Briefing: How to lose friends and alienate Rolex wearers

There’s a notorious Lloyd’s and London market checklist that members are known to proudly work through, ticking off items off as they are acquired.

The classic examples include the 43-inch waist – a product of long lunches and splitting Gs – the gouty toe or toes, the curry-stained Hermès tie and, naturally, the Rolex Submariner.

It’s this last item that leads to an ironic curiosity of the London market, whereby some of the best underwriters and brokers in the world become, at least from a moral hazard perspective, one of the worst risks.

Let’s face it, there should be absolutely nothing wrong with owning a Rolex. Indeed, it’s a failure of public policy that crime makes anyone feel unsafe wearing one.

But one of the last bastions of safety is probably Leadenhall Market, which I’m fairly certain has the highest per capita concentration of Rolex owners in the world.

One should be able to celebrate success. After the punitive taxes are paid, the fruits of your labour are yours. Yet could this luxury watch also make you a bad risk in an insurer’s eyes?

Many years ago, my father had his fellowship thesis rejected by the Chartered Insurance Institute on the basis that it was overly elitist. His suggestion was that if you took two identical houses next to each other in a nice part of London – same postcode, sums insured and security – the nature of the people living inside might still determine who represented the better moral hazard.

He used the example of one resident being a flashier Rolex wearer – and the other a somewhat more boring, discreet Patek Philippe owner.

The Rolex is instantly recognisable, not least to the envious and professionally light-fingered. The Patek, by contrast – especially one of those white-faced Roman numeral jobs – can look at a distance like so many other, less valuable brands.

Both brands are equally valuable, but this is not really about watches. Rather, it’s about signals – the car outside, the public holiday photograph on Instagram and, ultimately, public displays of success.

Fair is fair

And insurers have a right to be interested. Moral hazard, after all, poses the murky question of whether people behave differently when they know someone else carries the cost of misfortune.

It’s important, because getting it wrong offends one of insurance’s basic bargains – that premium should, at least broadly, reflect the risk an insured presents to the pool. If the careless are underpriced, the careful subsidise them.

There are lots of obvious responses to this problem, including doing essentially what insurers already do, which is ask more questions or demand a good safe.

You could apply a higher, variable excess and add a warranty requiring jewellery to be locked away when not worn.

Or maybe feed claims data back into underwriting and ensure you’ve trained the machine to notice concerning patterns.

All of these options are perfectly sensible, but not particularly novel. They are the insurance equivalent of my doctor telling me to eat less and move more.

An interesting questions for the future is whether underwriting can move from judging moral hazard to shaping it. Consequently, could the future competitive advantage in underwriting be the ability to quantify these ethereal qualitative factors fairly?

As an industry, we need to adjust to an ever-riskier world and this will likely require some creative thinking. For instance, more intelligent measures of behaviour, such as  factoring in public display, storage discipline, travel habits, willingness to take advice and even social media broadcast radius.

After all, moral hazard is not static. It changes by the hour, place, mood, company, alcohol intake, Instagram usage and whether the policyholder has decided that Soho at 1am is an appropriate venue for £40K of wrist-based signalling.

What value discretion?

So perhaps the future is not a moral hazard score, fixed like a credit rating, but something more dynamic, aimed at potentially making discretion valuable.

That was my father’s original point – that, while underrated, discretion is a vital component of risk selection.

Maybe certain activities could lead premium credits to accumulate, such as attending a short security briefing that works like a mini speed-awareness course for the conspicuously successful.

You need to get the policyholder to a place where they become their own inner Jeeves – ”Sir may wish not to wear the Daytona through Naples!”

Regulators will rightly twitch at anything that feels prejudicial or opaque. So the test must be explainability. You cannot rate someone because they have flashier tendencies, but you can rate observable behaviours that alter the probability of loss, such as overt public display, storage, travel, prior loss patterns, security adherence and willingness to mitigate.

And perhaps the most overlooked risk is success itself. A footballer, founder, influencer or newly promoted London market star may acquire wealth faster than caution. The watch arrives before the habits required to own it safely. Insurance could help teach that caution, commercially and sympathetically – it’s in our interest, after all.

I don’t pretend to have all the answers. Rather, I simply find this a fascinating subject – how the industry reacts in its headlong rush to adopt technological answers, only to run up against human judgement and thereafter quantify it.

For moral hazard is ethereal in part, a qualitative factor that does not easily lend itself to quantification.

But the likely ramification of ignoring all this is obvious, insofar as insurers will retreat, tighten terms and naturally raise premiums as capacity for covering portable wealth becomes more selective.

At the extreme, the market will do what it always does when nuance becomes too expensive – exclude, cap, aggregate and hide behind wording. Such crude responses would be a shame.

Moral hazard, properly understood, is a reminder that insurance is not really about objects at all – it’s about behaviour under the comforting shadow of indemnity, while the Rolex is merely the shiny, expensive little lighthouse flashing out a deeper truth about human behaviour.