At last month's Strategy conference in Newport, Insurance Times and Accenture gathered a tableful of directors from all walks of general insurance life to talk about the future. And here's what they said

The panel

  • Paul Battagliola, chief financial officer, Aon Re
  • David Bevan, general manager, St Paul
  • Ian Black, chief operating officer, HBOS
  • Andy Cook, editor, Insurance Times
  • Steve Fowler, partner, Accenture
  • Sid Khanna, partner, Accenture
  • Steve Lathrope, partner, Accenture
  • Andreas Loucaides, chief executive, PRI
  • Ian Owen, managing director, retail financial services, ZFS
  • Patrick O'Sullivan, chief executive, ZFS
  • Barry Smith, chief executive, Fortis Insurance
  • Marek Wakar, associate, Accenture

    Barry Smith: One of my main concerns in facing the future is recruitment. How can we compete for the best creativity? How can we become an employer of choice? That's probably the most important issue of all - to make sure that we can compete and be successful.

    We've got to be honest: do we get the best people from the universities? Overwhelmingly, the answer is no.

    Patrick O'Sullivan: You're right. We don't have the calibre of people that the banks - where I come from - have, although the banks started in that position back in the 1960s and 1970s. UK banks, in particular, were spurred on by the arrival of US banks competing in their own marketplace. It'll take a long time before the industry gets to a position where it's doing the same sort of sophisticated transactions that the banks are doing, and frankly maybe that's not what we should be doing. My main concern is that the industry is under-capitalised. Will capital coming flooding back? Will we have a different cycle?

    Steve Fowler: Insurance tends to be a career where people stay within insurance companies and get promoted perhaps on technical excellence, rather than a broader management capability. The industry is also facing a pace of change which probably hasn't really been experienced before. And I think those two factors represent both challenges and opportunities on the people front.

    Andreas Loucaides: Over the years, some talent has gone, but I wonder how much talent actually existed in the first place, in terms of the way we're doing business today, compared to the way we were doing business ten or 15 years ago. I don't think we've evolved as fast as other industries in embracing change, in the way we train our individuals.

    Sax Riley [the former Lloyd's chairman] said: "Look at Lloyd's, we've managed to survive after paying seven billion of losses."

    It was said in the context of there is a lot of strength and ability within Lloyd's to survive fundamental claims and still continue to trade. But it's a very sad indictment of our industry that we had the opportunity from 1993 as a clean start-up vehicle, to then be in a position of suffering that sort of level of loss.

    Now, I don't believe that regulation or anything else affected it, other than the core understanding of risk. We lacked the talent that we should have had, and this goes back to training and promoting, which we haven't done as an industry for many, many years. And that's why we're suffering at the moment, because there isn't anyone to take some of these positions that are becoming available. We haven't invested in training in the last 20 years to the level that other industries have.

    I spent a very pleasant day talking to graduates and we're doing ourselves a disservice if we think that they're not interested in our industry. Perhaps we're beating ourselves over the back a little bit, insofar as saying we haven't been successful over a period of time.

    David Bevan: Interestingly, we haven't had a graduate recruitment programme in the last ten years, until this year. We were always pleased to see some of our larger competitors training up graduates, whom we could then acquire at fairly modest cost. We think graduates are motivated by their working environment, by pay and conditions, by whether the company allows them access to the internet, by whether working conditions are reasonably flexible, so they can go and play football after work if they want to. Graduates now are much more short-termist than before. They are looking at what's in it for them over the next three to five years.

    Ian Black: If you speak to graduates about the insurance industry I think they wouldn't even realise what you were talking about. I'm just concerned that if you concentrate on skills you will get the best technicians in the world, but the best technicians in the world are necessarily limited.

    Steve Lathrope:The industry is missing a trick in graduate recruitment and it needs to set out a stall as a career path for managers and for people who want to manage on a large-scale. And if people think that they are coming just to be an actuary - which is a great thing to do, but still has something of an anorak association - then you are missing the chance of bringing a lot of people who would probably stick around for six or seven years, rather than just three.

    Ian Owen: I have twin boys, both at Oxbridge universities, so I guess they're considered pretty high calibre. But the insurance industry is sort of writing them off as not being interested. I find that worrying, as I can't think of a more fascinating industry to be in. And I take issue about our ability to recruit high calibre graduates. We can and do, albeit in the anorak areas.

    The industry as a whole lacks the people at the top, who can maybe bring those people through and train them because, from a large insurance company perspective, we do operate within these technical silos. You have people, not only who grow up within an insurance company or within the industry, but they also tend to grow up within a technical silo. There are very few people who can actually see the whole picture.

    Andy Cook: Having acquired the quality staff, what can a company do to be more profitable?

    Smith: Everybody in the supply chain must make a financial return in order to be in that market on a sustainable basis in the long term. We all understand the power of distribution and the fact that we need the inner knowledge of the customer. But, fundamentally, if you are a manufacturer and have suppliers of raw materials that make up a product, they too need to make a profit, and that's where there's a difficulty.

    Lathrope: Even now some insurance companies are talking about combined ratio targets of 102%. After all, we're in business to make money.

    O'Sullivan: I'll just dwell on that point - 102% means you're losing money.

    Fowler: I don't know many industries that contrive to not make money.

    Loucaides: I don't know whether we as an industry have ever appreciated that we are accountable to a shareholder base. If you look at most of the composites over any period of time, they've lost money for their shareholders, and that, I'm afraid, is the worst crime. We have brought it on ourselves.

    We need to change the way we view our shareholders and our accountability to our shareholders. We need to become more transparent, we need to become more ruthless in the way we reserve, we need to become more ruthless in the way we underwrite and price our risk. We have to get our customers, through the distribution channel, to understand that there is a price to be paid for that. And we have to make sure that we ask the right price.

    Now that's not a distribution problem or a customer problem, it's our problem for not making that clear to our customer base in the first place.

    Black: One of the fundamental problems of the insurance industry is that it confuses the price it can charge its customers with the price of manufacturing, which is a cost-led approach, rather than a customer research, pricing-led approach. In other words, insurers spend all their time on understanding risk and so the selling price is a function of that, rather than looking at, maybe, what the market can bear. Some customers will have super profits and some customers will have much lower profits.

    Loucaides: Irrespective of the capacity and capital in our markets, we should use only enough and give the rest back, because we don't need it. Pricing is nothing to do with what the customer will pay, because the customer will have to learn to pay, to allow us to exist going forward.

    Over a longer period of time, considering the number of players with the financial strength to be able to play the game, consolidation is going to achieve that anyway - and the game is becoming more and more serious.

    Black: Take household insurance, if you look at the market price for household insurance for the industry as a whole in the UK, it is lower than the technical price. That's interesting. How does that happen? Who's not making the money? At the end of the day it's the insurance company's shareholders not making the money, and that's why chief execs have to go.

    Lathrope: The behaviours day to day, are so separated, whether by time or function, that the guy handling the claim can't control the profitability. The guy handling the underwriting decision can't control it. It's some undefined combination of all those things coming together and based on all the uncertainties.

    So how do you drive accountability at the individual level? That imposes a responsibility on this industry for a much greater emphasis on measurement, trying to identify some of those accountabilities. That's bloody difficult. There is a lack of responsibility at a detailed level, perhaps at the coalface level for profitability, it's terribly hard to measure.

    O'Sullivan: If the industry doesn't wake up to the fact that it's been giving its profit away, just as you described, then we're all dead and we'll give our capital back to the shareholders. There isn't a banker in the world that sits and writes his own terms and conditions, there isn't a single one. When it comes to a large transaction, it's at least a firm of lawyers, who have professional indemnity insurance, and you can go after them. Here we sit ,and 30-year-olds are sitting there.

    Loucaides: In professional indemnity you can see that happening. Solicitors, accountants and engineers are now paying prices - or just about to pay prices - that they would have been charged ten or 12 years ago. It's ludicrous to have to come to that, but that's where we are. Why do we under-value our products? We need to change the customer's understanding of what we are providing for them and we have a very good opportunity in the next few years to drive that message home. And that we need to drive it home, so that it doesn't change.

    Owen: To follow your argument, the one thing the insurers have educated customers to think on personal lines is that cheaper is better. The marketing campaign has been entirely around the fact that cheaper is better.

    O'Sullivan: London isn't that bad. I'm sure a lot of people have opinions on this. I have not been in the industry long enough to quote on it. We are not leaders in terms of being world class, but I think we're not bad.

    Bevan: Regarding your own costs, if you get expenses down to 10 points, and then make a 10% improvement in efficiency, you've made one point difference in the retail cost of your product. There is a law of diminishing returns on killing your own expense base. We've tested the model of net pricing on commercial business and we have discovered a threshold of about £50,000 as a point beyond which commission becomes irrelevant and fee-based remuneration for the broker becomes most relevant.

    It has reached the point where we have now said to our broker base that we really don't want to pay commission on premiums above £50,000. We think you should earn a fee from your client, based on the services that you provide to your client. Most national brokers that we've worked with on those larger cases have said, well that's actually quite fair.

    Paying 15 points of commission in cases producing £100,000 is inappropriate, that's just not value for money for the client.

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