Lloyd’s James Tells PCI Threats to Industry Still Exist

November 7, 2006

Julian James, Lloyd’s Director Worldwide Markets, told delegates at the PCI Conference in Seattle that, despite the industry’s “current good fortune, I could make a strong case that we are still standing near the edge of the cliff.”

While he acknowledged the industry’s recovery from the dark days following the Sept. 11 attacks, and its ability to weather the 2004-05 hurricanes, he warned that it’s not out of the woods as yet. James singled out three areas that are cause for concern, which he described as follows:
— Financial – I will contend that, although we are now out of the financial intensive care ward, what we do right now will determine whether we are out for good or whether we go straight back in.
— Reputational – I will argue that although the industry looks solid financially, a backlash from a growing number of policyholders and members of the trial bar means we will have to do much more to explain why profitability is not a dirty word.
— Behavioral – Finally, I will demonstrate why our attitude towards the globalization of our industry needs to change if we are to remain competitive and indeed survive.

Financial concerns persist, despite the U.S. P/C having its best performance in 51 years, largely due to the cycle. “Return on equity,” James noted, “has been stuck at a long-term average of around 9 percent compared to over 13 percent for all US industries – that’s a pretty clear gap. And let’s not forget that the property and casualty industry as a whole has under-performed the Fortune 500 group every year since 1987.” He cited weak premium growth, the apparent downward trend in rates, except catastrophe prone areas, and the rising industry surpluses as painting a picture of “stagnant demand and over-supply.”

The picture is also colored by external factors: “States, especially in disaster-prone areas, are refusing to allow insurers to charge risk-based rates. All signs point to a slowing US economy. A sluggish economy means sluggish demand for home, auto, commercial property and workers compensation lines – which together accounting for about 70 percent of all premiums written.” He also cited tort costs, which continue to rise and new emerging risks.

To combat these potential threats to the industry’s health, James advised the PCI to adopt measures that have more or less become Lloyd’s catechism:
Rule #1- Don’t write for market share
Rule #2 – Focus relentlessly on delivering a gross underwriting profit
Rule #3 – Terms and conditions are just as important as price
Rule #4 – Stick to the business that you know and understand how to price

“These are not difficult concepts,” he continued. “But ask yourself the question – is this what you see going on around you in our industry in 2006?”

Addressing the industry’s reputational difficulties – i.e. the numerous horror stories about rising rates and inadequate claims payments, James stated: “Everyone in the industry agrees that if there are credible allegations of wrong-doing, they should be investigated. But we must appeal for calm and assure everyone that there is no industry conspiracy designed to rob the stricken and pad the pockets of the rich.

Quite simply, we must do a better job of explaining to policyholders, regulators and other key stakeholders how a solvent global insurance industry underpins the US and world economy.”

He urged the industry to “not be afraid to stand up and remind people of the invaluable role played by insurers. Ignore the headlines and look at the facts. The industry paid out almost 170 billion dollars to cover losses from natural catastrophes in the last decade – including 80 billion dollars over the past two years alone to deal with US hurricanes.”

Finally, James took on the challenges posed by globalization. He noted that “Lloyd’s is in no doubt this is the right time to further expand the geographical diversity of our market, and we have therefore sought a license to operate a new reinsurance platform in China.”

He also called for improvements and changes in the way international insurance transactions are regulated, including greater support for dialogue “between national regulators, and the development of international standards, including those of the International Association of Insurance Supervisors.

“The insurance industry is entering a new era where will be no room for protectionism,” James continued. “But as the logic of open borders and free trade takes hold in most corners of the globe, the US remains surprisingly bogged down in an ancient hodge-podge of insurance rules that prevent real competition, innovation and lower premiums for policyholders.”

He then reiterated Lloyd’s longstanding demand for changes in the reinsurance trust rules, under which “so-called ‘alien’ reinsurers continue to be treated like second-class citizens under rules that require them to post collateral equal to 100 percent of their gross liabilities.” Although James saw “progress” in removing the restrictions, the matter remains highly controversial.

In his concluding remarks, James indicated that since 2002 the industry has “made important progress,” and is now “standing on a potentially firmer foundation.” He warned, however that “we put our future in grave danger if we stop here. The environment in which we operate – both internal and external – is undergoing a time of brisk and dramatic change. As an industry, we will fail if we do not keep changing and adapting.

“In conclusion, the challenges we face today may be different, but the message from 2002 remains the same: ‘Our thinking and behavior must change if the insurance industry is to be a stable, secure industry for our policyholders and shareholders of the future.’ Let’s not mess it up again. Thank you for listening. Enjoy the rest of this splendid conference.

The entire speech may be read on the Lloyd’s Website at: www.lloyds.com.

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