so that they improve performance and confidence, rather than increase cost. We shouldn’t need their help to succeed, but help us they can and should.”

The full text of his remarks is available in the Lloyd’s Website at: http://www.lloyds.com.

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