Brexit and the US election have created a climate of uncertainty for the London market. Lloyd’s Chief Executive Dame Inga Beale discussed the challenges with Mark Drummond-Brady, Deputy Chief Executive Officer of JLT Group.
Top of the discussion agenda was the UK’s vote to leave the European Union, which has created unexpected challenges for the insurance industry.
“The mood doesn’t seem to be getting any calmer in the country,” says Beale. “But I think it’s now much calmer in the market.”
Lloyd’s is the centre of the UK market, with 11 per cent of its £27 billion annual revenues originating from Europe (excluding the UK). Its ability to attract global investment, provide capacity, and trade efficiently with global brokers and clients is fundamental to its future.
The uncertainty stemming from the Brexit decision – and the pending High Court constitutional ruling – will have an unknown impact on any future plans.
“People know that we have contingency plans in place at Lloyd’s, and understand what they are,” Beale says.
“We’re having consultations with underwriters and brokers across the market, and an ongoing dialogue with the regulators. But we do still have this uncertainty over what the government will negotiate.”
The passporting issue
Passporting is seen as key to allowing the UK insurance sector to continue to service European clients from Britain.
Passporting allows certain categories of insurance to be sold across borders within the EU. It is a feature of the single market that the UK industry is lobbying hard to retain.
Firms like JLT are in constant contact with government departments including the Treasury, the Brexit department, International Trade and the Foreign Office.
“The government is seeking information at every level,” says Drummond-Brady. “They’re trying to learn as much as possible about what the insurance industry is doing, and how it might respond – if we have passporting, and if we don’t.”
Beale outlines how the industry is aiming to speak with one voice to government. But with 150 industry sectors to deal with, the government is struggling just to understand the differences between passporting, equivalence and licensing.
“There are great difficulties in explaining the differences, and how people will be affected,” she says.
For his part, Drummond-Brady is worried that the industry’s lobbying may have already splintered: “I think we’re in a weak position, as every sector is pushing its own case.”
JLT isn’t waiting for Article 50 to be triggered and negotiations to begin. “We’re making plans to make sure we can continue to service our clients under all circumstances,” Drummond-Brady explains.
“We have some EU-domiciled operations, which we’re looking to strengthen. We’re already moving in that direction. We’re not waiting for any other outcome: we’re bolstering our presence in Europe now.”
Lloyd’s is equally focused on how it will operate after Brexit.
“We want to be able to continue trading seamlessly with Europe – and want our European customers to be able to do the same,” Beale affirms.
“Our team is looking at the branch and subsidiary models, and analysing the infrastructure requirements of each, as well as the staffing, capital and regulatory impacts.”
The quality of this work has been acknowledged, Drummond- Brady points out: “There’s lots of clear thinking on contingency planning. The international teams are doing a fantastic job.”
He also recognises how tough it must be to engage politicians: “Some of the commentary we’ve heard at Westminster has been: ‘Stop whingeing about what the problems might be. Talk to us about how to create a new competitive platform.’
“That comes down largely to regulation, to perhaps removing some premium tax, and to becoming more efficient on corporation and personal tax, so that we can attract the right sort of talent to London.”
Beale is clear that, whatever the outcome of Brexit negotiations, Lloyd’s will remain at the heart of the London market.
“Whatever happens about deploying capital, infrastructure and decision-making in other countries, the expertise is fundamentally going to be in London,” she affirms.
“However Brexit comes about, 90 per cent of what Lloyd’s does will stay in London. That’s important, because part of what people respect about Lloyd’s and London is the cluster of expertise we have.”
Brexit was by no means the only disruptive event of 2016. The election of Donald Trump as US President is also causing concern – especially his attitude to international trade.
“Whether or not he aims at the London insurance market, we’re going to get caught in a baby-and-bathwater scenario,” warns Drummond-Brady.
Over 40 per cent of Lloyd’s revenue comes from the United States. This premium is exported currency, and could be targeted by a Trump government.
Beale says that Lloyd’s is waiting to see what Trump will do. “Insurance isn’t usually high on their agenda,” she points out.
“But as with Brexit, where we quickly brought experts together, and delivered their output to the underwriting community, we’re lining up the same for the Trump situation. We’re looking to bring some experts over to work with.”
It isn’t all gloom, however. Drummond-Brady expects some interesting opportunities for JLT and its clients, especially if Trump delivers on his pledge to rebuild America’s infrastructure.
“We’re strengthening our expertise in the US, particularly when it comes to servicing multinational companies,” he explains.
“Construction is a strong sector for us, and a lot of the big European construction companies are building extensively in the US. They see a potential infrastructure boom as a great opportunity.
“Whatever happens under Trump, brokers and the insurance market are well positioned to help clients take advantage of the opportunities.”
The talent challenge
Amid the turmoil, Beale pledges that Lloyd’s – and especially its underwriters – won’t be distracted from their primary obligation: to provide a first-class risk transfer mechanism for brokers and their clients.
“A lot of what we do at the corporation level deals with these issues, which frees up underwriters to do what they’re good at – focus on the risks.”
This requires deep expertise, which is a key focus for Lloyd’s, she explains.
“There’s been a lot of progress in the market on bringing top talent in from other countries. We don’t know what the immigration and visa rules will be after Brexit, but I think this market will still be a magnet. Wherever I go, people want to work in London.”
Drummond-Brady agrees that people, and the expertise they bring, are key to the future of Lloyd’s and the London market.
“London is losing business because capital is so fungible nowadays,” he says. “But you can’t easily replace 400 years of accumulated intellectual capital and market practice, and the cluster of talent in a city like London.”
It’s essential that Lloyd’s attracts talented people who can help it to ensure a vibrant future, Beale says.
“We must appeal to millennials more. We must appeal to the tech-savvy population. And we must have a culture that’s much more vibrant, dynamic and modern.”
For Drummond-Brady, the key is to marry the fresh thinking that young talent brings to the market with its immense existing expertise.
“Traditional broker skills and attributes will still be required. Abilities such as understanding clients’ needs, a thorough grasp of market dynamics, and ensuring good relationships with insurers will always be central to what we do.
“But brokers will need to reskill – and fast – as they learn to process large amounts of portfolio data, deploying new analytical skills.
“At the same time, however, we can’t allow 30 years of career expertise to retire, without transferring that knowledge and experience to the next generation,” he adds.
“We’re working hard at retaining older men and women, and people who need a more flexible working regime. We need a better environment to retain all that account-handling wisdom.”
The efficiency imperative
Another critical success factor for the London market is the need to be more efficient.
“We do a lot of unnecessary work, because our processes are very old-fashioned,” says Beale.
“We should be able to use technology to streamline what we do, while investing in the talent that can provide the expertise and thought leadership we need.
“That demands quality at the front end, not commoditisation. But to afford our distinctive front-end model, we must be more efficient than the competiton with our systems, and with our middle and back office.”
This lies at the heart of JLT Advantage, a service enhancement initiative with a strong emphasis on agile digital solutions, Drummond-Brady points out.
Lloyd’s is at the forefront of developing a transparent and efficient risk-transfer system for clients. It is looking to remove barriers in the way of clients, their brokers, and access to the best underwriters and capacity. Electronic trading to replace paper is a prime example.
Beale and Drummond-Brady agree that what makes Lloyd’s stand out is its track record on innovation.
Beale says: “Big data is everywhere. Technology is moving faster than ever. And artificial intelligence is coming along very quickly. We have to realise that jobs will be very different in 10 years’ time.
“A big question for us is: how will technology change our jobs? Our focus has to be on retaining the specialist underwriting expertise that’s always been there. That’s what will enable us to meet new challenges.”
Leading academic research, including that from the University of Oxford, shows the full extent of this challenge. The predictions are that artificial intelligence could make underwriters and brokerage, claims and policy processing clerks all redundant within ten years.
Facing up to these challenges hasn’t stopped Lloyd’s responding to the more immediate needs of clients in the face of technological and societal change, says Beale.
“New risks are emerging all the time – cyber risk, for example. Lloyd’s has a world-leading 25 per cent share of the cyber insurance market.”
The response of the market to the needs of its clients has been very encouraging, says Drummond- Brady. But he cautions against complacency.
“There’s still a huge amount of work to do on cyber risk coverage,” he says. “Our clients need more capacity. The cover available is too limited in scope, especially around breach and liability. And the limits are too low.”
Beale is confident that the market will rise to the challenges at hand, and a wide range of emerging ones, as technology advances.
Lloyd’s is at the cutting edge of research into the impact of climate change and the evolution of automated transport, with a range of covers for drones already established. It is also responding to the huge growth in demand for insurance for non-physical risks, such as reputation.
“What makes Lloyd’s unique is our ability to write new risks without complex models,” she affirms.
“The syndicates and multiple underwriters involved mean we don’t necessarily need the models. Where others struggle, we do it at Lloyd’s because we’ve always done it. People share the risk, and issue it without the need for an algorithm.”
Beale also highlights Lloyd’s ability to collaborate with experts from beyond the world of insurance: “We’re constantly working externally to build an understanding of new risks. For example, on the impact of climate change, we’re working with the World Bank and the UN.”
Lloyd’s track record of innovation has kept it at the heart of the solutions brokers offer their clients, says Drummond-Brady.
“We know that, when faced with new, complex risks, Lloyd’s underwriters will be first to step forward. Our partnership with the market delivers enormous value to our clients.”
Ultimately, despite the prevailing uncertainty, Lloyd’s and JLT are determined to be at the forefront of clients’ risk transfer needs. Beale and Drummond-Brady are excited at this prospect and the opportunities ahead.
Download Risk Specialist
For further information, please contact Mark Drummond-Brady, Deputy Group CEO on +44 20 7558 3569 or email firstname.lastname@example.org