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Many of the businesses within the London insurance market have strong and long-standing relationships with the region as reinsurers of Gulf risks. I hope that the dialogue we have today will enable us to build on the strong co-operation which already exists between us.
As the world’s leading market for specialist insurance and reinsurance, Lloyd’s has been taking on the world’s biggest, most complex, and most unusual risks for over 300 years. But today the stakes have never been higher. Projects are getting ever larger and at the same time their number is soaring. And there are few places undergoing more transformation right now than the Middle East.
So today I would like to give an insurer’s perspective on this fast changing and highly challenging risk environment by addressing three questions:
• How can we manage risk better in today’s increasingly complex environment?
• What role can the Gulf States play within the global insurance market? and
• What is Lloyd’s strategy for the region?
How can we manage risk better?
In this increasingly complex business environment, insurers want to work with companies who put risk management centre-stage in the decision making process.
In the energy sector, rising demand, concerns about future reserves, and high prices are combining to require development of new oil and gas reserves and the cost of energy projects – both onshore and offshore – is soaring.
In construction, the Middle East is home to the Burj, rapidly on the way to becoming the tallest in the world. And new skylines are continually emerging across the region.
Exploring new waters or building ever higher into the skies is only possible using increasingly sophisticated technologies and along with this come new and bigger risks - personal, physical, financial and political.
The good news is that today’s companies are thinking more about risk management, and boards are spending more time dealing with corporate risk issues. Working with the Economist Intelligence Unit , we conducted some research with global business leaders recently, and we found that the average board now spends about 10 per cent of its time on risk management – around twice as much as at the beginning of the decade. In today’s most successful public companies, the board is now playing a bigger role in risk decisions. But it seems there is more work to be done in embedding a culture of risk management throughout the organisation.
Above all, what insurers want to see is a focus on contingency planning. Preparedness is key – yet you may be surprised to know that many businesses aren’t ready to face disaster when it strikes. In our recent research, almost 40 per cent of business leaders admitted that they do not have adequate disaster plans in place to respond to terrorist attacks . Some think that contingency planning is too expensive, but in fact the most important steps for surviving a crisis often cost little. Being unprepared can be the most expensive strategy of all.
Our global research also reveals important gaps in risk management skills and training. Fewer than one in five board members have had training on how to implement risk management across their companies, and only one in four companies include risk management objectives within staff job descriptions.
Understanding and managing supply chain risk – in its widest sense – is something else companies must get to grips with better in an era when energy security is a growing concern and industry is increasingly dependent on outsourced and off-shored services. For those involved in construction projects, there are also some particular concerns around suppliers and contractors and the availability of skilled workers, plant space and raw materials. Our research shows that the most forward-thinking companies are now taking steps to protect their supply chains – and almost a quarter of large companies have tried to strengthen their supply chain resilience in the face of political violence risk.
In summary, if insurers are to take today’s growing exposures on, they want to work with companies who are willing to develop a risk management culture and implement risk management processes at every level of the organisation to understand and mitigate them.
What role can Gulf States play within the global insurance market?
So in this environment of larger exposures and greater risk awareness, what role can the Gulf States play within the global insurance market?
Right now, despite the economic boom and a growing infrastructure, the Gulf States still account for only 0.3 per cent of global insurance market premium . If its assets are to be adequately insured for the future, the local insurance market must therefore undergo significant expansion. And it must have open access to the full range of global markets to get the reinsurance and specialist insurance support it needs.
Larger, more complex risks will generate greater demand for intermediaries with specialist expertise and established international relationships. Insurers themselves will increasingly require support from reinsurers as risks grow larger and more complex. And it will be increasingly important for the region’s emerging financial centres to interface efficiently with other supervisory structures around the world.
Our own experience in London also tells us that the most successful financial centres are those which act as gateways into a regional market larger than just the domestic market. Here within the EU, we are very conscious of the importance and benefits of a regional system which operates on the basis of mutual recognition.
Jacques Delors once asked rhetorically and I am sure with tongue in cheek “Who can fall in love with a common market?” and indeed we might protest from time to time about another level of regulation from Brussels.
But we recognise the benefits of this structure in practice: there are no major barriers to transacting commercial lines insurance and reinsurance business across the EU. It would be misleading to suggest that the single market in insurance is perfect. But the framework is right and enables companies to trade freely within the EU, as well as providing a solid basis for dialogue with other trading regions as we try to establish ways of working together and achieving mutual recognition.
Can Gulf states work together to develop a common market for insurance in the region? At Lloyd’s, we certainly want to see the kind of success we have experienced in the EU replicated elsewhere. We believe that where barriers are removed, it results in a more efficient and less costly insurance market with greater potential for growth.
Today, London is a global insurance hub second to none. Capital from all around the world makes London its home and within one square mile, the concentration of insurance skills is unrivalled, resulting in a huge cluster effect. Within a few hundred yards of the Lloyd’s building, around 50 billion dollars of premium is underwritten each year and the concentration of broking expertise is univalled.
As Gulf states seek to develop the capability of their financial centres in the fields of insurance and reinsurance, we would certainly be delighted to share our own experience with you.
What is Lloyd’s strategy for the region?
Finally, then, I would like to talk briefly about Lloyd’s strategy for the region.
As I mentioned at the outset, many of the businesses in our market have many strong and long-standing relationships with the Gulf as reinsurers of your risks, particularly in the oil and gas sector, where we are a market leader. Lloyd’s also leads reinsurance coverage on many other projects in the Middle East: Palm Island, new buildings and shopping malls, ski slopes, and terrorism cover for major construction projects.
I made my first visit to the Middle East as Chairman of Lloyd’s earlier this year. I was warmly welcomed by the leadership in Qatar and Dubai to discuss how an international market such as Lloyd’s might support increasing economic growth in the region. We are therefore now in discussion with the syndicates in our market about their expectations and their appetite for business in the region. We have also begun to talk with regulators to understand how Lloyd’s might best support the local insurance market. We are especially interested in understanding where Lloyd’s might access direct insurance business across the Gulf region – working in co-operation rather than competition with local companies in specialist and niche lines where demand is expected to grow. This would of course complement the strong position we already have in international reinsurance. We are also interested to hear more about what is happening in the Takaful market, as we believe Lloyd’s could be well placed to provide Retakaful support.
In the medium to long term, as the economy grows, it seems likely that Lloyd’s and the Gulf will do more business together. Lloyd’s is in great shape to respond to the changing needs of insurance buyers, and our appetite and capacity for complex and large risks has never been greater.
However, a note of caution is also appropriate at this point. The scale of the risks we are now working with means the insurance markets have no choice but to price insurance more carefully and more accurately, according to the underlying exposure. In the onshore energy market in particular, we are concerned right now about downward pressure on insurance prices and whatever and wherever the risk, Lloyd’s underwriters will focus only on underwriting profitable business, not building market share.
In conclusion, risk management must be at the heart of business strategy, especially in the Middle East where risk exposures are soaring. I believe that the Gulf States now have a growing need – and an unprecedented opportunity – to build an insurance sector which supports this growth, and interfaces efficiently with the wider global market.
If we in London can help with that process in any way, please do tell us. For our part, Lloyd’s is now looking closely at how we can best work with the region in future, and I hope that our relationship will continue to flourish and grow.
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