Global Leaders Forum: View from the front

Willis president Grahame Millwater opened proceedings at this year’s Insurance Times Global Leaders Forum with a personal view of the global market. He was downbeat about the industry’s prospects over the next couple of years, predicting that rates were unlikely to rise until the beginning of 2013.

Kicking off a topic that was to prove a running theme for the day, Millwater said he didn’t see any alternative to continued consolidation over the next two years. “The appetite to sell is greater than the appetite to buy. It’s going to happen,” he said.

But he did not believe that acquisition should be the industry’s main driver, arguing that the sector needed to get its head around organic growth. “We can’t build our businesses around the cycle; we have to build them around long-term, sustainable growth.”

To achieve this goal, said Millwater, insurers must concentrate on value, appealing to a new breed of buyer, focusing on developing and retaining talent and embracing technology.

Millwater also highlighted regulatory changes. “Solvency II is a real challenge for insurers. No one seems to know what the end game is,” he said, adding that the USA may be developing its own version of the European insurance directive.

His presentation was followed by Shore Capital Stockbrokers director Eamonn Flanagan, who focused entirely on mergers and acquisitions.

While talk about RSA’s failed £5bn bid to buy Aviva’s general insurance book appears to have died down, he said, the industry might not have heard the last of the deal.

“Andy Haste, the chief executive of RSA, is a very determined guy,” Flanagan said. “He’s not going to stick a £5bn deal on the table and walk away because Aviva said no. I think that story has got legs.”

Flanagan pointed to a number of drivers for M&A, including the fact that private equity investments made between 2005 and 2007 were coming up for renewal. He also said general insurers were generally well capitalised, with few toxic assets in their investment portfolios, making them potentially attractive.

But acquisitions needed to be meaningful yet manageable, said Flanagan, pointing to Lloyd’s as a source of such assets. “The Lloyd’s insurance sector is ripe with acquisition potential,” he said.

Referring to larger, listed Lloyd’s firms such as Beazley, Catlin and Hardy, he added: “There are some meaningfully sized companies in the Lloyd’s market – big enough to make a difference but small enough that you can chew.”

Wrapping up the first session, managing director of Swiss Re financial markets (London) Kanwardeep Ahluwalia warned delegates that they should never underestimate the value of risk officers. He emphasised that the role had become increasingly important since the financial crisis fallout and warned that every company board should have a place for a chief risk officer.

The pull of China

Speaking after the morning break, Lockton chief executive Julian James said that companies could not be considered global organisations unless they were conducting business in China.

James told delegates to “get on the playing field now” because the country was changing from being a cheaper exporter to a goods-hungry mass consumer. “Whatever statistic you want to look at, you cannot escape the fact that there is massive growth there. China is changing and it’s changing very, very rapidly,” said James.

Insurance is a relatively unknown commodity in China, with state-owned insurer PICC retaining majority market share. But James said there is an emerging entrepreneurial base of insurers looking to gain a foothold there.

An AM Best report published in September shows that, despite having a population of 1.3 billion, the country’s insurance industry is only worth £104bn. However, said James, the premium non-life sector had expanded by 50%-60% in the past two years.

In his experiences of the Chinese market over the past 18 years, he said, UK businesses had been extremely hesitant to become involved because of the language, legal and financial barriers. But they should begin looking for opportunities in China immediately.

“Isn’t it better to get involved now and understand what’s going on in terms of the future, rather than wait 10 years and realise that the train has left the station?” James asked.

But he had a stern warning for investors looking for short-term profits. “The insurance market is in its infancy there. If you are expecting your business to double overnight because you put your flag in China, it’s not going to happen. It is a long-term investment.”

Lloyds Banking Group head of insurance and financial services Bill Cooper turned the forum’s focus back on to M&As. Picking up on a theme introduced by Flanagan, he said many private equity firms must soon repay their bank borrowings, which will put pressure on highly leveraged brokers backed by venture capital.

Private equity houses had taken advantage of cheap money during the 2005-07 boom to back businesses, including those in the insurance sector, said Cooper. But crunch time will come when repayments begin between 2012 and 2013.

“There is quite a large refinancing bubble around the major corporate world. The insurance world is not immune from that,” he said, pointing to AA Insurance’s holding company, Acromas, as a typical example.

“When that refinancing becomes due in 2012 and 2013, in the build-up to that period we expect a sizeable number of transactions. It could be companies merging together, or a sale to a large global business or an initial public offering.”

He said the bond market was primed to releverage insurance debt. “The bond markets are pretty open. There seems to be great demand from the bond market for all sorts of issuance. We see it going across the range of the insurance sector, including into broking.”

Sharing information

Cooper believed the economic conditions for both insurers and brokers were tough because company downsizing has led to a fall in premium volumes. Despite this, banks are still willing to lend to the insurance industry, but want good-quality financial information in return.

The insurance sector had improved dramatically on providing financial information, he said, but many companies still lagged behind acceptable standards. “If they cannot tell us what is going on in their business, you wonder whether they know what is going on at all,” said Cooper.

Change is coming

Andreas Berger, chief executive regional unit (London) of Allianz Global Corporate and Specialty, used his presentation to focus on how companies can effectively respond to global trends. As an example of rapid change, Berger said that declining US consumer demand in 2008 had caused around 34,000 Chinese toy factories to close, which had a knock-on impact on German manufacturers of the factory machinery and Japanese and Korean transport networks.

In this context, sharing knowledge and information across markets was key. He said: “The bottom line is that a true partnership is not only transactional and price-driven. It is the opposite. It is creating a long-lasting relationship that benefits all parties.”

Acting ABI director-general Maggie Craig rounded off the morning by training the spotlight on the regulatory challenges facing insurers.

Commenting on the government’s plans to overhaul regulation of the financial services, she said: “There are serious shortcoming that require careful thought, careful design and follow-through. Regulators must take competitiveness into account.”

Craig added that splitting the FSA into two new bodies – the Prudential Regulation Authority and the Consumer Protection and Markets Authority – created a risk of fragmentation. The new regulators needed to ensure their activities were proportionate to the risks they were policing.

The highlight after the lunchtime break was Insurance Times editor-in-chief Ellen Bennett’s double-headed interview with Ace European Group chairman and chief executive Andrew Kendrick and Heath Lambert group chief executive Adrian Colosso.

Kendrick said the insurance industry should not underestimate the importance of claims professionals, and they should no longer play second fiddle to other market executives.

“There is an industry perception that claims brokers and underwriters are second-class citizens, which to my mind is absolute horse-shit,” said Kendrick. “You need people that are at the top of their profession. They need to be able to deal with brokers and be in front of clients saying: ‘I am a professional’.”

He added that Lloyd’s, which on the same day as the Global Leaders Forum set out its vision for claims, was already well down the road in addressing the issue. “There are going to be new ideas coming out about recruitment and education,” he said. “It is getting to be where it needs to be.”

Kendrick warned that insurers scrimped on their claims department at their peril. “It would be immensely naïve for quality management to not consider investing as much as they can in the claims service and claims operations, given that when I look at the insurance profit-and-loss account, it is the biggest expense that goes out of the front door,” he said. “If I were not looking after that, I would need my head examined.”

Colosso agreed, adding that as a former claims broker, he placed a great deal of emphasis on the claims department. “We put a lot of money into the claims department. Interestingly, in these tough economic times, it has been quite easy to attract good-quality law graduates who can’t get a job anywhere else. We have taken on four recently and sent them straight to the claims department.”

Kendrick and Colosso discussed the continuing unease about insurers paying brokers contingent commissions.“I have been an advocate for a long time of banning commissions [altogether] and going to a fee model. Then you cut out all the argument,” Colosso said.

He added: “I don’t necessarily agree with [the use of contingent commissions] unless you have evidence that you are bringing something additional to the table.” He argued that there would be little point in a simple volume-based payment, for example.

Kendrick asserted that brokers typically charge contingent commissions when their main revenue streams are under pressure. He dubbed the practice of accepting commissions from insurers when acting on clients’ behalf as “inappropriate”.

However, he added, there were times when it is acceptable for insurers to remunerate brokers – assuming they have satisfied regulators, clients and carriers that there is no conflict of interest.

“If a broker has a revenue stream that is running at a 75% combined ratio for me, and he wants to be paid something towards his acquisition cost, I would be pretty foolish not to entertain that,” he said.

Technology debate

The forum itinerary was rounded off by the Global Leaders Technology 2020 Debate, which explored the challenges of technological change for the insurance market.

On the panel were Deloitte partner Ian Clark, Microsoft insurance business development manager Bruce McKee, Barbon Insurance Group chief executive Martin Oliver and Catherine Stagg-Macey, senior analyst at IT research consultancy Celent.

Stagg-Macey said she did not believe greater commoditisation was inevitable. Noting that comparison sites were relatively unknown in other countries, she believed the UK insurance market could resist any growth of aggregator models in commercial lines.

Technology was crucial to recent broker consolidation, the growth of networks and “broker clubs” such as Countrywide, said Clark, adding: “What we’ve seen recently is a move towards entities that can afford to invest in technology.”

And while e-trading could cut costs for brokers and customers, Clark also highlighted a problem with this area. “Are we going to see long-term sustainable soft markets because of these technology changes and the value that’s coming up the chain? That’s the dilemma I see.” IT