2. Market share in OECD
Market share in OECD (Direct gross premiums basis)
Other
9%
Canada
3%
Germany
9%
Spain
USA 2%
43%
France
6%
UK
10%
Italy
Netherlands 4%
2% Japan
10%
Korea
Source: OECD
2%
3. Market share worldwide
19%
33%
2%
2%
2%
2%
4%
6%
6% 14%
United States Japan 9% United Kingdom France
Germany Italy South Korea Canada
Netherlands Spain Other
4. Insurance density
Ratio of Direct Gross Premiums by the Population
6,000
5,625
5,000 4,858
4,000 3,752
3,551 3,512
3,000 2,725
2,625
2,348
2,000
1,445 1,391
1,000
0
UK USA Netherlands Germany France Canada Japan Italy Korea Spain
US$
Source: OECD
5. Leverage of UK capital
Retained Business
100
93 93 94
90 91
90 87
84
81
80
Retention rate (NWP/GWP - %)
70
60
50
40
30
20
10
0
USA Netherlands Korea Italy France UK Spain Germany
Source: OECD
6. Megacities facing natural hazard risks
(50 most economically important global cities)
Natural Hazard High hazard Medium hazard Low hazard
risk risk risk
Tropical 6 2 9
storm
Winter storm 3 6 8
Thunderstorm 0 36 14
hailstorm or
tornado
Flood 2 21 26
Storm surge 2 9 12
7. Climate impacts
• Global temperatures have
already risen by 0.6°C and
are likely to rise further by
at least 1.5-2.5°C
• Sea level rises of at least
0.5m expected in UK by
2050-60
• Tropical windstorm effects
predicted to increase
intensity of storms –
damage up by 66-75% in
US and Japan
8. 2005 US Hurricane Season
Insured Losses
National Flood
Insurance
Program
$15.3
211,000 claims
Private
insurance
companies
$40.6
1.7 million claims
9. World beating underwriting
• Climate change is a
significant and growing
source of risk to business
performance
• Impact will vary according
to geography and sector
•We need to understand
the changing risks
affecting customers - and
the effectiveness of the
measures they are taking
to reduce the impacts of
climate change
10. Global opportunities
•New and expanded
products eg ETS
compliance risks, D&O
extensions, supply chain
risks, cat bonds
•New processes eg carbon
sequestration, clean coal
•New services eg climate
risk consultancies, long
range forecasting
Editor's Notes
The importance of London (which for the purposes of my talk embraces Leeds, Manchester, Edinburgh, the M4 corridor and even obscure East Anglian cities) to the global economy remains substantial, even several centuries on from gatherings in coffee houses. All 20 of the world’s largest insurers and reinsurers have office in London. It is a global centre of expertise, particularly for marine, aviation and energy insurance. The London Market alone employs 40,000 people in London and a further 10,000 people elsewhere in the UK. Altogether insurance employs 332,000 people in the UK, a third of financial services jobs and three times as many as the utilities of electricity, gas and water supply combined.
UK accounts for 10% of the whole OECD market – the same as Japan but only around a quarter of the US market share
And 9% of the global share. Japanese performance pulls away from us here, reaching 14% of the total. It is worth noting that 20%o of US reinsurance placed abroad, and half of US primary insurance abroad comes to the London Market, according to the IUA. This benefits the broader services economy, providing business for UK and foreign banks based in London, legal services and maritime services, for example.
The UK achieves the highest ratio of direct gross premiums to per capita GDP amongst OECD countries. This not only emphasises the importance of the UK in the global insurance industry, it demonstrates the disproportionate importance of insurance to the UK economy – and the vital importance of ensuring our continued competitiveness on global markets. Government ignores the needs of the insurance industry at its peril. But the industry also needs to safeguard its competitive advantage. How does a small offshore island achieve a competitive edge? The chief assets any insurance company has are its capital and its people. I shall touch on the former, but spend the bulk of my time examining an issue on which we can exploit our expertise – human capital, call it what you will – to secure an even more important role in the future.
Compared with other OECD markets, the UK direct insurance writers retain significantly less risk – that is, we lay off more risk to reinsurers thereby levering in other capital. This means UK insurers can write more business – or riskier, more rewarding business. UK insurers can exploit markets that others may be reluctant to enter – you only need to look at the arrangements for catastrophe cover in other European and English-speaking markets to understand just how peculiar UK insurers are. The UK is the only major market where private capital backs flood cover. In recent weeks this may have seemed a bad idea! The ABI is currently estimating the cost of the June floods at around £1bn. But it has led to a unique partnership between UK insurers and Government on the provision of flood insurance and the defences and other risk reduction measures that underpins this. The UK taxpayer gets an immensely good deal compared to the French or US taxpayer. In return for just £600m a year invested in inland flooding and coastal defences the Government hands over the residual risk to the private capital markets. Of course, it’s not as simple as that and the industry lobbies hard to improve risk – and secured an additional £200m a year just yesterday to address the half million homes with inadequate protection. But still, this comes cheap compared with a £16bn bill which could result from an East Coast storm surge around 2030, once climate change has resulted in 40cm sea level rise. All of this is possible only because UK insurers have significant reinsurance arrangements in place, effectively re-exporting some of the risk onto global capital markets. To retain access to those markets we need to prove that we really understand the risks we write. Here in the UK and abroad. And this is where our comparative advantage could increase – if we understand climate change better than our global competitors.
Munich Re has demonstrated very clearly, in its study Megacities: megarisk, that virtually all the world’s major economic centres face significant weather risks. Nearly all of them, for obvious reasons, sit on the coast or on a major, navigable river. And are subject to significant flood risk. Climate change and rising sea levels will mean that many of those currently facing relatively low risks of flooding or storm surge will see much higher risks in future. The UK is one of the leading centres of climate change science with internationally renowned institutions like the Tyndall Centre. Insurers need to forge strong links with academia to incorporate emerging knowledge into underwriting practice. We know that traditional cat modelling will not suffice – the past will not help predict the future. Actuaries will need cleverer tools. Links such as Benfield and UCL, the Lighthill Risk Network, Willis’ Research network, ABI’s close links with UKCIP and EPSRC are all essential to nurturing an unrivalled expertise with global potential.
ABI undertook a ground-breaking study in 2005 which attempted to turn the emerging science on windstorms and climate change into loss potentials.We estimated that a severe hurricane season in the US could rise in cost by three-quarters to $100-150 bn. That was the equivalent of 2-3 Hurricane Andrews (the largest natural cat loss at that time) EXTRA in a season. That was in early July 2005. It was greeted with astonishment and some scepticism – but it was clearly something a long way off, likely to occur late this century.
By November’s end to the hurricane season we had seen 3 of the 10 most costly hurricanes ever, leading to $56bn in claims, and counting. The bill keeps getting readjusted as litigation over liabilities is settled in the courts. But it all looks very feasible. And the US taxpayer does not want to retain this heavy burden. In markets such as Florida, the reaction of the state legislature has been to deny the science, refuse to accept cat models that predict a much worse future and put in place state funded reinsurance arrangements when the market prices the cover too high. In London we can do better than that. If we build the right skills and retain light touch regulation that ensures we can develop risk tools that respond to customer needs, and attract capital to underpin these.
To understand our business, we need to understand our customers’ businesses and the risks they face. In some respects we understand the risks better than they do. In others, they understand much more than us. So we not only need to develop our expertise in underwriting further, we need a broking community that recognises the need to develop open relationships with customers that ensure both parties understand risk and its sources, how it can be managed and the most cost effective way of transferring residual risk. Or the life jacket will not keep the global economy afloat.
So we need to understand new things about old risks and everything about new risks. We have a good head start, a firm foundation to build on. London and the UK can seize the opportunities that changing risk offers and, in the right environment, can help to keep the global economy bouyant.
