Lloyd's eyes cyber-risk, emerging-market opportunities: CEO
YAMATO SATO, Nikkei senior staff writer, and KOSUKE TAKAMI, staff writer
TOKYO -- Lloyd's of London, the world's largest insurance market, has kept pace with innovations over the years -- the automobile, the airplane, the satellite.
Now, it sees growth opportunities in helping businesses cope with cybercrime and other 21st-century risks, and recognizes the impact that technological advances have on the insurance business itself, CEO Inga Beale recently told The Nikkei.
Excerpts from the interview follow.
Q: Could you explain the recent results at Lloyd's?
A: Our 2016 first half-year results, what that showed was that the margins are being squeezed a bit on the underwriting side. You will have seen that the combined ratio went up on the prior year. The combined ratio went up to 98%. That is one of the metrics for insurance that isn't very good to go up especially over 100%.
We found that we have increasing pressure on the top line - on the premiums - because of the abundance of capital in the world, and they are looking to invest in sectors where they can make good returns. Investing in insurance and some reinsurance has delivered returns in double digits for many years. So it's a very attractive sector for investors to come into. With this abundance in capital, it has been putting pressure on the top line. So it's a competitive environment, but at 98% it still means we're making a profit on the underwriting.
Q: Would you explain your position on the cyber-insurance market? This looks likely to become very important going forward.
A: Lloyd's has always been at the forefront of providing insurance for new risks. We have been underwriting human progress. As the world moves on, we went through the Industrial Revolution and Lloyd's was always there ensuring the first things -- the first motor car, the first plane, the first satellite that took off. Lloyd's was the first to provide insurance for all of the new things that came along.
As we look out across the landscape these days and look at all of the risks businesses are facing, cybercrime and cyberattacks are one of the rapidly increasing risks. The estimates are that cybercrime is costing the global economy something like over $500 billion per year. That's how much it is costing economies and businesses across the world and it's going one way only, and that's up.
Lloyd's has been a pioneer in offering specific cyber insurance for clients for actually some time now, for quite a few years. But we found that it is predominantly the U.S. businesses that are buying cyber specific insurance. What we anticipate is a rapid increase in demand for cyber insurance as more and more businesses around the world understand the risk they are facing.
Q: What is going to happen to Lloyd's after Brexit? The negotiations on Britain leaving the European Union will start as early as next year.
A: The important thing here is that we don't know what the required outcome, or desired outcome of the government's negotiations are because they are still in the process of gathering information from all the various sectors. We are giving input from an insurance perspective; the banks are giving their input; and all the various other sectors are giving their input to the government as to what they would like the government to negotiate.
Until the U.K. actually exits the EU, Lloyd's policies, all of our trading rights, are unaffected. All the policies are still valid right up until the day before the exit. However, because of the uncertainty around what the government's going to negotiate, we are making our own contingency plans.
What we're doing at the moment, is looking at two options: one is for Lloyd's to set up branches in each one of the countries and get a license for insurance in each country, or we set up some subsidiary model in one of the EU countries and then write business into that.
Q: Which route are you going to take?
A: We are going to decide in next year. We haven't decided that. We are still looking at all the options, costs associated, and risks associated with it, and we won't make a decision until next year. However, we are not going to wait around because we need to give our customers and our syndicates certainty.
Q: President Obama said that the sun would rise even after a Donald Trump victory, and it did. But there is so much lack of clarity surrounding a Trump presidency. How do you see the impact on the economy?
A: I think it is interesting because there is a lot of uncertainty in the world at the moment and I think that this is just another piece of that puzzle. We have our own challenges in Europe with the U.K. potentially exiting the EU, and that is giving some uncertainty. I think now with a new president in the U.S. it's just more uncertainty.
My take is that the financial markets these days are much more used to uncertainty than perhaps they were, so they do not seem to panic the same way, so things have been quite calm.
For Lloyd's, the U.S. is our largest market. Over 40% of our premium comes from the U.S. But over history, whether it has been a Republican or Democrat president, it has not actually made much difference to Lloyd's. We continue to be one of the leading players in the U.S., and I imagine that will continue. I don't think a new President is going to make much difference, to us anyway.
Q: Next question is about your business in Asia, including Japan. I understand that Lloyd's recently got a new license in India.
A: We have traditionally been very strong in the very mature insurance markets, and Japan is considered a mature insurance market. We analyzed what is happening to commercial insurance -- in other words, where commercial insurance growth is happening. For the last three years, 43% of commercial insurance growth was coming from the new emerging markets. McKinsey have done a recent piece of work which is anticipating that two-thirds of commercial insurance growth in the future could come from these emerging markets. Therefore, Lloyd's is very interested in providing insurance in some of these new markets.
Hence, we have a license application going through for Malaysia at the moment. We have just been awarded the license in India, and will be opening up there next year. We have a platform in Singapore which is the largest collection of Lloyd's underwriters outside London. There are about 200 Lloyd's underwriters now in Singapore, and altogether about 400 people working there now. China has expanded dramatically: we are doubling our growth in China each year and we have over 30 syndicates in China, and over 20 syndicates in Singapore. We're having to look at our existing business model which was very much ''sit in London and that the business comes into London."
Q: What are the tasks you see facing Lloyd's when you look forward? Where are the difficulties ahead?
A: I see three big challenges out there: one of them to me is the changing demographics. I talked earlier about where the commercial insurance growth was coming from. It is coming from these new markets. There are forecasts that more global companies will be headquartered in some of these new markets, rather than in the Western world that we have been used to. That means a big shift of economic power to some of these new markets. That is something that we then have to think about as a major global insurer. How do we provide new products for these big global companies that are going to be sitting in countries where we haven't necessarily been strong in the past? That is one of the challenges as we see it, which is why we have this work going on to open up in India, to go to Malaysia, to open up in China, and to build our Singapore platform.
Another thing, I touched on it earlier with the cyber risk landscape, is the changing nature of risks. Interestingly, here in Japan, some of the major risks are still the natural perils -- the wind will blow; the earth will shake. But for many other parts of the world like the U.S. or most parts of Europe, the biggest risks are man-made risks, not natural risks. There are things like market shock, oil-price shock, cyberattacks. Those are some of the biggest risks. Fifty percent of the global GDP that we analyzed in that study is at risk from man-made threats. How do you provide insurance protection for these kinds of intangible risks? How do we understand what the exposures are? So it is the shift from natural exposures and natural peril exposures to more and more man-made risks. That is another challenge.
The third challenge is the technological advancement. In the internet of things, everything is going to be connected globally. Business models are going to be changing. Artificial intelligence is going to be removing jobs. When we look at the likelihood of jobs that will be replaced by machine, an insurance underwriter is quite high on the list.