Lloyd’s broker discusses impact of increased litigiousness, growing technology risks and shifting demographics
In the past, insurance agents and brokers, and even many insurance industry company lower-level executives, tended to concentrate on those issues and trends that immediately affected their day-to-day operations. Perhaps, to some extent, it’s even true today. What does it matter what is happening overseas at Lloyd’s of London and other major foreign insurance markets, such as Germany, Italy and France? Who cares if some U.S. insurance companies are dedicating money to investing in developing countries? What really matters is what is happening right here-old-line companies going out of business, insurers retrenching from certain lines of coverage, premium increases soaring. We have enough to worry about on our own shores.
However, while this sense of isolation may provide a comfortable cocoon for those who believe there is, or should be, a geographical separation of insurance industry concerns, those provincials might do well to think again. Those who attended the annual meeting of the International Insurance Society in July were probably soon disabused of the idea that there are no common denominators that affect the global insurance industry. In fact, attendees, who did not know it already, probably learned very quickly that reinsurers, insurers, agents and brokers and all the various intermediaries involved in insurance are in the same boat.
One speaker at the seminar was Edward Creasy, chief executive officer of the UK-based RJ Kiln & Co., Lloyd’s managing agents. Creasy listed for the audience at the US annual some key trends which, he said, will “shape tomorrow’s risk environment” in most of the world’s insurance markets.
One trend that must be monitored, according to Creasy, is the rise of global compensation culture driven by the U.S. legal environment but spreading elsewhere. He said the tort liability system in the United States was $205 billion in 2001, equal to a 5% tax on income. By the year 2005, Creasy said that cost will rise to $300 billion. However, for those who believe it is a problem particular to the United States, Creasy pointed out that the propensity to sue for even the most frivolous of reasons has spread to other parts of the world. New South Wales, the London executive said, has now surpassed the United States in terms of litigiousness.
Second, Creasy noted that the risks associated with developing technology-whether old risks that are amplified in a new context, such as fraud, or new risks, such as virus attacks-are not yet completely understood by consumers or regulators. Again, this is a trend that is worldwide, not just in our own backyard.
Another trend that will affect the global insurance industry in the next few years is the impact of shifting demographics, according to Creasy. The population is aging, but living longer, and a significant portion of that population is becoming more concentrated in disaster-prone areas. Roughly 50% of the world’s population is currently living in coastal areas, he said. “If there were to be a Hurricane Andrew today, it is estimated that the nonproperty losses alone would be about $25 billion,” said the London insurance executive. “Mega catastrophes used to occur once every 100 years. Now, it is estimated that they will happen every 25 years. These things increase the potential catastrophe exposure that the world’s insurers are facing.”
Creasy said that shifting geopolitics is also something that the world’s insurers must learn to deal with. “September 11, in one day, changed the definition of the word ‘terrorism.’ Today, the nature of a terrorist attack and its potential consequences has changed dramatically.”
Finally, Creasy said that the increasing size of risks, where today’s multinational firms and global companies are seeking to protect ever larger balance sheets against both traditional physical risks and increasingly intangible risks, must be taken into consideration.
Said Creasy: “As an industry, we need to collectively manage the insurance cycle better in order to create stability for three key groups: the customer who must be able to enjoy logical and stable pricing; the shareholder who is looking for consistent, stronger financial performance; and regulators who are responsible for a healthy and solvent insurance industry.”
Remarking on what characteristics insurance executives of the future will need, Creasy said that there must be an appetite for professional education, expertise attained through industry-wide exposure, stronger communication skills-focusing on communication between insurers and clients-and entrepreneurial spirit to respond to new and emerging risks.
Of those characteristics, probably professional education stands out as the most critical. There have been some major global developments in the last few decades that have affected not only global insurance companies but also the small independent agencies across the country.
Lloyd’s of London, for example, has changed from an exclusive old boys club, where deals were struck in the privacy of smoke-filled rooms, to an open market where accountability is now of the utmost importance. The changes that have taken place at Lloyd’s-the move to the dominance of corporate capital over individual investors, the new outside regulatory environment that has replaced self-regulation, the new franchise approach intended to improve Lloyd’s underwriting performance-were necessary to keep the market from going under. If Lloyd’s had gone under, as it was near doing during the lawsuit years of the ’80s and ’90s, it would have been the biggest insolvency ever in the world, and the effects would have been felt all the way to Main Street America.
After September 11, the losses sustained by the world’s reinsurers and insurers exacerbated an already tightening insurance marketplace in the United States. Reinsurers raised primary insurance company premiums significantly and those primary companies, in turn, had to raise their rates for the insurance-buying public.
Reliance Insurance was based in Pennsylvania, but its fall has been felt, not only in every state where Reliance operated, but also by its reinsurers overseas.
Therefore, in terms of professional education, the time is past for making parochial choices. The more aware of global insurance developments today’s insurance executives are, the more they will be able to compete in the industry five years from now and beyond.
Phil Zinkewicz is an insurance journalist with some 25 years’ experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.
Copyright Rough Notes Co., Inc. Oct 2003
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