Lloyd’s CEO John Neal tells SIRC 2019 ‘reinsurance industry has not reacted quickly enough to changing risk landscape’

Today, despite the fact the re/insurance industry’s customers face new and increasing threats to their businesses, insurance buying isn’t keeping pace, John Neal, CEO of Lloyd’s told delegates at the Singapore International Reinsurance Conference yesterday.

“Less than half the world’s natural catastrophe exposure is covered by insurance, and over the past 14 years, commercial property and casualty insurance penetration as a percentage of global gross domestic product has fallen from 1.3 percent to 1.0 percent,” he said.

One of the reasons people are not buying insurance is that the industry has not reacted quickly enough to the changing risk landscape, he said.

“Companies face new threats because their assets are now predominantly intangible: software and data, as opposed to tangible, such as property and equipment,” he said.
“Intangible assets are vulnerable to new risks such as cyber attack and reputation damage, which require fundamentally different insurance products.

“We need to offer products and services that are more closely aligned with our customers’ expectations.”

Neal added that while new capital is increasingly attracted to the insurance market, the industry is still “overly bureaucratic” when getting capital into the market.

“As a capital-dependent industry, insurers have to make it easier for new forms of capital to attach to risk, thereby offering customers better value,” he said.

He added that the industry needs to reduce costs across the distribution chain, removing activities that are not adding value.

“The cost of doing business in our industry on average is around 30 percent; at Lloyd’s it’s closer to 40 percent,” he said. “Acquisition costs can also be high, even for more commoditised products.

“Large corporations are increasingly retaining risk on their own balance sheets because they see limited value in transferring risk to an insurer at these high cost levels.
“A corporation’s own captive will pay a claim when it arises, more quickly than an insurer.”

Neal highlighted the talent shortage currently faced by the industry, and the need to address it in order to drive future progress.

“Research shows that only 4 percent of younger job-seekers want to work in the insurance industry,” he said.

“To attract the brightest minds to our sector, we need to do a much better job of selling ourselves, of communicating and demonstrating a more appealing, real value proposition to our employees, and most important, of creating an inclusive culture in which everyone is respected and valued.

“As a sector, the issue is clear: carry on with business as usual and risk becoming irrelevant as customers see decreasing value in our re/insurance offering or change and realise the enormous opportunities on offer.”

He went on to discuss the plan Lloyd’s has put in place to become more relevant, innovative and cost-effective in all its markets including Singapore and Asia-Pacific in general.

“Our plan is based around three priorities: performance, strategy, and culture and people,” he said.

“All three in combination will enhance our Asia-Pacific offering and ensure our Singapore operation can operate to its full potential.”

The right move
Discussing Lloyd’s focus on performance management and oversight, Neal said that a strategy of “wait until the good times return” is not the right one for the sector nor for Lloyd’s.

“We realised we had to take decisive action to improve performance, not passively wait for conditions to get better,” he said.

“We knew we had to radically transform how we do things, starting with performance but including everything else we do.”

He said this was why last year Lloyd’s performance management director Jon Hancock took a rigorous approach to business planning, removing £4 billion of underperforming business from the market.

“The business plans contained £7 billion of new and innovative business, including cyber, sharing economy and parametric covers,” he explained.

“Some syndicates exited certain classes, but the Lloyd’s market still writes business in every class that it did before.”

He added that this year Lloyd’s is running a Light Touch pilot, which means that for 15 of the best and most consistent performing syndicates, Lloyd’s lets them get on with business planning.

“That means less oversight, and fewer reviews and information requests,” Neal said.
“For the poor performers, it means more of those things.”