Regulation, Capital, Industry Image Dominate CII Conference

The industry “needs leaders that will actually lead,” said outgoing president Andy Homer as he closed the 102nd Insurance and Financial Services Conference of the U.K.’s Chartered Insurance Institute (CII) on Sept. 19. He also admonished the assembled leaders of Britain’s insurance community that facing the market’s new challenges and profiting from new opportunities are ultimately their responsibility.

Prominent issues at the two-day event included: the state of the capital markets, equity values and interest rates, the U.S. tort system, asbestos, applying technology, cutting costs, underwriting discipline and how to avoid the market cycle.

Closer to home, the delegates examined the effect of the Financial Service Authority’s (FSA) proposed regulations and how to improve the industry’s tarnished image with consumers.

Lloyd’s sets the tone
In his keynote speech Lloyd’s CEO Nick Prettejohn called for the industry to reform itself, to overcome the cycle of “peaks and troughs” that dominate the history of insurance, and stressed the vital need to use technology to modernize the way the industry operates in order to reduce costs.

“Whichever way you look at it,” Prettejohn said, “general insurance has been a cyclical business.” The result “for some classes of business” has been “extremely volatile pricing, which cannot be in the long term best interests of the shareholders of underwriters or brokers—or most importantly, policyholders.”

He echoed the industry’s new mantra—the absolute necessity of making profits on underwriting, rather than relying on investment returns to make up the difference, although this has rarely, if ever, been the case.

Company failures are historically caused by management failures, Prettejohn noted, as he urged the industry to improve how it operates. “Time and time again, in history’s two by two matrix, it is only the combination of strong management and strong underwriting, that produces excellent results over the long term.”

Prettejohn also said that in order to control the cycle it might be necessary to simply maintain Lloyd’s present capacity (around £20 billion – $31.8 billion) at current levels or even reduce it. “I wouldn’t be disappointed [if capacity stays the same], and we avoid losses.”

Impending FSA regulations
While many priorities are shared on a global basis, the U.K. insurance industry is specifically worried about the FSA regulations that will come into force in October 2004 with full enforcement in 2005. According to a CII straw poll 23 percent of the delegates said it was their greatest concern. The new rules, designed to regulate the financial services industry, will require increased reporting and transparency, especially regarding investment products.

During the course of the conference delegates heard from Sarah Wilson, director of the FSA’s “High Street,” or local division, and from its new head John Tiner—the microcosm and the macrocosm. The FSA needs the cooperation of the insurance community, both Tiner and Wilson stated, and the insurance community needs the FSA if it’s to restore public confidence. The goals of the FSA and organizations like the CII are in fact quite similar: Raise standards of qualification for those who work in insurance; get rid of the bad apples; prepare to face future developments; and above all, treat the public/policyholders fairly.

That doesn’t mean there’s agreement on all fronts. Insurers are concerned not just about the costs involved, but also the adverse effects the new rules may have on the industry.

“The rules on capital requirements are very complex and potentially very burdensome,” said Pierre Lefèvre, CEO of France’s Groupama. “They could undermine the competitiveness of the industry. ” He warned that they could drive companies out of the U.K.

The role of capital
Swiss Re CEO John Coomber, the first Englishman to head the world’s second largest reinsurer, pointed out in a luncheon address that while loss events such as 9/11 and the U.S. financial scandals had cost the industry around $40 billion, the meltdown in the equity markets had been far worse, effectively withdrawing over $180 billion in capital. He reminded the delegates that “insurance is a pooling mechanism,” and the loss of such a large amount curtails the industry’s ability to perform its role in society.

He also inveighed against the notion of “unlimited liability,” pointing out that it was inherently “a promise that can never be fulfilled.” Coomber stressed that capital should be used to establish companies and attract the skilled people to run them, not to pay claims. Echoing Prettejohn, he expressed disapproval at setting prices by premium level, rather than by the level of risk, and claimed that in some areas, such as terrorism coverage, the industry was simply “not equipped to cope,” making government backup a necessity.

On the following day Martin J. Sullivan, AIG’s vice chairman and co-chief operating officer, discussed capital positions, especially AIG’s—around $58 billion, $56 billion of which represents retained earnings, with $622 billion in assets. He pointed out, however, that generally the industry’s capital is stretched thin, and stressed the need to consider capital strength when placing policies.

Sullivan also attacked the high costs of the American legal system. To British delegates, concerned about “the compensation culture,” as it’s called in the U.K., Sullivan’s statistics were the stuff of nightmares: 15 million lawsuits in 1997; class actions up 1,000 percent since then; $300 billion in awards by 2005; 200,000 asbestos cases in the courts; $13,000 per bed to insure nursing homes in Florida; and all the other horrors of an out of control legal system. Sullivan warned that without serious reforms, U.S. consumers would be paying an additional $1,000 annually by 2005 to compensate for insurers’ increased costs.

Concerns over public image
The U.K. insurance industry is indeed worried about consumers, but less about their lawsuits than about the low esteem consumers have for the industry. Judging from the multiple discussions the topic engendered, it is uppermost in the minds of practically everyone involved in the U.K. insurance market.

The problem may be an old one, but the insurance industry’s entry into financial services has exacerbated it. Beginning in the late ’80s and early ’90s life and pension insurers’ began marketing a large number of fairly complex financial products; notably “endowment mortgages” (home purchase loans with insurance guarantees) and “with profits” life and pension vehicles, whereby buyers participated in investments. Unfortunately the market downturn and a lot of bad investments resulted in a number of people losing a lot of money when the companies couldn’t meet their promised financial goals. As a result courts and regulators have levied fines and ordered billions of pounds in reimbursements against companies found guilty of “miss-selling” these types of policies. The reputation of the general insurance industry has suffered through contagion.

As a result, the industry has a big image problem, and several discussions focused on ways to improve it. Mick McAteer, senior policy advisor with the U.K.’s Consumers’ Association (CA), observed during a final-day lunchtime debate that the public’s need for insurance services has grown dramatically, as government pension schemes are being curtailed and risks covered by general insurers multiply.

McAteer pointed out that changing demographics—higher numbers of retirees, a fragmented labor market, an increase in the number of single households, trends toward social exclusion, the growing debt burden—signal “a seismic shift in society,” in which the “industry has a vital role to play in contributing to the well-being of the country as a whole.”

McAteer urged the industry to work with consumers in trying to fulfill their real needs, not just sell them products. “The world has changed and the industry has no choice but to adapt,” he told delegates. He did offer somewhat of an olive branch—with thorns. “If you want to talk to me about it, my door is open. If not, then there will be no compromise and no mercy.”

Topics USA Legislation Training Development Market