Global warnings

Panel

Chair: Sandy Maxwell, Insurance Times

David Curry, HW Wood

Terri Grainger, Mansion House Executive

Chris Thevenot, Allianz Global Risks

Martin Davidson, Willis

Hala Melcon-Sharker, JLT Re

Julian Edwards, MCE Insurance

David Partington, Marsh

Lynn Harris, Groupama Insurances

Jon Nottingham, AXA

Hanna Beaumont, Aon

David Curry: Climate change is going to need a joined-up approach from lots of different organisations and bodies globally. It's not just the insurance industry, because it's a problem that's affecting everyone.

It's a problem that's been simmering away for so long, but only now has it started to come to a head. We just cannot ignore it anymore. There are natural catastrophes occurring more often. The insurance industry is obviously going to be affected by this. What can we do?

The governing bodies of the insurance industry can lobby government for what that's worth, but it's not going to have the sort of effect required unless we are accompanied by other industries backing us up.

Risk management is going to play a part — and improving flood defences for areas prone to flooding. Again, that is a reactive measure, unfortunately. I've said that insurers could try to raise even more public awareness, possibly through scare tactics saying that this isn't going to go away; more floods are going to happen around the world, which will possibly lead to rating increases.

The situation that frightens me is if we come to a situation in the UK where flood cover will be withdrawn in certain areas, or it gets to the point where it's like earthquake cover in the US, it will only be given on certain areas.

Chair: Large parts of the UK could be uninsurable for flooding by 2080. Are these kind of predictions realistic?

Curry: Yes. My main comment would be that the insurance industry can take certain steps, but they're going to have to receive cooperation from many other industries around the world and many governments around the world, because it is a global problem.

Hala Melcon-Sharker: The insurance industry has a unique position, because it has a good understanding of the risks associated with climate changes, such as subsidence, storms and flooding. With climate change being as it is at the moment, we will see an increased level of frequency and severity of losses. We have the opportunity in the insurance industry to help prevent these outcomes by making our clients more aware of the risks and how to mitigate these losses.

Curry: The problem is also going to be that global warming is occurring naturally, and human intervention - so to speak - is speeding it up. It will really be down to governments, ultimately, to try to stop the human causes that are speeding it up.

Terri Grainger: We can encourage best practice in building homes, with the correct rating risks. There can be some sort of amount in the risk that encourages better building codes for the future. It has to be an holistic approach with lots of different groups becoming involved. Insurance can play a big part.

Julian Edwards: I agree. Climate change has effects globally, regionally and locally, as well. So does insurance. There is a natural synergy there. Insurance is one of the few industries that operates on that level.

Martin Davidson: The insurance industry has an important research role to play. We can provide through leadership. I noticed that the CII has recently launched a study ' ' on the issue of climate change, which looks at the advances in science, the experience of insurance models and developments in global economies.

Grainger: The ABI has been doing quite a lot. It has been providing an input into the government's Stern Review. If the CII is becoming involved as well, that will encourage this more.

Jon Nottingham: It's important that all these groups pull together so that we have a joined-up and unified approach and do lobby. We understand risk, we understand the exposures, we need to be cleverer and understand what's gone on before and learn the lessons in being able to predict.

Grainger: That's where it's difficult as well, because traditionally the insurance industry has talked about what's happened before. When it comes to the environment, it's very difficult to predict now and come up with models. That's where the more sophisticated risk-modelling comes in.

Nottingham: Do we understand the current position in terms of how people buy? As we were heavily affected by the Carlisle floods, we are currently doing a huge piece of work to look at how many people are insured versus uninsured, how many people have business continuity plans and what the success rates of those were. We really need to understand those things.

From some research that we've done, one in three SMEs does not buy business interruption (BI) cover. Over 10 years there's a 61% increase in the duration of a BI claim, and over five years, there is a 58% increase in the cost of a BI claim, averaged out. These are horrifying statistics.

Grainger: You think of the immediate effects to buildings, but it's the consequences for years later, when businesses are folding. The point was made about Carlisle at the Insurance Times' Forces of Nature conference — if that happened in the South East, where would we be?

Hanna Beaumont: The majority of losses after Katrina weren't necessarily from the initial impact, it was the follow-on. Even though the factory might be back up and running, people did not have a house to live in, so couldn't go back to work. Should we look at protecting in the first place, or should we look at getting the public aware and having better business continuity in place to deal with problems once we're back up and running?

The insurance industry has collated a lot of information, which is not necessarily shared. That's where we should concentrate our effort, using the information we have, and again involving government to say: "Let's stop this happening. Let's not just find a way to pay out money when people have a loss, but make sure they never have a loss in the first place."

Edwards: We've gone beyond lobbying the government. Governments are educated. It's more working with people and educating them. Governments cannot find the resources that the insurance industry can, with computer modelling.

Lynn Harris: We have unique access to the business user and the customer, so we can help them with a loss, understand what it is and militate against it.

Chris Thevenot: The insurance industry cannot change the climate in the short or medium term. We need to do what we do best, and that's not purely risk transfer - it's risk management. We can identify the risks, we can analyse them, then we can try to control accumulations and control the losses, through pre-loss physical controls and post-loss, and not purely concentrate on financial risk control.

Nottingham: Financial risk control is very reactive; we need to be much more proactive. Floods are the classic example. Some areas are now becoming uninsurable, or we are putting big deductibles on the client. That's a very reactive solution, that's penalising the general public.

David Partington: The industry has always modelled on expected future losses. One of the reasons that the world has been able to cope with the number of natural disasters that we've had recently has been the fact that the insurance industry has been there to pick up the pieces, to ensure that businesses are back up and running as quickly as possible. Insurance is the cement that glues industry together.

Nottingham: That's certainly our belief, the problem is it's not how the world perceives us. That's the biggest challenge. If there's one big positive out of all of this, it's our opportunity to get our place at the table and influence the world, hopefully by changing perceptions.

Harris: Should perhaps the insurance industry step up to the mark for the government there? We could say: "From our statistics we can see that there are certain areas where there could be problems. Don't build houses there. Then we won't be expected to insure them."

Edwards: You wouldn't want to publicise that there is £80m worth of property in London that's below the tide level.

Harris: The government is making a massive investment now in trying to help out people in flood areas. Yet why is it still allowing new properties to be built in flood areas?

Melcon-Sharker: Planning is the key. New Orleans goes to show what can happen if you don't look after infrastructure, such as defences. We need to ensure that new buildings are more resilient.

Davidson: There are obviously competing pressures. More people want to live by the coast and in the South East. Government has to find a way to manage that. It's difficult to turn around and say: "We cannot build houses here." It is a matter of looking at the best way to manage that risk.

Partington: What extent are losses in the future going to be fortuitous? If you live by the coast, or in the Thames Gateway, at what point will insurers say: "That is not a fortuitous loss"?

Thevenot: We insure for uncertain events - not certainty.

Chair: Is there a capacity to manage losses from hurricanes? Lloyd's was looking at a risk-modelling scenario for next year at about £100bn. They're now saying that's a conservative estimate.

Davidson: The whole picture is so uncertain. The level of Katrina's losses could barely have been considered a few years ago. Somebody said that the attempts to model the loss of Katrina would've needed the combined input of three different models to simulate what might have happened at the end. It is such a difficult situation to try to predict, which makes the insurance industry's role all that more difficult.

Nottingham: You have to look at the range of predictions for certain things - temperature and others. There really is a huge issue in predictions, but the facts are that it is changing naturally, and humans are intervening. Those are the facts. We have to address them.

Partington: At the moment, we have a market where there is plenty of capacity and capital, which is potentially disguising the true costs of these events. If we were to turn into a hard market again, it would be really interesting to see what impact $100bn of modelling would have on premiums.

Chris Thevenot: Some syndicates are restricting their capacity now in certain areas of the world. That's very much due to the uncertain nature of the catastrophic events. Events that are perceived as catastrophic now may well be the norm in the future. That's the greatest fear. Models can help. We should use as many models as possible, because one model is not going to show what's going to happen, as you said. In New Orleans, you would have needed three models.

Beaumont: We're hiding what a big loss it may be at the moment. It has gone from the industry saying: "We're going to have to insure this and find a way to provide capacity," to people looking at this being a good opportunity to make money and get premium. If you're coming in with new capital, it is perhaps easier to pay less attention to the historic data and make more of the immediate opportunity. Are these markets going to be there when we are moving towards a harder market and need that capacity to provide safety for the public? Probably not.

Curry: At the moment, we're in a soft market; it's not going to last forever, it's going to go hard eventually. There is something like four or five hurricanes in a certain region of the world that they've predicted are highly likely. If they have anything like the same effect as ones we've had in the past, the insurance industry will pick up the tab. That will make that hard market fairly certain. The problem is, when that happens, will clients say: "Here we go again; the insurance industry is putting up its rates"? But if we start to educate more people and share the detail we've accumulated, the whole industry will be taken more seriously, which is what I'd like to see.

Davidson: In terms of educating the general public, there were a few interesting points made at the conference where insurers could have a role. One was using the customer base that insurance companies have. They could provide information about climate change to their customers and tell them what impact they could have on their premiums in the future. Also, insurers may be able to offer a premium discount for customers that are energy efficient.

Thevenot: The critical point is that the public is becoming more aware of climate change. The insurance industry can show the link between climate change and how it affects its pocket. Everyone's aware of what's going on in terms of climate change, but, if you ask them how it's going to affect their premium, they say: "Ah, I should have thought about that."

Edwards: It's difficult for the insurance industry to have an impact on individuals. That has to be pushed more from the government and political parties. The insurance industry has to work closely with the government to make those changes happen.

Thevenot: It's a difficult situation for the insurance industry, because being eco-friendly does not reduce your loss ratio, so can we reduce the premium?

Nottingham: We have to understand the influence that we do have. We are the biggest silent contributor to the UK economy. We do understand risk, we do understand the issues, we should have a much bigger part to play in influencing the government in all those types of issues. We touch customers, individuals and businesses every single day. The education process - not necessarily from a social aspect, but from a risk perspective — is absolutely within our remit and is what we need to do better.

Chair: Turning to transparency, is the industry doing enough in terms of brokers' commission?

Edwards: With personal lines brokers, what do clients look for? They look for an overall package. We disclose all our charges. Would we be concerned by disclosing our commission? Honestly, no, not really. I don't think the consumer who's buying personal lines insurance is particularly interested whether we earn 10%, 15% or 35%. There's nothing wrong with that, fair play to them. I don't think the end consumer is particularly interested as long as the overall package is priced right, the products are backed up with the claims service and all are regulated by the FSA. It does create more of a void between brokers and direct writers, which is possibly inevitable, but I'm not particularly concerned about it.

Harris: There is almost a separate issue between personal lines and commercial. If a customer ultimately is getting a good, fair deal on their motor insurance, and let's face it they have plenty of places to go, are they really bothered and do they really ask the question? For example, they would go to a supermarket and know that every tin of beans that they buy has a mark-up, but are they demanding to know at the till what the mark-up is?

It's slightly different when you're talking about commercial, because you are talking about money that affects the bottom line of a business, but my view on that is that brokers shouldn't fear having to disclose commissions on commercial business. They provide an exceptionally valuable service, as do solicitors, as do lots of other trades and professions and they're not frightened about being very upfront about what they charge. We should be more confident in that.

Grainger: It's how much value you put into that process. That's where brokers do need to be more confident. You can't talk about 'all'; there are always exceptions, but brokers do add a huge amount of value through the process. It's not being shy about earning money out of that. They are there to provide a service.

Nottingham: We're a service-led industry, if you were paying someone for that service, would you want to know? Absolutely you would.

Edwards: It's all about the value of the product. Does anyone negotiate on tins of baked beans in Tesco? Nobody does. It's a low-value purchase. On a car, you will negotiate, because you know that the dealership has a bigger margin in there. It's probably the same for commercial brokers. If we were negotiating on our own commercial insurance, you know what the commission is and you know the broker's got that margin to play in. We, as a consumer, would be a lot harder in our negotiations.

Davidson: But is the industry doing enough to promote transparency? The picture is very patchy. At the top end, for large business, especially for the larger brokers, they have now made very specific efforts to increase transparency and disclosure, for various reasons. But at the lower end it may be that it isn't happening as much. There is a risk of ending up with a two-tier market. If there aren't consistent principles applied to transparency across the market, you could end up with double standards. It is fair to say that there is more demand for larger companies to have transparency, rather than at the SME level. This may be due to the awareness of risk managers of larger companies. They understand '

' more about the process, and are keener to understand what their brokers are earning. Smaller businesses may not understand as much about the insurance supply-chain process.

Nottingham: The better question is: is it desirable as a starting point? It's really difficult to argue against it. From a customer point of view, from their interests, it's obvious. More importantly for me, it's the way we're perceived as an industry. There's too much traditional selling of insurance instead of advice-giving with solution-selling in terms of making clients understand the value, either personal or commercial. That's the thing we need to change. Are we doing enough? Unless the perception of the insurance-buying process changes, then no, we're not doing enough.

Davidson: There was a very interesting Airmic study recently, which looked at transparency. First, it said the levels of transparency had gone up. The more interesting point was that the levels of satisfaction that Airmic members had with the level of their brokers' fees and commissions went up from 43% to 78% of their members saying they were satisfied with the value that was being provided. That transparency helps to demonstrate the value that brokers are providing and, therefore, it's a very good thing.

Melcon-Sharker: That's basically due to the recent onset of the FSA regulations and the increased discipline that it has brought to the marketplace. That's why you probably found that the percentages have increased and you have those sorts of improvements going on. Particularly in today's post-Spitzer environment, you cannot afford not to be transparent in your business process. As a broker, maybe 10 or 15 years in the past, we wouldn't put forward every single transaction that we would do. Nowadays, we're more willing to do that. In the past, we haven't been great at always volunteering information, now it's almost like a day-to-day activity that you think about automatically.

Beaumont: In the past, there may not have been an unwillingness to want to disclose; it's about being able to collect information from all the different parts within your group so you are able.

If you have the broking side and the client-service side, and, although we know with a fee what we are earning, you're not necessarily out when the deal is being done with the broking side, and need to collect that information for them and bring it back to have it in one place.

One thing that has been put in place is the systems to make sure it is very easy to access all that information. In the past, because people possibly did not ask for it, there weren't those systems in place.

Melcon-Sharker: You also have to be careful about information overload. Sometimes people say that by complete disclosure you may be providing a lot of information that is very unnecessary and adds very little value for the buyer.

Chair: Is that a matter of education? There was a recent IUA/LUA survey of corporate insurance buyers, where two thirds of them wanted full disclosure. Is that just a matter of educating the buyer that this is not necessarily desirable?

Partington: Full disclosure is absolutely critical. From a client perspective, it's critical to demonstrate that we are acting on behalf of the client rather than on behalf of an insurer. I also think it's critical because, if a buyer is paying for something, he has an absolute obligation to understand what he is paying for that service, and from an industry perspective it's important as well.

That survey you referred to also suggested that the majority of people believed that the average commission rate was about 10%, whereas in reality the average commission rate is somewhere between 15% and 20%, which creates a whole set of risk issues for the industry for when this becomes more and more exposed. It's better that we create a situation where we have full disclosure, rather than wait for it to happen.

John Tiner's made it pretty clear that, if we don't move to a full transparency and full disclosure model pretty quickly, the FSA will do it for us, which is not going to help everybody, because it's going to increase the costs associated with regulation. Also, in the event that there is full disclosure and commissions aren't paid to brokers, there's a responsibility for insurers to start differentiating their pricing according to whether commissions are taken or are not taken. I still don't think that's completely happening in the market. I don't think this is just a broking issue.

Thevenot: I couldn't agree more. If two insurers are offering the same product, let's say it's homogeneous - it never is, but let's say it is - and one of them is offering commission and the other isn't, that's a price differential. The insured has to know about that.

Partington: Whether it's an upfront commission or whether it's a contingent commission, the insurers need to differentiate the price in between those two brokers.

Beaumont: Brokers are getting better at providing a consultant service to our clients, and are creating a more loyal environment where we record the real time we spend and show that to the client. You shouldn't be too shy to say: "This is what we earn, because this is the time we spend."

Partington: Let's move to full, complete disclosure to make it absolutely clear that the broking industry is a professional services industry, as opposed to an industry that acts as agents to insurers.

Nottingham: The irony is that when you actually sit there and prove it we're probably doing a lot more for a lot less money than comparable professions. It's an easy perception to turn round if we get it right.

Harris: We shouldn't be shy as an industry to put a value on the services that we provide to customers. Certainly there are lots of other professions that aren't shy about it.

Nottingham: We have to want to do it as an industry, as opposed to having it forced by the FSA.

Davidson: That's why brokers have to see transparency as an opportunity and not a threat, because if they wait until they're forced to do it, it doesn't create a very good image for the industry.

Grainger: What is Biba is doing, in terms of putting disclosure in the terms of business? This is going back to the information overload and how to get the balance right, rather than just giving out all this information. Give them the option, if they want to know the structure or whatever, to provide that information.

Partington: That's a weak position, where if someone wants to know they can know. That's a half-hearted attempt that's going to come back and bite us, because that will lead to regulation.

Edwards: It might not be enough, but I do tend to disagree with you on that. Again, it's important to differentiate between clients. I'm not necessarily talking about personal and commercial, I'm talking about different ends of the commercial spectrum. The chap who's buying his shop insurance compared to the chap who's probably one of your clients.

Melcon-Sharker: They could get quite annoyed with that. I know some of our international clients have no idea what's going on in the London market — contract certainty, FSA — and they think what's the point in you even telling us about this. It has nothing to do with us. The same sort of thing goes with disclosure, we always tell them that if they want anything, let us know and we'll give it to them.

Curry: I've never had a problem with transparency because I've dealt with clients and all of them are on fee. At the start of the year, it comes up for renewal, I agree the fee; they get the client-service agreement; it has everything in there that they're expecting of me from how many meetings a year they're going to have. If there's any extra work that they need doing during the year, they'll be a sliding scale. Clients don't have a problem with that. If a client is going to argue about a fee, and try to drive me down to the point where I'm making a loss on the account, then it's time to say goodbye.

Partington: Most of my business is on a fee, but I also have some very large global organisations I act for where I take commissions, because that's their preferred mechanism. It's simpler for them from an accounting situation, within their own organisations, for local placements to be taken on commission. I don't think that changes the transparency situation one iota, because they still absolutely understand the commission that's taken on that policy. The fact is, it's paid from the premium rather than paid by them to us. It doesn't change the situation at all.

Chair: Is the FSA going to become more draconian? It was pretty much hands off last month with John Tiner's speech.

Edwards: It is inevitable over a period of time.

Partington: I sincerely hope not, because it will just create additional frictional costs of doing business.

Nottingham: We should be dealing with these issues ourselves as industries, not being forced down this route.

Melcon-Sharker: We work well as a free market when we do things in a less restrictive way. This is why we've been doing this for donkeys' years. Insurance is one of the oldest industries in the country, if not worldwide. We should be left to do what has always worked for our industry. The FSA is obviously a great source for reference if we need assistance, and to make sure that we're doing our jobs properly. To tell us what to do is another matter.

Grainger: I don't think it wants to either. It is giving us the challenge to rise to, and we have to go with it as an industry. I t doesn't want to get prescriptive either.

Harris: That's my impression from what I've read as well. It doesn't seem as though it wants to issue specific guidance and rules as to what should and shouldn't be done, but it would rather see us taking our own measures.

Beaumont: The majority of us work in global businesses. We're not only affected by UK regulations, we're affected by what happens in the US, as well. It is quite prescriptive with what it wants Unfortunately, we can't just look at what the FSA's telling us. We have to follow Sarbanes-Oxley and everything else that is happening in the US. IT