Lloyd's broker

Rough Notes, Oct 2003 by Zinkewicz, Phil

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.