Worldwide, the IIS – International Insurance Society is an well known and recognized organization, but in the Central and Eastern European financial markets there still might be room for a presentation. So, what is the role of the IIS?
Michael MORRISSEY: Well, the role of the IIS is to promote growth and innovation in the insurance industry by exchanging ideas and strategies between all stakeholders. By that I mean that there are many industry organizations, some of them regional, some focused on certain lines of business, but there are only few truly global. But even the few global ones have a niche in which they stay focused. Our membership from 102 countries currently includes AXA, ALLIANZ, Munich Re, Swiss Re, Nippon Life, AIG etc. It also includes the Green Delta Insurance Company in Bangladesh or a Nigerian life insurance company – and anything in between, so there are big companies as well as small companies, developed markets and emerging markets. Also, we have about 50 national insurance regulators plus 130 insurance scholars from universities around the world, the global insurance leaders of the professional advisory firms etc. So, among our members are the heads of insurance for KPMG, Deloitte, EY and PwC; the heads of insurance globally for BlackRock, Deutsche Bank, McKinsey, Milliman, DLA Piper, Clyde & Co., just to name a few. So, in other words, we believe that the more inclusive and diverse the membership is, the more robust the exchange of ideas can be and the better the outcome. I’ll give you an amusing example. At our big annual conference, two years ago, one of the management board members of a major insurer came up to me during a break and said “You know that fellow over there?” and I said “That’s Mr. Lhendup, he runs the Royal Insurance Corporation of Bhutan” and he asked me a question about our business and I must admit I had a hard time answering it. And I said “Well, Klaus, that’s what we think it’s one of the key values of the IIS. We don’t think that the best ideas necessarily come from the biggest companies from the biggest countries. We think good ideas can come from unexpected places and if you put all the industry’s stakeholders into the same room, you end up with better ideas. So, that’s the idea of the IIS. I may also say that, secondarily, as it has evolved, promoting and emerging the insurance development form is a particular focus.
You do organize a Global Insurance Forum. Last year it was hosted by Singapore, next year it will take place here, in London. What is the purpose of this conference, knowing that there are so many events out there?
M.M.: This is different. This will be our 53rd edition, which itself tells you something about the value of this event. We have each year more than 500 industry leaders from more than 50 countries, so, again, it’s a diversity, it’s the inclusiveness of industry leaders to get an opportunity to address the most important issues of the day. We used to go to a different city every year, with occasional repeats. We decided recently that we should really have a hub city strategy and rotate for the convenience of our members and logistics, so now we do London, New York. We had to think hard about our region hub and it was either Hong Kong or Singapore and we decided on Singapore. It’s really the greatest assembly of all leaders in the industry of any gathering. We’ll also have military, national defence experts. We try to bring a different prospectors to the big decisions of our industry.
You’ve mentioned in your public appearances about an increasing number of challenges for the global insurance industry. Is it fair to say that we are living in a time of structural change?
M.M.: Well, certainly accelerating change. It’s true: we lagged the banking industry, we also lagged the asset management industry or some other industries which is why some companies are struggling and why there are also opportunities for new entities.
Which one of these will most likely disrupt the industry the most? Technology, Peer2Peer insurance…
M.M.: Well, in general you say technology is the one that has a lot of manifestations and the industry has been slow to adopt new technology for the last 50 years, whether is simply using computers to increase processing speed 30-40 years ago or other factors. For a long time it didn’t threaten their basic position. But now young buyers don’t care if the insurance company has been in business for a hundred years. I think about the commercials and the advertisements that I used to see 30 years ago: there were some references to the company being in business for 150 years, but young buyers don’t care. They don’t care if the company has a multibillion dollar balance sheet or not. They are spoiled by an entirely different level of customer experience. You know, people who buy products from Apple or people who go to Starbucks have a different expectation of what they get for the money they spend. They want something different, they want something better. And it’s hard for legacy companies to adjust. It’s hard from the change of computer systems, it’s hard from the change of their attitudes. So it’s giving an opportunity for new entities within the industry – I spent a day at Google recently and the group of insurance companies’ CEOs were invited there to talk to them and the tone of the meeting was very friendly, but the undercurrent of the meeting was “we would like to have a cooperative relationship with your industry, but if you don’t want to have that kind of relationship, we will just come into your business on our own anyway”. This feels threatening, but they are very much in the insurance industry; Amazon is in the insurance industry, other companies are getting into the insurance industry – because they see it as big and maybe easy pickings for them. There is a lot of arrogance there. But they are smart guys. There is a saying in Texas: “If you can do it, it’s not bragging!”… So, there are those external completely new sources for competition. But even within the industry, there are entities that made it by not having a big legacy system to support. For instance, for a US Property & Casualty company, the expense ratio is somewhere around 30%, roughly half administrative, roughly half compensation to sellers, whatever they may be. Can you think of another product this day and age for which 30% of what you pay for it goes to those costs? Therefore, if you start a new company you can have a leaner system and that is not doing something revolutionary at all. This is using tools that are already available, such as outsourcing. You mentioned Peer2Peer insurance: in some ways is like “old wine in new bottles”. And by that I mean that P2P insurance structurally is not much different than affinity-based mutual or cooperative insurance. It is like risk retention groups.
On the same topic: we recently had a meeting of the World Economic Forum’s insurance group in Munich. One of the presenters was Dan Schreiber, the CEO of Lemonade, the famous P2P carrier. As I heard him talk I realised that the efficiency difference and the lower cost proposition wasn’t due to the fact that is was P2P but due to it being a new company. By starting from a blank sheet of paper they could adopt behavioural analysis-driven underwriting modelling and actuarial work, block chain-processing technologies, internet sales etc. Is it more efficient? It can be. Because it is P2P? Not really.
So the bottom line is that it isn’t really that different than mutual business model. I’m not saying it won’t work, all I’m saying it is not really revolutionary. However, traditional carriers will have to adjust in the future so it is tough for legacy companies.
Understood. But moving forward to a different topic now, you are also advising the United Nations on the insurance related issues. Can you share some of your common areas of interest in this regard?
M.M.: Let me give a quick history first. In 2012, when the U.N. was preparing the launch of the Principles of Sustainable Insurance (PSI), they approached the IIS to review the principles prior to the launch. As we were communicating with them about the final text, I said, “who would be at the ceremony from the insurance industry to hear this important message?” “We’re having our annual conference in Rio, why don’t you bring the team and launch the PSI at the IIS Global Insurance Forum where we will have 600 insurance leaders from 55 countries and all the world’s insurance media in attendance, and really make a splash, really have a big impact. They decided to launch the PSI at the Forum and were very happy with the outcome. It opened their eyes to the diversity of our organization and that also opened the door to us working with other international organizations such as International Labour Organization, the Every Woman, Every Child program, which expands healthcare opportunities for women and children, and the U.N. Development Project. The IIS advisory role in the development of PSI, ultimately led to the formation of the Insurance Development Forum (IDF). Through our work with the PSI, and through our diversity, the IIS became the incubator of the IDF and is now its permanent secretariat.
The U.N. has been involved in several projects aiming at bridging the protection gap. From this angle, what can a global society do, in order to increase the penetration level?
M.M.: We have some education to do. In example, in California, earthquake insurance is rarely available, because the take-up is lower than 10%. That is not smart. It’s irresponsible for people not to buy this coverage. In the Mid-West of the United States there is plenty of flood insurance available, but people don’t buy it and then they cry after a disaster has occurred. So, we need to do more education with people in order to make them understand that bad things don’t only happen to other people, they can also happen to you. And, of course, work with the governments to make sure the insurance really is available. None of the Sub-Saharan African countries with the exception of South Africa had either the financial resources or frankly the expertise to have catastrophe insurance plans. Now, the African Risk Capacity has been formed, there are more than 20 sub-Saharan governments involved. These governments pay the premiums for a cover that’s parametrically triggered, which is a great thing. So, it’s not only the education of consumers, but also the education of governments. And there are ways to do this but it is a big mission. There is nothing wrong in saying that the insurance industry wants to help people avoid these calamities or recover from them, but that we also want to expand our market.
When we first started talking with the U.N. we kept in mind that most of those people have never worked in the private sector. So there is not only ignorance but cynicism about for-profit organization – so it took time to explain that this is a legitimate way to expand our business.
Chronologically, the first protection gap that we are targeting is that with respect to natural catastrophes. In example, when Hurricane Sandy hit New York City, almost 15% of the losses were insured. When the Chilean earthquake struck 2% of losses were insured; in the Thai floods about 10% – so there are huge gaps. However, there is an equally large protection gap on the other side of the industry: life& health, whether this is expressed as retirement saving gaps, access to health insurance etc. So down the road this will be just as important in the next 2-3 years, although currently it is not so visible in terms of what you might have read in the media.
Huge infrastructure spending needs around the world are financed by insurance companies and pension funds but in most countries insurance investment regulation is based on a kind of 1970s’ frame reference: bonds are safe, equities are risky; short term is safer, long term is risky; publicly quoted is safer, private investments are risky. If you add all those things together and understand that it is on that basis that regulators assign capital charges to make investments, it means that insurers are steered towards investing in bonds, especially in Government bonds, because those are the safest. Tell that to the Greek or Italian insurers!
How should regulators deal with this?
M.M.: We have to educate them that risk is different than it was 30 or 40 years ago.
That is quite a bold statement!
M.M.: I know. OK, you’re absolutely right. …discuss with the regulators. As long as we have this in place, the money is not going to go where it can do most good. So that is an important effort of the IDF. You can call it an education, you can call it discussion. But regulators have to be shown the evidence, in a non-confrontational way, that risk profiles have changed. Remember that they have a dual role: prudent regulation aspects are important, but the other role is providing adequate access to insurance in a certain territory. Because if you focus entirely on prudent regulation and your laws are so bulletproof that no insurance company can ever go broke there, but your people don’t have access to a range of insurance products on an affordable basis, what have you really accomplished? We need to encourage regulators to broaden access to insurance. China is only country I know that explicitly in its insurance law says that the insurance industry can be a driver of the economic growth and not a derivative. That’s a powerful statement!