Making Risk Normal

Remarks to:

Worshipful Company of Insurers

Friday, 28 June 2019, Guildhall

Professor Michael Mainelli, Alderman & Sheriff-Elect, Executive Chairman, Z/Yen Group

Master, Wardens, my Lord, fellow Aldermen, Sheriff, Honoured Guests, Fellow Liverymen, Ladies & Gentlemen.

I was delighted when your Master set me the task of addressing you some time ago.  It’s my first address since so many of you kindly took a chance on me here on Monday to succeed Sheriff Vincent Keaveny who has done such a wonderful job with Liz Green this year.  My sincere thanks. I’m also delighted that your special guest, Peter Harmer, exemplifies the international livery approach I emphasised on Monday.

Terry said he didn’t want a Private Eye pseuds corner of post prandial prattle.  He wanted me to talk about the challenges facing our insurance sector, partially based on Z/Yen’s Global Financial Centres Index and Global Green Finance Index, and on my observations with Lloyd’s since 1987.  Of course, next week is Climate Action Week, which highlights the green opportunities, but first I must start with the challenges.

As I stand on this platform I’m reminded of one challenge facing a man filling out a life insurance application form, in front of the salesperson.  He was embarrassed about his father’s cause of death.  The salesperson asked why. He explained that his father had been hanged.  The salesperson thought about this for a moment and helpfully said, “Well then, just put down: ‘Father was taking part in a public function when the platform gave way.’”

Challenge is an interesting word.  The etymology is the Latin “calumnia”, to accuse or dispute.  “I challenge you to a duel”.  However these days it is more “I challenge you to a deal”.  We use the word challenge to mean an invitation to compete or take part.  Peter Harmer has earned your admiration for rising to many challenges. 

Challenge is about risk & reward.  25 years ago Z/Yen used the then unconventional theme of risk/reward management.  Of course the insurance sector has been about risk & reward since its inception at the Royal Exchange and later moves to Lloyd’s and the greater London market.  Interestingly, this year we celebrate the quincentenary of a real chancer, Sir Thomas Gresham, founder of the Royal Exchange, with a new biography, by Professor John Guy, “Gresham’s Law”, and an exhibition at the Guildhall Library – a real Tudor Wolf Of Wall Street, living beside Wolf Hall no less.

Today’s insurance challenges range from eliminating sexual harassment to the gritty detail of making a profit in an extended soft market, zero-interest rates, and taxation.  Insurance has had a particularly hard time with regulation, as the requirements for tighter actuarial data in many cases creates a Catch 22 restricting innovation.  You can’t have evidence until you write, but you can’t write until you have a market. 

Ambrose Bierce’s “Devil’s Dictionary” defines insurance as – “an ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table”.  Some innovation that could have been insurance has partially moved to the capital markets where regulation allows such bets.  I’d point to catastrophe bonds, insurance-linked securities and warrants, or even one successful initiative of mine to use contracts-for-difference on gambling markets to supplant sports contingency insurance.

Private equity is moving in for consolidation, but we equally have expansion popping up in insurtech, fintech, smart ledgers, peer-to-peer, or insurance-on-demand. 

As today’s Economist reports, our 25th Index shows London slipping in insurance to second place after New York.  I don’t want to depress you after such a fine and generous meal, but I might take the opportunity to point to three fairly obvious areas of concern.  Markets, costs, and products.

  • markets – London has been slipping in global market share for some years now.  Slipping not sliding, but we need to turn this round and engage more strongly with the growing markets in Asia, Latin America, and increasingly Africa, to engage with enormous projects like China’s Belt-Road Initiative.
  • costs – despite decades of initiatives such as Limnet, Kinnect, Darwin, TMEL, and TOM, costs here are high.  We need to simplify before we automate, but we do need to automate.
  • products – the world is full of new risks we need to grab, from nano-technology, to autonomous vehicles, drones, artificial intelligence, cyber, new medical treatments, climate change.  For example, I’ve been pushing for cyber-catastrophe insurance-linked securities on smart ledgers to provide cyber business interruption.  Anywhere there’s a risk there’s a way.

Opportunities are so plentiful that we’re in danger of losing the trees for the forest.  So what can any post prandial prattle contribute?

I would suggest one big area for attention – purpose.  It has often been remarked that the insurance sector was not core to the financial crises since 2008.  We could debate this, starting with AIG; but we should learn some things from bankers’ experiences.

During the crises, a news team stopped a young banker on Finsbury Square and asked him to address Adair Turners’ rhetorical question, isn’t banking “socially useless”?  The young fellow was flummoxed and shrugged his shoulders.  This is terrible; to go to work each day with no purpose. 

I would hope that we have here a group of people who will explain clearly to the BBC news team outside the Guildhall right now why insurance is socially useful – providing social protection, facilitating trade & commerce, promoting financial stability.  The social benefit is even wider as insurance helps us to ‘pull together through pooling’.  We share risk information and make much better choices using society’s great decision-making mechanism, the monetary system.

We risk fire, burglary, automotive damage, even life; but we feel things are normal when we can insure against them. Insurance normalises them.  Like Sheriff Keaveny, one of my nationalities is Irish.  I spent a few years advising on financial services for the Office of the Taoiseach.  I remember vividly a day in 2010 when Mary McAleese, President of Ireland, came to the Royal Dublin Society Library to make a speech to the European Insurance Forum.  She said:

“The certainty and confidence that insurance provision brings to all our daily lives, whether business or personal, enables us to breathe more easily, to find the confidence to let innovation flourish and to engage with the present and the future, chastened by the past but not allowing the fear of the possible to paralyse us in the present.”

Your Chaplain echoed this point about the past and the future in his sermon at service beforehand.  Her wonderful speech on insurance puts thousands of insurance marketing people to shame, “to engage with the present and the future, chastened by the past but not allowing the fear of the possible to paralyse us in the present.”  You can almost hear the P-45s being handed out in the marketing department – apologies to any fellow Marketors here.

We need to express that sense of purpose outwards, to sell clients worldwide the products they need to engage with the present and the future.

So, as Insurers with purpose, should you be optimistic or pessimistic?  A number of nationalities walk into a bar and are asked, “are you optimistic or pessimistic?”:

•          the Englishman says, “pessimistic, Brexit & Remain”;

•          the Scotsman says, “pessimistic, Brexit & Referendum”;

•          the Irishman says, “pessimistic, Brexit & Border”;

•          the Italian says, “pessimistic, elections”;

•          the German says, “pessimistic, Euro”;

•          the Australian says, “pessimistic, North Korea”;

•          the American says, “pessimistic, China”;

BUT the Insurer says, “optimistic, pessimism is for better times.”