Our panel of young professionals and Sandy Scott of the CII discuss the merits of pooling mechanisms and how the CII is taking industry education forward
Chair: Our discussion this time is whether pooling mechanisms are viable and a realistic solution to terrorism and long-term liability issues such as employers' liability (EL) and the problems of climate change.
Then Sandy Scott of the CII will answer questions on training and competence.
David Curry: First, there's no easy answer to the question, because certainly the risks that have been put forward there in terms of SPL, terrorism, are really different from each other. Take EL, you're going to get losses arising on a far more frequent basis than you would, say, terrorism.
Terrorism losses generally tend to happen quite infrequently, it's not every day you get Canary Wharf or a 9/11 where EL claims are happening all the time.
In terms of EL insurance, I don't think the pooling mechanism is the answer.
I think it is down to getting the underwriting correct. I'm finding that we're in a soft market at the moment and I'm starting to see really heavy EL policies with stacks and stacks of claims, and underwriters slashing their rates to ridiculous levels to compete. That is the problem. If all the insurers took a uniform approach that they were not going to get drawn into it then the correct rates would be getting charged. For terrorism, I'm not really sure what the alternative is to pool reinsurance at the moment; all of the insurers took a decision in 1993 to stop giving terrorism cover up front, and government reinsurance was arranged. You then had the £100,000 limit that was given and then you could budget top up, and now that's gone and basically you either take it or leave it.
Again, underwriting is a part of it, because a lot of the problems that insurers stated as happening following 9/11 were due to the fact that they hadn't underwritten the particular risk of a plane flying into a skyscraper because they didn't actually think it could ever happen. So underwriters have got to be more aware that the terrorists in the world will do anything.
Climatic change. I'm a bit stuck on that one, to be honest, because I didn't really think climatic change was an insurable risk. I think that's more of an issue for governments to take a stance.
Chair: Do you think then that the government will have to have more involvement in the industry in the future if, say, more freak weather were to hit the UK?
Curry: Well I certainly don't see that things like the greenhouse effect and certain gas emissions can be laid at the doorstep of the insurance industry. I think really it's got to go back to the source.
Ben Buckton: To echo what David said, with regards to EL, I would say it's more about pricing and underwriting. I don't think you can turn to a fund or a pool for those sorts of risks, it's up to insurers to ensure that they've got the technical expertise and the underwriters that know what they're doing and know how they're pricing the risks. I think there are things, such as asbestos and potentially further things such as toxic mould in the US, that could be an issue for us in the future. But it's down to insurers to look at that risk and to underwrite it.
I don't think any sort of EL fund would really be sustainable. Insurers and brokers should both be working together to make sure rates are sustainable and at a level that the risk is adequately priced to reflect what the insurer is holding, otherwise companies are going to struggle in years to come with the latent claims.
When it comes to terrorism, I would say that is a fund that is unsustainable, and I think government should really be lobbied by insurance brokers, or trade bodies, to look at other ways around it. If we had two more events such as 9/11 the industry would probably be crippled. Could the insurance market survive if something further happened?
And that links in with climate change as well - you've got the tsunamis that happened at the end of last year. If these events keep occurring, will the insurance market survive? I don't know, but it's something the government, trade bodies and insurers should all be discussing and coming up with a solution. Whether pooling is the solution, I'm not sure.
Sandy Scott: It quite shocked me at the time - in January this year I attended a round table of the leaders of the US property casualty industry, and Ted Kelly, chief executive of Liberty Mutual, said: "If there is a major terrorist event in downtown Manhattan, or in any mega city in the world, then the insurance industry is bust. We will not be able to pay the claims."
I was actually quite shocked by that statement at the time. Of course it was linked to the renewal of the Terrorist Risk Insurance Act in the US, which is still being debated - it runs out at the end of this year.
So what you get in a major terrorist event is a market failure, so you have to have some sort of backstop pooling arrangement, preferably bankrolled by government. And that's what we have in Pool Re in the UK, although it only covers property and business interruption claims, and it seems to have worked very well for this country. It is also something that many other countries have studied. They have other government-backed arrangements in France and Spain. When we come on to talk about EL and climatic change and the natural catastrophe of the market, however, I don't see a market failure.
However, we failed our customers as an industry because we sought to correct overnight years of undisciplined underwriting. We had a huge rating spike, and that actually isn't treating customers fairly. No risk manager wants to go back to his board every year and say the price has changed by 50%. So I think this links very much to the point about underwriting discipline, and it's very easy to preach - everybody's been preaching it since 9/11.
But has anything actually changed?
Climate change. I think we should celebrate our success there; 2004 was the worst year in history for insured natural catastrophe losses, with about $50bn paid out, largely over American hurricanes. You've all mentioned the tsunami, about $5 billion or so, quite small in comparison. That emphasises the need for the insurance industry globally to try and produce simple products for areas of the world such as that, because we have a societal and moral duty as well as just an economic and wealth creation duty.
All the research suggest that the incidence of these huge natural perils is increasing. This year we forecast enormous increase in windstorm activity in the Caribbean and Bermuda, for example. There was a UN study last year I think that said natural catastrophes, the cost of natural catastrophes would increase something like 900% over the next 25 years. But do we need a pool? I don't see the need. At the moment, as long as we continue to build our knowledge of the catastrophe market then the market can cope.
Chair: Ben mentioned industry associations becoming more involved with lobbying of the government on some of these issues. Do you think you do enough at the moment?
Scott: I think there is a need to educate the Treasury of the natural catastrophe market. It is quite a specialist market. We are talking about the wholesale markets here in London.
Allan Clare: From a limited experience of underwriting, I agree on the EL and the climatic change issues. The only comment I would make in respect of terrorism is that future events I think are inevitable. Where and when is the issue. And it's a case of identifying, which I think we have, the right effective solution, which has got to be pooling, it's got to be government-backed. But overridingly it's about having a system that provides confidence and reassurance so that we actually pick up the pieces when these things happen.
Chair: There was that case last week about the Boscastle claims, that AGI - an Arab/Jordanian insurance company - is refusing to pay. Then Prince Charles says he will back the claimants. So are we worried that these reputational risks will carry on if certain large insurers keep on turning round and saying no?
Scott: Let's remember the good things that happened in Boscastle and Carlisle. Royal & SunAlliance (R&SA) had their caravan there the next day and people could go down to Tesco's and get their claims sorted out.
But Prince Charles got involved with one claim, so perhaps what is required is better management on the ground, more empowerment of loss adjusters, to be able to make decisions about resources required there and then without having to go through some enormous chain of approval.
Buckton: If the media at large tend to focus in on the negatives, such as this Jordanian company, and surely the rest of the country will. Are the CII or anyone doing anything to try and tackle that?
Scott: I am pretty certain that the ABI is doing quite an effective job in that area, I think they are the right organisation so to do on that particular issue.
Chair: To tackle the EL crisis, the first thing that happened was that everyone had a knee-jerk reaction and said the government should get involved, and there was a lot of lobbying of the government. No-one actually looked at some of the alternative risk transfer opportunities. Do we think the insurance industry sometimes shies away from some of these issues? Do insurers go out of their way to find a scapegoat, rather than take on the responsibility themselves?
Richard Hawkes: That depends on the insurer. I do take your point that certainly there are alternatives to traditional insurance that could be investigated before resorting to the government, such as the alternative risk transfer mechanism, capital markets and protected cell captives.
Curry: I think the more people that can be innovative and think of new ways of tackling things, it's only for the good for the industry.
Chair: Do we think that the EL crisis is now over; that the industry has tackled that internally and that there is now no need for an EL fund?
Has the rating actually improved to such a degree that that's no longer a problem?
Buckton: I don't think the insurance industry should relax. A couple of years ago certain insurers were worrying that mobile phones - the electro magnetic waves - could be the next asbestosis waiting to happen. Maybe the trick is identifying what could be the next asbestosis and tackling it before it actually turns into a big monster.
Chair: Regarding toxic mould, there have been no cases in the UK of toxic mould, though we hear that this is going to be a major issue, and in the US it's hit hard, but there's no proof in this country that it actually exists.
Clare: Back to something Sandy said about treating customers fairly; everybody has a part to play in this 'treating customers fairly', and making sure that people can plan and budget correctly for their insurances.
Curry: Surely the customer has to expect that if they're getting a fantastic price year on year, that isn't sustainable and it's going to come back to haunt them in three years' time.
Buckton: It's for the brokers to educate their clients that it's not just about the price, it's about the cover that is provided and the insurer that's providing the cover; is it a stable and well-backed insurer that is likely to be there 10 years down the line when you're potentially going to have a claim?
Chair: Do you think the broker needs to have much more knowledge and skills when it comes to some of the big liability issues? Do brokers know what they're doing?
Scott: My general perception is that brokers are more technically competent than insurers. A lot of the research, a lot of the deep understanding of new products comes out of broking houses these days. I'm not knocking insurers, but I get the feeling that the brokers invested more, particularly throughout the 1980s and 1990s, when we had a booming stock market and really underwriting didn't count for much, because it was about the return on your investments that made your profits.
Chair: Just one last question about terrorism. After 9/11, of course, there were lots of contracts that were disputed, the famous one of Silverstein of course, but it also caused the hard market. Now, some would say such a terrible, tragic event actually helped this industry make some money.
Do we think that another major event in fact wouldn't actually cripple the industry at all, but actually help it?
Curry: I think when 9/11 happened, I remember that was close on the heels of Independent collapsing, so I think we were heading actually for a hard market anyway, that really just pushed it way over the edge, and also what didn't help was the fact that insurers said they hadn't rated for that event. So I wouldn't say a massive event would cripple the industry.
Scott: I would disagree with that. What happened in 9/11 was that insurers and reinsurers got hit on both sides of their balance sheet simultaneously, and that's exactly what would happen if you had a major event again, and there is less capital still, about 25% less capital in the global market than there was on 9/11. Perhaps they are less exposed in their reserves to equities and are far more invested in fixed interest and property, but I wouldn't feel confident that it would be a less significant bump than happened back in 2001.
Chair: Sandy, do you want to just talk a bit about the CII and about the conference itself?
Scott: Well just quickly about the CII. We have 92,000 members at the moment. We do do things in 150 countries in the world and I see our role as being two things. First of all, underpinning the reputation of UK insurance plc; although we are a global body, I do seek to do that wherever we go.
Secondly, our vision statement is protecting the public by guiding the profession, so that the public can recognise professionals in the insurance, broking, or financial advice sectors of the industry. That then knocks on to a huge amount of other things, because I think that is key to changing the reputation of the industry. So in enhancing the way the industry is seen by the public means that they will insure more, invest more, save more, buy pensions, all the things that they currently do very reluctantly.
Lobbying in support of the people who work in the industry in this country I see as an important role for the CII. This year we're just about to do our strategic plan for the next three years, so when I talk about this year, I'm really talking about when it starts in September.
Education, what are we teaching people on aggregations and accumulations in an underwriting portfolio? Because that's what we've been speaking about. What are we teaching about climate change and natural catastrophes?
What are we teaching about risk management? And so on. So I try now very much to have the CII driven by the market and the industry and not by what some folk who once did an exam 30 years ago think you should know.
That's why we have all these various faculties now, the broking faculty, the claims faculty, the London market faculty and next underwriting and risk on the general side. And they are all stuffed with what I think are some of the best people in those areas. And everything we develop now, it wouldn't have been what you guys took, it's developed through a focus group of people who work for companies, just as you would develop a product if you were thinking of doing some MPD, you'd get your customers to do it. And then around that we put some standards, obviously.
I've also focussed more on the ethics, and shortly we'll issue a guidance note on TCF and a guidance note on conflicts of interest. A professional body has to issue guidance when things are unclear, and a lot of people are unclear about these issues.
Finishing on an important point, this is a people business, it relies on people who know what they're doing, but in this country less than one in 10 people in financial services, and I'm including all those that have to be qualified, have any qualification at all relevant to the job that they are doing. That is not a long-term sustainable position for this country.
Chair: Do you think the people you work around are much more competent than they were?
Hawkes: Something we've instilled in the last two years is an emphasis on values. Professionalism is one of the core values throughout the company, and that means providing the necessary training to do our jobs, having the full backing and support of our management.
Curry: I'd have to say that in my opinion a lot of the onus on qualifications of competent staff has to come from the employer. The thing that bothers me is when I see companies who are progressing people through an organisation over other people that may be qualified.
For me, taking professional examinations shows a commitment to the industry.
So it bothers me when I see people who just get put into certain roles, maybe as directors, and in this day and age that really should not be happening.
Buckton: From Allianz Cornhill's perspective, one of our key aims is to have the most technically competent underwriters in the industry. They do that by actively encouraging people to take their CII exams, helping them with studying, funding them through it, but we take that hand in hand as well with our own in-house training.
I think the qualification is a verification of competence and skills that those people have learned over their years dedicating themselves to the industry.
Clare: When I joined the industry not too long ago the particular specialism that I had was okay, but to actually progress in this industry you have to know about insurance, and the CII was my gateway to insurance. I'm a claims person, but to get on in claims, to get on in insurance generally, you need to know everything about insurance, and that was the only way for me to do that.
Hawkes: But as valid are the competences, qualifications take you so far, but having those business skills, being competent at what you do.
The regulation now is insisting that we are, and for our organisation competencies have been a fundamental part of personal development appraisal for some time.
Buckton: As you said, the all-roundness as well. I'm in a sales oriented role, rather than underwriting, but by doing ACII you get knowledge of claims, underwriting, all sorts of different areas, not just sales or claims.
Scott: I have never argued for compulsion. And anyway you wouldn't make ACII compulsory because it's not something that everybody's going to do.
If you work in a call centre doing motor business, you don't need the ACII. There are more appropriate qualifications. I think you do need the certificate, because everybody should know something about regulation, something about the market that they're in and the product they're selling.
So there's different means of evidence and competence for different people at different levels.
I would find it impossible to argue that to be a director or whatever you must have ACII, and the reason is that it doesn't matter what profession you look at, you can have umpteen qualifications, that does not at the end of the day mean you're going to succeed and get to the top.
Chair: On consolidation, how do you see the CII fitting in?
Scott: Well we are pursuing a strategy of consolidation in our own area, we have a joint venture with Cila and we merged the LIA last year, and it's actually about setting global standards. Because what people need today are globally portable standards, those set of letters have to be globally portable if you go and work in Germany or Egypt or wherever you are operating.
Chair: The CII membership is growing. Are you hoping that in the end there will be a larger global membership of the CII?
Scott: Oh yes. I mean the consolidation we are pursuing won't just be in the UK, and the next merger we do is highly unlikely to be in the UK.
Chair: Sandy, what are you hoping from the CII conference?
Scott: Well the conference this year, as you might expect, has a lot of good speakers from across the market. We've talked about the issues this morning, reputation, underwriting discipline, insurance cycle, the catastrophe market, terrorism might be in there because of the events in July this year, but what we try to do there is give people access to the big leaders of the industry giving their big picture. So you get a good overview of their view of where things are going. And in the break-out sessions on claims, on broking. And so it's a mixture of big strategic speeches and much more focused learning opportunities. And of course because of the Expo and all the rest of it, you get an opportunity to directly ask some of the big names what they think about anything.
Chair: I was going to ask you, Sandy, about whether or not you're still interested in creating a GCSE or A level in insurance. It was mentioned some time ago in CII literature about introducing insurance examinations/qualifications in schools and colleges. Has progress been made in that area?
Scott: There is a national strategy for consumer financial capability, it's actually one of the FSA's objectives, and I'm involved with that.
I think it's a very long burn, we're talking about a couple of generations, and I wanted to see where that got to before I decided what we would or would not do in schools. Financial education is now included compulsorily as part of the curriculum in what's called Citizenship. We provide funding to, PFEG, the Personal Finance Education Group, so it teaches teachers to teach, if you like.
Chair: We talked about this a while ago when we talked about succession planning and how we, as an industry, can attract the right people, the right calibre people, into what is financial services, be it at school or at university. How do you direct them into working in financial services, rather than in law or medicine or some other profession?
Scott: Well myself, Chris Hanks from Allianz Cornhill, Brendan MacManus from R&SA and Mark Cliff from AXA are doing a session at the conference on that very subject, so I won't expand on that. It requires a cross-industry approach to tackling it. Just having Allianz Cornhill running its graduate recruitment or school leaver recruitment, or NFU or R&SA doing something isn't tackling the fundamental issues. So we've tried to come up with a plan there, let's see if it gets bought into, because I think that's one of our roles at CII.
Buckton: Can I just ask a quick question? The CII over the last few years has done a lot of work around making the qualifications more accessible to all levels of people by tailoring exams and qualifications to people's learning styles. When people have got these qualifications, do you see it as a challenge in terms of continued learning, other than the CPD?
Scott: CPD isn't just about technical insurance, it's all the other things you might do developing your sales skills, your team management, your leadership, your account management, your finance and so on, all the things that you will also need to progress on. Apart from that, for those who want to, we've just launched an MSc, where you get let off again, because you've done the ACII, about half the core subjects - for people who want to continue their sort of academic education in a technical role.
1. Sandy Scott Director general, CII
2. Allan Clare NFU Mutual
3. Ben Buckton Allianz Cornhill
4. David Curry Miller Insurance
5. Richard Hawkes Groupama Insurances
6. Chair - Elliot Lane editor, Insurance Times