John Nelson, chairman of Lloyd’s, and Hank Watkins, president of Lloyd’s America Inc., sat down with National Underwriter and PC360 at RIMS on April 28 to explain challenges associated with the Lloyd’s model, the state of the E&S industry, what emerging risks and markets Lloyd’s is targeting, why insurance leaders should take on social responsibility and their plans to recruit the next generation.
Q: Have you had any challenges explaining the Lloyd’s model to underwriters and brokers in the U.S.?
John Nelson: It depends on who you are talking to. Lloyds is the No. 1 E&S lines writer in the States, so the broking community knows Lloyd’s on the whole pretty well. Explaining Lloyd’s is something we do energetically through Hank and the team in the States—at events like RIMS and others. We have regular “Meet the Market” events around the country. Most recently in Chicago and soon in Atlanta. Lloyd’s always sounds complicated, but in essence it isn’t. It’s relatively easy, I find, to explain. A lot of people come through, visit the Lloyd’s room, see the building. When you see it physically in operation, it helps with the explanation.
Hank Watkins: We have 32 people across the U.S.—20 on licensed platforms— who, generally speaking, are there for compliance purposes, to answer broker and underwriter questions. We also have a full-time person in Boston, one in Atlanta, and one in L.A.— who go to the conferences, broker offices and give presentations. It’s a relatively small platform of people who are facing the brokers, coverholders, and the risk managers every single day. We’ll use any number of venues, any industry conference – AAMGA, NAPSLO, PLUS, PCI, Target Markets, RIMS, CIAB. Those are just the big ones. We are closely tired with the surplus lines associations in the individual states.
The universities are great platforms for us—The University of Alabama, for example, on their insurance day, their “I” day, they not only have students, but hundreds of brokers, wholesalers, etc., who are also their risk managers, so we can talk to an audience of 300 people and cover a wide range of our stakeholders in one show. We do webinars. There are a lot of ways we do this.
Nelson: We also have a direct effort with the risk managers, here at RIMS, but also around the world in terms of the insureds understanding what Lloyd’s does. Given that we are specialist insurance, it tends to be high risk, high toxicity if you like. Business-to-business catastrophes. The major insurers know Lloyd’s very well. We are trying to extend the knowledge base. I don’t want to sound complacent, but I think we do a good job. If you look at our brand recognition, we score very, very high.
Watkins: We have over 1,200 coverholders, those are MGAs with binding authority with Lloyds throughout the country. They are our biggest cheerleaders. The footprint of Lloyd’s corporation may seem small, but through our binding authority network throughout the country it’s massive. They wear the Lloyd’s brand very proudly on their sleeves. And there are a lot of brokers too, who push Lloyd’s very hard.
Q: How would you characterize the state of the E&S industry?
Nelson: In the States, I would say very competitive. You can see that there are more people coming in. The market though, I think is growing. But on the other hand, technology is changing all of the time, creating new E&S risk. That’s what Lloyd’s is there for.
If you look at Lloyd’s performance, what’s interesting is we are the No. 1 E&S supplier. Last year our direct business grew by 15%. It’s partly to do with penetration, and with the market, it’s changing. It’s creating more opportunity. We certainly aren’t complacent. Outside the U.S. is extremely tough. You have low interest rates, driving more capital in. If you look at the Lloyd’s market itself, average capital is around 15%. Last year we had 14.7%, so this is really attractive. It’s pulling more and more capital in. It’s increasing the alternative capital particularly in the reinsurance space and it’s driving premium rates down. It’s tough, but I think Lloyd’s so far has performed very well.
Q: What emerging risks are you seeing?
Nelson: In terms of emerging risks, it’s the way in which technology and the ways of doing business are changing. Something we take seriously is innovation and trying to keep ahead of developments. If I am being critical, what I would say is that if you went back 20 years and mapped the key risks facing corporations, and you map those risks against the product that the insurance community is providing, there is a bigger and bigger gulf. One of the key challenges for the insurance industry is that they will never come together. There are many risks that are not appropriate to insure, it’s got be risk managed.
But on the other hand, we need to close that gap as an industry. And I think the industry understands that. For example, Business Interruption risks are absolutely fundamental, Cyber is a very big thing, but then there are things like autonomous vehicles and drones. There’s no doubt that’s a question of when. These will begin to play a significant role in the economy, and in business supply we are creating a whole set of suite of new risks. And that’s something in which Lloyd’s historically has done well. If you look back at things like D&O, satellites, and so on, we have been at the vanguard of that.
What you need to do is look at what business is actually doing. Take the supply chain. If you have one piece of the chain going wrong—and we saw that with the Thai floods, where suddenly the Japanese auto industry was brought to a halt. Analyzing emerging risks requires hard work, hard thinking and hard analysis.
Watkins: Lloyd’s has an emerging risks team in London. These market underwriters meet once a quarter, and they share what they are hearing from brokers, and they will aggregate and talk about it. I sat in on one of their meetings and it’s fascinating to hear about what’s bubbling up. The Artic is thawing a bit and that opens up tremendous opportunity for shipping and also creates risk for anyone who wants to put a deep sea oil drilling platform there or mine for minerals that are now visible from space because the ice caps are melting. Solar storms are another issue. Obviously Cyber is No. 1.
Nelson: We did a big report on climate change a year ago, two years ago. What we know is enough evidence and history and we can model it. All of our business plans, if we are writing that type of risk, the climate change model is built into it.
Q: How do you analyze emerging markets and how quickly they are moving?
Nelson: A few years ago, we did it more by feel than demand. Three years ago we decided to launch a long-term strategy. And we keep this under review. We put a great deal of effort into those countries we think are suited to Lloyd’s, and those countries are in South and Latin America—Brazil, Mexico, Columbia, Peru.
And then we are growing well in Eastern Europe—especially Turkey. India is a big opportunity, but difficult. Cultural issues there, but the Indian Parliament passed legislation to let Lloyd’s go onshore. Southeast Asia is a natural market for Lloyd’s. We have done extremely well there—that’s now 12% of our business. Our biggest platform outside London is in Singapore. And in China, we have a hub in Shanghai.
We are thinking more carefully about Africa. That brings all sorts of difficulties. We have to worry about political stability, corruption, regulation, bureaucracy. We measure those things very carefully.
Q: Hank, anything new with IICF? [Ed. note: Watkins sits on the board of the Northeast Division of the Insurance Industry Charitable Foundation]
Watkins: It’s the one corporate social responsibility mission that Lloyd’s has embarked on. It’s a well-run and appropriate organization that gives us a platform to spend some of our energies and help make a difference in society.
In the U.S., the industry itself is viewed as responding after a tragedy—a fire, car accident, disaster. Through corporate social responsibility, you can let the world know that we are here every single day, that we aren’t just waiting for claim. Through the IICF, we can band together. There are no stripes in the room. My competitors are across the table from me. But in those moments we are here to participate. That’s huge and you can’t put a price on that. It makes you feel good.
Nelson: It helps the culture of the organization; it makes people proud of the place they work. They are more loyal.
Watkins: I can’t think of an insurer who isn’t involved in either IICF or City of Hope [with the National Insurance Industry Council]. And we all get it, and I think people coming out of college expect you to get it.
Q: What is your strategy for attracting the younger generation to the insurance industry?
Nelson: Overall, the insurance industry, probably going back about 20 years, hasn’t done a good job of getting across that insurance is an attractive career. Let’s be honest, it’s not a Google or Apple. I do think over the last few years that an insurance career is more on the map—worldwide. The insurance industry has done a much better job of explaining what insurance does, particularly the kind of insurance that we do, which I would characterize as socially useful. We make a real contribution to the economic chain. Not just in the States—but the new New Zealand earthquakes, Thai floods. Insurance is pivotal in the recovery of economies and communities. More of that is getting across. Insurance is something that is global, so opportunities are huge. Both where you might like to work, what types of business lines you would like to operate in.
We have big communications programs with the major universities around the world. I have seen three sets of universities while here [at RIMS]. We take that seriously. The quality of young people coming into insurance has improved over the last 20 years. It certainly has in London, and I think in other countries as well. It’s an attractive business. People are your best ambassadors—young people, bright people—news travels.
Watkins: Lloyd’s in London has a well-developed internship program; it’s typically for U.K. citizens. In the U.S. we don’t have the facility to hire people out of college. Perhaps someday, but not currently. We ask them to consider the surplus lines industry in particular, whether through a wholesaler or insurance company.
Nelson: We encourage nationalities and diversity. Particularly in underwriting, it’s not diverse enough in terms of nationality. It’s much better now in terms of gender diversity. But the real challenge is nationality. We have to improve that. That will improve the quality of business we do. If you have people in the core of the underwriting community coming from all of these countries, then they’re well trained, they understand the local countries and they can add to assessment of risk. We see great benefits.