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on a Global
Scale By Sax Riley
Chairman, Lloyd’s of London

any aspects of the insurance business have changed
over the years. Although much has changed, the fun-
damental facets of the insurance offer haven’t. The
basics of risk have not changed, and the way we underwrite
them hasn’t changed very much, either. Today, we still exchange
uncertainty for certainty. The skill of underwriting, our core
competence, is much the same as it was when Lloyd’s of London
started in this game over 300 years ago.
What has changed — and continues to change — is the
entire environment in which we operate. This article focuses
on three specific areas, each of which presents both
challenges and opportunities for the insurance industry in one
way or another. They are a shift in the risk climate, an
explosion of globalization, and a rocky financial landscape.

16 LIMRA’s MarketFacts Quarterly • Fa l l 20 02

THE CHANGING NATURE OF RISK In the past, people came business is being done in this way, and with it comes risk of
to us with their concerns about the cost of fires, sinking ships, various kinds. Internet technology does two things. First, it
thefts, and the other conventional insurable perils we all know presents old risks and amplifies them in a new context. Con-
about. We were able to ease their concerns by exchanging the sider, for example, exposure to fraud, potential third-party
unknown cost of those perils for a known premium cost. These liabilities, and copyright and jurisdictional issues; all of these
conventional risks remain. Some of them, like fire, we now were present in our businesses before we went online, but
have pretty much under control. We haven’t stopped them, now they are reemphasized in a new form. Second, technology
but for both insurers and our clients they have become much carries a range of new risks, such as the threat of viruses,
more manageable. Other traditional perils, such as earthquake hacking, and business interruption due to system failure.
and weather risks, are giving increased cause for concern. A survey conducted this year in the United States by the
Today, 40 of the world’s fastest-growing cities are in earth- Computer Security Institute asked companies about their
quake zones. Half of the world population lives in coastal experiences with computer crime and security. Nine out of
regions, many of which are exposed to rising sea levels, flooding, 10 organizations reported computer security breaches over
and cyclones. In addition, businesspeople are coming to the past 12 months. Eighty percent were able to identify
us about a whole new tier of risks that were not on the financial loss as a result of misuse. Of those who were able
corporate risk agenda 10 years ago. to quantify the size of the loss, the average value was nearly
We increasingly rely on modern communications and $500,000, with the most serious losses occurring through
technology. Any involvement with the Internet alters the risk theft of information and financial fraud.
profile of a company dramatically. However, more and more In tandem with the development of technology and com-
munications, we have
witnessed the rise of the
global brand. Globaliza-
tion as we understand it
has been underway for
centuries; however, the
past 20 years have seen
a spectacular growth in
its visibility. Pivotal
events in recent decades
— oil crises, currency
crises, and the like —
have led to a sudden ac-
celeration in its social
and political promi-
nence. They have also
triggered the rise of the
global capital markets
that make market con-
fidence an increasingly
important part of
today’s equation.
Today men and
women from Africa to
America are increasingly
conscious of the brand
of their clothing or their
bottle of beer. These
brands are immensely
valuable. In research that
Lloyd’s commissioned
recently, 65 percent of
executives surveyed in

18 LIMRA’s MarketFacts Quarterly • Fa l l 20 02

the food and beverage industry said their brand was their and it may be provided on the basis of much more limited
company’ most valuable asset. Once again, a changing social underwriting information than would be demanded by an
trend is driving a very real change in business values. international carrier.
As with any asset, various perils place brands at risk. In Typically, globalization cuts costs. Products are manufac-
January a U.S. court ordered a huge Swiss pharmaceutical tured where labor and production costs are lowest. It might
company to pay a U.S. company $505 million over the vio- therefore seem counterintuitive, but international competi-
lation of a licensing agreement for biological testing tech- tion can actually increase the cost of insurance. To
nology. Such licensing and patent infringement cases are fairly understand why, it is necessary to understand what it is that
common today. the insurance policy fundamentally represents: a lease on
Other losses can be even higher-profile. Product recall cases capital. By paying an insurance premium, the insured is renting
can be particularly undesirable, costing companies not only the insurer’s capital for the duration of the policy. The
in terms of the physical reclamation of potentially damaged level of alternative demand for access to that capital will
goods, but also in terms of business interruption, lost sales, and determine the size of the premium. In the case of a domestic
damage to the corporate reputation. insurer, the only alternative demand will also be domestic,
So, although we understand and manage many traditional but the level of international demand will drive an interna-
perils better than ever before, corporations today face a number tional insurer’s pricing.
of other concerns that did not exist a Globalization is also profoundly
decade ago, whether natural or man- affecting the fabric and structure of
made. The good news is that special our industry. As the world economy
coverage is available if you need it. If Globalization goes global, we have seen a steady
we are to be successful in managing increase in cross-border insurance
21st-century risk , we must work to- business. Today, it accounts for over
gether as an industry to anticipate and is also profoundly 2 percent of the world’s nonlife
respond with new approaches and market. The UK’s unique historical
solutions. position as a center of world trade

GLOBALIZATION In mid-April there

affecting the and commerce is ref lected in that
even today its insurance market plays
were demonstrations in Washington, a significant part in the provision of
D.C., at the meeting of the G7, IMF, and cross-border insurance.
World Bank. We have become used to
fabric and structure Additionally, we have seen a wave
such antiglobalization demonstrations of consolidation. The reinsurance
around the world. This is not mentioned industry is a case in point. At the
in order to debate the pros and cons of of our industry . beginning of the 1990s the world’s
globalization, but simply to illustrate five largest reinsurers accounted
that there are pros and cons. Global- for 21 percent of the reinsurance
ization presents both challenges and opportunities for the market, but10 years later they represented 38 percent of the
insurance industry as well. total. Together, the top 20 reinsurers increased their share from
A major advantage is that globalization provides access to 39 percent to57 percent over that period.
the products, skills, and experience of service providers across Globalization also has implications for insurance regula-
the world. No longer is the consumer constrained by what is tion. Host country regulators cannot hope to be familiar,
locally available from often second- or third-rate suppliers. in detail, with every insurer or reinsurer around the world.
This is good news for the consumer, but threatens the Reliance on home country regulation becomes a necessity if
domestic supplier with potentially damaging competition. the host country regulators are to allow their market the
The argument is, of course, that competition forces domestic advantages of free access to offshore reinsurers’ balance
suppliers to raise their performance to match the higher global sheets, for example. Organizations such as the International
standard, so that in the long run, globalization will be good for Association of Insurance Supervisors and the Organisation
them, too. for Economic Co-operation and Development are now
Protectionism is not always bad for the consumer, either. actively promoting greater co-operation between regulatory
While a locally available product may not be world-class, authorities, greater information sharing, and the setting of
a protected local supplier might be willing to make a product international minimum standards for regulatory practice. And,
available when an international supplier might not. While of course, with another round of World Trade Organization
local coverage may be more limited in scope, it may be cheaper discussions now underway, more countries will be entering

Fa l l 20 02 • L I M R A ’ s M a r k e t F a c t s Q u a r t e r l y 19
the arena of liberalized trade in
financial services. So, this work must You can’t deliver parts to the equation. First, for those
of us who are completely sold on
continue and deserves our support the benefits of globalization, rule
to achieve an increasingly harmo- compelling levels of number one is don’t underwrite for
nized environment that is fair and market share.
liberal, yet rigorous and disciplined.
But globalization does not neces-
shareholder You do not have to be big to be
effective. Interestingly, we did an
sarily lead to greater profits. Bigger analysis of all the syndicates in the
value without
is not always better. Lloyd’s Market over the period 1995
through 1999. We divided the
making an businesses into quartiles based on
ENVIRONMENT The beginning of profitability performance. The top
this article mentioned that losses underwriting quality — the good performers —
have soared over recent decades. In shrank their businesses in real terms.
fact, economic losses rose from profit . The bottom quartile — the poor per-
$69 billion in the1960s to $536 bil- formers — grew their businesses.
lion in the 1990s. The cost to the The same pattern applies elsewhere.
insurance industry climbed even more rapidly — from $6.6 bil- The belief that global market share is a valid business goal
lion to nearly $100 billion — over the same period. We need by itself is a dangerous one.
to return to the concept of making a profit on our core Rule number two is that terms and conditions are
activity: underwriting. just as important as rates, if not more so. The past 10 years
Perennial optimism and irrational exuberance on the stock have seen extensions of coverage that have had just as much
markets have been replaced by sober reality. Industry cash economic effect as the reduction in rates. Indeed, they may
flow has deteriorated and interest rates are low. All of this have been more harmful, because these extensions have eaten
means that investment income cannot be an alibi for under- away at the discipline of identifying, anatomizing, segmenting,
writing. You can’t deliver compelling levels of shareholder and pricing risk.
value without making an underwriting profit. Indeed, some The tragedy of September 11, 2001, has provided more
of the best analysis to date suggests that the new start-ups evidence to support this view. There have been various
in Bermuda will have to operate at combined ratios of around efforts by politicians to intervene in the market to correct
80 percent to satisfy their required rate of return. what they see as a market failure. They see it as failure to
Continuing on the mathematical theme, there are three provide coverage, rather than seeing the true failure, which

20 LIMRA’s MarketFacts Quarterly • Fa l l 20 02

is to identify and price coverage properly over the long term. the challenges and opportunities we need to address at
The third and final rule is to make a gross underwriting the start of the 21st century. However, whatever shifts around
profit. Don’t rely on reinsurance to bail you out. Again, looking us, the greatest challenge is to remain true to the core
at those in the industry that deliver outstanding shareholder perception integral to your brand. The Lloyd’s brand carries a
value, the best businesses make it work at the gross level. couple of important perceptions: that we will insure things
These are not difficult concepts. They are not unfamiliar. And others can’t or won’t, and that we will pay losses no matter
yet we all know how many, or rather how few, organizations what. The key to success is not necessarily copying Lloyd’s.
turn them into reality. But it holds true for all insurers, and indeed all businesses,
Many conversations with policyholders have revealed that staying true to the core perceptions of their brand is
a real desire for pricing and coverage stability, heading to a key component of success. You can spend millions on
stability of relationships and improved financial planning. advertising, but if your products and actions don’t live up
Relative stability at levels of rating and coverage that deliver to the qualities that people associate with your name, it will
an economic return is of interest to policyholders, under- not stand up to the test of time.
writers, and brokers. Here is a lighter but equally resonant thought on change.
Post-September 11, 2001, we have finally seen the start of Lewis Grizzard, the U.S. author, wrote that life is like a dogsled
a return — long overdue — to the notion of making a gross team. If you aren’t the lead dog, the scenery never changes.
underwriting profit. Intelligent insurers are forgetting the That is perceptive, and unarguable. Being a leader of change
notion of market share and simply focusing on gross under- isn’t always easy, it is never cheap, and it is often unsuccessful.
writing results. In turn, this is having an effect on the products But for those of us who see change everywhere, in our
being offered. Where packages had become the norm, markets, in our business environment, in our shareholders’
now they are being divided. What we are experiencing is a demands, across the spectrum — we can either lead, or
return to the fundamentals of analyzing and pricing simply react. For those who just react, the scenery truly never
specific exposures. changes. But for those who lead, take the brave steps, make
managing change a core competence, and steel themselves
CONCLUSION A shifting risk profile, a global trading for fundamental changes of self-image, then exciting, bold
platform, a difficult financial environment — such are new landscapes lie ahead. 

onfe re nces 2003 New

Five in One!
LIMRA International’s
2003 Distribution Conference
Marriott Rivercenter
San Antonio, Texas
• Agency-Building Program
• Brokerage & Independent Program (combined)
• Multiple-Line Exclusive Agent Program
• Financial Management Program
Save the dates:
February 26–28, 2003

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Fa l l 20 02 • L I M R A ’ s M a r k e t F a c t s Q u a r t e r l y 21