Insurers must spread their risks to survive
Last week Richard Ward was on his first visit to the region as CEO of Lloyd’s. He made several speeches and talked to plenty of major players in the local market. And while he maintains he isn’t an “insurance man” – he’s a chemical engineer who revolutionised London’s International Petroleum Exchange – he’s learned plenty since taking the Lloyd’s job in 2006.
Last week he was making sure the local market – and insurance-buyers – understood that the global financial crisis was caused by the banks, not the insurance industry.
But insurers have to deal with the realities of the disaster the banks have dumped on them, and Mr Ward was urging insurers dealing with liability not to put all their eggs in one basket.
He says too much concentration in areas like D&O will lead to big claims and financial challenges.
He told insuranceNEWS.com.au he’s not discouraging insurers from providing D&O cover, but he is warning them to have a diverse portfolio and not expose themselves to the one class.
“There’s a lot of D&O exposure out there that will come into the insurance sector,” he said. “Insurers need to have a diversified approach to risk, be very careful about risk selection, and about the price. The banking sector didn’t get the pricing of risk right.”
Mr Ward says Lloyd’s has learnt the hard way about overexposing itself to a particular class of insurance.
In 1996 the insurer nearly collapsed and had to change the way it did business after taking on toxic liabilities associated with asbestos in the US.
“But we didn’t learn all our lessons there,” he said. “In 2001 we had enormous losses when the World Trade Centre collapsed. We ended up short of cash and had to completely restructure our business.
“We now have a very different business and focus – much more on risk management and much more conservative.”
Mr Ward says while Lloyd’s is happy to take on risk in the market it is careful to diversify its risks.
For example, over the past few years Lloyd’s has scaled back its D&O cover to financial institutions to reduce risk. It was a wise move, with Mr Ward saying D&O claims will continue to rise this year.
He says a recent survey of company directors found boards spend 15% of their time discussing litigation, while every CEO said litigation was on the increase.
Company directors feel they are 50% more exposed than they were three years ago, 50% believe they will be targeted for a liability claim – that figure rises to 80% in financial services – and one in five has already been targeted.
“Already 50% of companies have separate D&O cover,” Mr Ward said. “It wouldn’t surprise me if it was 75% by the time I get back to the UK.”
He says as companies become more bureaucratic and risk-averse, it is stifling productivity and risk-taking. But if the recent swag of litigation and class actions is anything to go by, they have little choice.
Recent heavy snowfall in the UK recently caused London’s bus networks and thousands of schools to shut down because they were concerned about their liability.
And people who lost property in Hurricane Katrina in 2005 are now suing the oil companies, arguing that the oil production platforms in the Gulf of Mexico caused a microclimate that encouraged the hurricane to hit New Orleans.
Wacky or wise, liability is a serious business for companies, and Mr Ward is concerned at the implications.
“We absolutely can’t ignore it,” he told insuranceNEWS.com.au. “We’re faced with investor activism, angry shareholders and class actions. People are now continually looking for someone to blame.”
Mr Ward didn’t discuss the ramifications for niche liability insurers which have crowded the local market over the past six years, when times have been good. But he did acknowledge that if insurance isn’t a lottery, working in some classes can be a bit of a gamble. He advised insurers to “spread your chips across every number possible on the roulette table”.
Last week he was making sure the local market – and insurance-buyers – understood that the global financial crisis was caused by the banks, not the insurance industry.
But insurers have to deal with the realities of the disaster the banks have dumped on them, and Mr Ward was urging insurers dealing with liability not to put all their eggs in one basket.
He says too much concentration in areas like D&O will lead to big claims and financial challenges.
He told insuranceNEWS.com.au he’s not discouraging insurers from providing D&O cover, but he is warning them to have a diverse portfolio and not expose themselves to the one class.
“There’s a lot of D&O exposure out there that will come into the insurance sector,” he said. “Insurers need to have a diversified approach to risk, be very careful about risk selection, and about the price. The banking sector didn’t get the pricing of risk right.”
Mr Ward says Lloyd’s has learnt the hard way about overexposing itself to a particular class of insurance.
In 1996 the insurer nearly collapsed and had to change the way it did business after taking on toxic liabilities associated with asbestos in the US.
“But we didn’t learn all our lessons there,” he said. “In 2001 we had enormous losses when the World Trade Centre collapsed. We ended up short of cash and had to completely restructure our business.
“We now have a very different business and focus – much more on risk management and much more conservative.”
Mr Ward says while Lloyd’s is happy to take on risk in the market it is careful to diversify its risks.
For example, over the past few years Lloyd’s has scaled back its D&O cover to financial institutions to reduce risk. It was a wise move, with Mr Ward saying D&O claims will continue to rise this year.
He says a recent survey of company directors found boards spend 15% of their time discussing litigation, while every CEO said litigation was on the increase.
Company directors feel they are 50% more exposed than they were three years ago, 50% believe they will be targeted for a liability claim – that figure rises to 80% in financial services – and one in five has already been targeted.
“Already 50% of companies have separate D&O cover,” Mr Ward said. “It wouldn’t surprise me if it was 75% by the time I get back to the UK.”
He says as companies become more bureaucratic and risk-averse, it is stifling productivity and risk-taking. But if the recent swag of litigation and class actions is anything to go by, they have little choice.
Recent heavy snowfall in the UK recently caused London’s bus networks and thousands of schools to shut down because they were concerned about their liability.
And people who lost property in Hurricane Katrina in 2005 are now suing the oil companies, arguing that the oil production platforms in the Gulf of Mexico caused a microclimate that encouraged the hurricane to hit New Orleans.
Wacky or wise, liability is a serious business for companies, and Mr Ward is concerned at the implications.
“We absolutely can’t ignore it,” he told insuranceNEWS.com.au. “We’re faced with investor activism, angry shareholders and class actions. People are now continually looking for someone to blame.”
Mr Ward didn’t discuss the ramifications for niche liability insurers which have crowded the local market over the past six years, when times have been good. But he did acknowledge that if insurance isn’t a lottery, working in some classes can be a bit of a gamble. He advised insurers to “spread your chips across every number possible on the roulette table”.