Opportunities and Challenges

More than 200 faculty, students, administrators and community members packed the tiered-lecture hall in Mihaylo Hall Dec. 2 to hear Peter Levene, chairman of Lloyd’s of London, discuss managing risks and pursuing innovation in the face of increasing intervention by regulators. The free public talk was sponsored by Mihaylo College of Business and Economics, the Center for Insurance Studies and the Insurance Industry Charitable Foundation.

The following is a transcript of the speech Levene presented:

It’s wonderful to see so many people who are giving up their afternoon to come and listen. I hope you find it enjoyable. I hope you understand it.

We’re supposed to speak the same language, and we do generally. The Lloyd’s building in London — outside there’s a pedestrian crossing, which has the pedestrian control traffic lights. You press the button when you want to cross and eventually it will change. I was waiting there the other day and there were two American ladies standing there, waiting to cross.

And one of them turned around to me, she said, “Excuse me, sir. What is that beeping noise?” And I said, “Well, madam, that is there to tell the blind when the lights change, so that they know it’s safe.” She looked at me and said, “You know, that’s absolutely amazing. In the United States, the blind don’t drive at all.”

Anyway, I'll try and make myself as well understood as I can do in this wonderful climate you have. I was just speaking to my wife a few moments ago, and she's struggling through the snow. So being here is not exactly a hardship.

It is a great pleasure for me to be back in Southern California. It’s certainly not the first time that I’ve been here. This state, as I’m sure you know, in terms of world economy size, is the world’s eighth-largest economy.

Caption: Students were among the audience attending the Dec. 2 talk by Lloyd's of London Chairman Peter Levene. Photo by Karen Tapia

The United States is Lloyd’s biggest market, by far in the world. It’s probably around 40 percent of our worldwide business, accounting for something like 12 and a half billion dollars of premium income every year.

And within the United States, California is our second-largest market, the largest one being Texas. They went to pains to tell me that when I was in Houston. They gave me a T-shirt, which said on it, “Texas is bigger than France.” That’s the sort of thing they like to do there.

California, of course, to all of us worldwide, stands for innovation. What goes on within this state is really quite remarkable. It’s the home of cutting-edge industries, biotechnology, biomedicine, and of course, the world’s leading digital and entertainment industries.

And Lloyd’s has been a partner to these industries for a very long time. In the 1930s, we insured the legs of Fred Astaire for $75,000 each. And today, we’re still up to date. Today at Lloyd’s, we insure Ugly Betty’s smile. And in the public’s eyes, we are known for insuring fairly unusual risks. Smiles, legs, taste buds. And most recently, American footballer Troy Polamalu; we insured his hair.

But of course, the great majority of our policies cover industrial parts rather than body parts. We insure businesses against property loss, business interruption and liability, as well as many other risks. And I would like to think that we match California in our reputation for innovation in new insurance products.

And it’s a great pleasure for me today to be able to speak to young people who have decided to make their career in insurance. You are very fortunate in having this type of faculty here. It’s something in which, in the U.K. and most other countries, doesn’t exist. And so we have to do a lot of in-house training. And to be able to take people who are so well educated on joining the industry is an enormous benefit.

Now, unlike you, I entered the insurance profession relatively late. In fact, the first time I went into the insurance industry was, funny enough, when I became chairman at Lloyd’s eight years ago. Before that, as you heard from the dean (Anil Puri), I worked in the defense industry, both inside and outside of government. In other words, on both sides of the table. And I also worked for John Major when he was our prime minister, advising him on efficiency.

I also spent time on working on two regeneration projects in East London (and) a new railway line, which goes to the other project, a new development called Canary Wharf. This has now become a leading European financial services center. We started off with about 5,000 people working there. Today, just a few years later, there are 100,000 people there.

I also spent a year as lord mayor of the city of London. That, I have to say, is quite distinct from the mayor of London. There’s some difference in their antiquity. We’ve had a mayor of London now for about 12 years, whereas I was the 671st lord mayor of the city of London, whose job is basically to go around the world as the roving ambassador for the financial services industry.

So for me, talking about insurance, I find it easier to compare it with a number of different fields. And I find as chairman of Lloyd’s that one of the great advantages has been to witness, first hand, the extraordinary and essential role which insurance plays in society and in the wider economy.

Since the financial crisis of 2008, the reputation of the whole financial services industry has suffered right around the world. And I have to say — I feel very strongly about this — that I think this is unjust. Insurance is not banking. Did the banks foul up, big time? Absolutely. Did the insurance industry? Absolutely not.

Before anybody says, “What about AIG?” As I expect you know, AIG’s problems did not come from their insurance sector, it came from their financial products sector. Which only goes to prove you should stick to your knitting, as we say.

Throughout the whole of that crisis, the insurance industry as a whole stayed strong. Lloyd’s posted record profits last year, and we made more money last year than the whole of our 300-year-plus history. And our continued credit ratings of ‘A plus’ confirm that our structure, and options, and operations have been shown to be fundamentally sound.

Caption: Peter Levene, chairman of Lloyd's of London. Photo by Karen TapiaDownload Photo

Today, the current myriad of proposals to fix banking regulation, unfortunately, tends to confuse insurance and banking. In the U.K., we have seen endless reports. I make it a hobby of stacking them on top of each other on my desk. And as of last week, from the floor, they reach about that height. So we have these reports, we have the academic viewpoints on this, and we have government proposals. The usual thing, “I’m from government, and I’m here to help you.”

Politicians around the world seem to feel this enormous weight of expectation to do something. But it’s not enough just to do something. You have to do something which is worthwhile; you have to do something which is good. And above all, something, if there is a problem, that’s going to help to fix that problem. And I have to say that that does not mean more regulation. What it can mean is better regulation.

And I wish that many of our lawmakers, and it’s not just in the U.K., it’s in this country and so many other countries as well. I wish that they would focus much more carefully on the role which insurance plays in supporting industry and the wider economy.

I would like to focus on two elements. The first is our role in taking on the risks of other businesses to enable them to grow. Second is advising businesses on how to manage both existing and future risks.

At Lloyd’s, we understand that it is our role to help businesses to rebuild in times of crisis. Part of what makes our organization unique is not simply the 300-year history which we have, but also the pride that we feel in Lloyd’s reputation of helping the wider economy to manage the risks which they have to face.

Of course we make money. We aim to make good profits, and there’s nothing wrong with that. Because if we don't make profits, then when there are claims, we’re going to have quite a job to pay for them. But when people talk about the great and defining moments for Lloyd’s, they don’t talk about great profit years. They talk about how we have innovated.

We insured the first planes in 1911. In fact, the very first aviation policy we issued was before the Wright brothers had taken to the air, so that showed a certain amount of foresight. We insured the first American drivers of cars in 1907, the first policies for the jewelry industry in 1887, and offered the first protection against earthquake damage in 1895.

Now yesterday, we flew down from San Francisco. San Francisco has a very special place in Lloyd’s history. Four years ago, I was in San Francisco for the events to mark the centenary of the 1906 earthquake. We sponsored the dinner which they held there, and I spoke at that dinner. Now, why was it so special for Lloyd’s?

Well the reason was because in 1906, Lloyd’s business in the United States was just starting to get off the ground. And when the earthquake happened, Lloyd’s had a local agent in San Francisco who saw the destruction, the fire, the mayhem that was going on. And he didn’t know what to do. Most of the insurers were literally, quite physically, running for the hills.

He sent a cable back to London, to his boss — a man who is a Lloyd’s legend, a man called Cuthbert Heath — and he explained what was happening. He said, “What do I do?”

He got back an answer which was 13 words, and this is very much the basis of Lloyd’s business in this country, and it’s retained in our archives. The reply was very simple:“Pay all of our policyholders all of their claims, irrespective of the terms of their policy.”

Now today, I’m sure that we would go along with the first part of that cable, paying all of policyholders all of their claims. ‘Irrespective of the terms of their policy,’ I’m not so sure about. But he did it, and it proved to be the most fantastic investment. Because that ensured that Lloyd’s name, as a very reliable provider of insurance, became legend in the United States.

And for us, if you think about it — this rather bizarre institution which isn’t even a company and which is the only insurance market in the world to have $12.5 billion market every year in the United States — is pretty unusual, and a lot of the credit for that goes to what Cuthbert Heath did in that one event just over 100 years ago in San Francisco.

Behind every great inventor there stands a great insurer. And at Lloyd’s, we continue our reputation for bespoke, very expert underwriting, which can price the most complex risk.

After 9/11, where Lloyd’s actually took the largest hit of any insurer or re-insurer in the world, despite all of that — and which basically somehow was all paid on time and to the penny — we were one of the only two insurers who were prepared to quote a policy for the Golden Gate Bridge that did not exclude terrorism.

Here in California, a national leader in clean energy, we have been very supportive of the renewable power installations in the state.

At a time when the financial services industries are generally seen as having a negative effect on the community, it is worth remembering the positive role played by insurance. For example, Lloyd’s policies to cover individuals against the financial consequences of suffering small pox in the 19th century insisted that the policyholder be vaccinated, something which of course led to many people staying healthy.

In the same century, insurers’ insistence that properties covered for fire must have their chimneys regularly swept reduced the number of urban fires. The list is endless. There were insurers who insisted on crash helmets for motorcyclists and fire sprinklers in workplaces.

But what we are best known for in the state is our reputation for paying claims. And this is what we want to maintain — whether it is the earthquake in San Francisco, the loss of the Titanic, the World Trade Center, the Northridge earthquake or the damage suffered from Hurricane Katrina where the Katrina, Rita and Wilma, the trio of hurricanes, caused Lloyd’s greatest ever payout only five years ago, in excess of $8 billion net.

And our support to victims of disaster is something which I saw firsthand when I visited Chile after the earthquake that happened there earlier this year, where again from nowhere they suddenly sustained this earthquake and we paid to make good what had been damaged.

Now people often say to me that the role of the insurer is growing more and more complex, that the world is a much more risky place than it has ever been before, but I didn't believe that's true.

If you take the 1900s here in the United States; in 1903, 600 people died in a fire at the Iroquois theater in Chicago, and there were over 1000 fatalities following a fire on a steamship in 1904. In the same year, a fire in Baltimore caused losses of $90 million, and as I said, the San Francisco earthquake devastated the city, resulting in claims from Lloyd’s alone at that time of $50 million, which in 1906 was a very great deal of money.

But then we have always lived in a very risky world. The key question we need to ask is, could we in business have foreseen some of our risks? Could we have managed them better? Well, I’m a strong advocate that risk can be mitigated and can be reduced, but this takes foresight, planning and fundamental imagination and sometimes courage. It also costs quite a lot of money.

The main point about Lloyd’s is that our development for over 300 years from when merchants gathered in Edward Lloyd’s coffee house and pooled the risks of the cargos on their ships, has been led by development of industry. How industries have evolved or declined, we have had to find new products to understand innovations and crucially and most importantly to price new risks.

It’s essential that insurers understand emerging risks and advise businesses on how to mitigate them. In recent years at Lloyd’s, we’ve given a great deal of thought to issues like climate changes, nanotechnology and the effect of globalization on the risk landscape.

A very strong piece of advice which I would give to people entering the profession like yourselves, is to remain aware of what is happening in the world outside insurance. You need to understand not just the risks your clients face today, but those which they will face in the future.

Just yesterday, we held a seminar in San Francisco to look in depth at cyber risks. And I can tell you that, like most of the other people that were there, I came away from that pretty scared at what I heard.

So what risks are businesses most concerned about today? Well, at the moment, the risk landscape is dominated by financial risk. But the problem with many risk management strategies is that they focus on current risks, and they don’t look at future risks. Boards of directors should be developing plans to deal with future energy or water shortages to establish what the exposure might be and what their mitigation plans are.

Californian is a very good case in point. Every summer, as you all well know, you suffer bush fires, and every winter you suffer mudslides. You sit on a very delicate part of the Earth’s crust and have to live with the possibility of an earthquake destroying whatever there is around you, whether it’s your home or your business.

 This state also suffers from water and power shortages. So perhaps there’s no surprise that this state has taken a global leadership role in concern about climate change, with some parts of the state outlawing plastic shopping bags. Something that I have to say has been adopted in the UK as well with considerable success. And we start to wonder why we ever needed them in the first place.

At Lloyd’s, the ability to adapt, the ability to look at what is happening in the world outside of insurance, has kept us successfully in business, as I said earlier, for more than 300 years. Lloyd’s started out as a maritime insurer only. Because at the time when Britain, an island, was building a global empire, this where the business went.

But today in the 21st century, we’ve diversified, in particular into the United States and the new industries that are being developed here. And, we have been awarded license to operate in China. Initially as a re-insurer, which is now underway. And only this year we were give a license in China for direct insurance, which when we’ve done all the necessary preparatory work, will start operating later next year.

It’s very tempting to focus your business on where the best rates lie at any time. But the really successful business, the one that insures, also will look to who the client for the future will be and what they will need to insure. And that’s why Lloyd's is developing markets in China, in Brazil, and in several other emerging economies.

Over the past decade, one of the biggest surprises of my career has been not the growth in China, because I think most of us expected that, but the rate at which it has happened. I went to China for the first time in 1989, and went to Beijing where virtually everybody was on a bicycle. Today, they’re on their fourth ring road, and China is now the largest producer of cars in the world, having overtaken the United States. That’s a pretty dramatic growth pretty quickly.

This year China had become the second-largest economy in the world. I am a great believer in China. I’m not one of those who thinks that it threatens the largest economy in the world, here in the United States, and certainly not this state, sitting on the edge of the Pacific Ocean. I think that the opening up of China will provide us in the West with very valuable new markets, which we need.

China’s growth means that we must be able to compete. This is where we need business-friendly regulation, rather than any kind of knee jerk response to a financial crises, which has happened. If the United States, if Lloyd’s, can stay true to its principals of innovation, or enterprise and responsibility, then we will all be able to remain at the top. And that is what all of you, in your future careers in the insurance industry, must work for in the future.

Ladies and gentlemen, thank you very much for listening patiently.

Jan. 4, 2011