Professional Documents
Culture Documents
Change
on a Global
Scale By Sax Riley
Chairman, Lloyd’s of London
M
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.
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
THE CHANGING FINANCIAL
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
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