Resilience running thin
Working together: Lloyd’s Chairman Bruce Carnegie-Brown believes governments and insurers need to collaborate
As decades go, the 2020s haven’t had the greatest start. Massive bushfires and floods in Australia and elsewhere, followed by covid, war in Ukraine and now cost-of-living and energy crises.
But this string of catastrophic events doesn’t deter Lloyd’s Chairman Bruce Carnegie-Brown from seeing positives for insurance and insurers.
Visiting Australia last year for the first time in his role with the London-based insurance marketplace, Mr Carnegie-Brown says the world’s resilience “is running a bit thin”.
“That’s partly because of these multiple exogenous events bearing down on us,” he told Insurance News. “But it’s also because in the free world – if that’s the right description – we’ve been rewarding for a long time now an economic model that is really quite stretched.
“We’ve been rewarding top-line growth, we’ve been rewarding long supply chains, we’ve been rewarding just in time inventory, we’ve been rewarding quite high indebtedness on balance sheets to improve capital returns.”
That all works fine when there’s downward pressure on costs and good availability of labour and capital, and when the world is a reasonably benign place.
But Mr Carnegie-Brown believes that in the current environment we’re discovering “we all need a bit more resilience” when it comes to business management.
“As a result, I actually think it’s quite a good time for insurance in a paradoxical sort of way, because insurance is all about resilience.”
While huge claims have been paid out as a result of natural disasters, covid and the Ukraine conflict, insurers are in the conversation like never before as governments and the private sector grapple with the new risk landscape.
But even though insurance is hugely relevant as global communities plot a better way forward, it cannot solve many of the world’s issues on its own.
Mr Carnegie-Brown sees three areas where insurers need to work with governments to find solutions – climate, cyber and pandemic.
“G7 countries pumped $US14 trillion into their economies in 2020 alone to try to support and protect citizens from the pandemic,” he says. “If you look at all of the resources the general insurance industry has globally to pay its claims, that amounts to about $US2 trillion.
“So there’s a gap, and we should recognise that gap. But we should say we’re available to share our expertise and to take risk and to make government risk-taking more smart by partnering.
“Across those three dimensions of climate, cyber, and pandemic, it’s really important that we do that. Because otherwise it’s problematic.
“The size of these risks, in many cases, is too large for the insurance industry alone to bear.”
As the climate changes, and the frequency and severity of natural catastrophes increases, Mr Carnegie-Brown believes some outcomes are becoming more predictable, and insurance struggles to operate under circumstances where the risk is higher and a bad outcome more likely.
“It is already problematic in northern Queensland, and in places like Florida, to do insurance on a purely commercial basis,” Mr Carnegie-Brown says.
“If you’re looking at it just economically, insurance is there to provide for unexpected loss. And frankly, if the loss is expected, then the premium is going to equal the size of the claim.
“Where that threshold is, is critical. So if there are more events going on around the world, then clearly that threshold is moving up into being a more inevitable outcome.
“That squeezes out the ability of insurance to play on a commercial basis, which is why government investment in resilience for the expected outcomes is really important.”
Cyber is the fastest-growing line of business for Lloyd’s, with the marketplace accounting for more than 20% of global premiums.
But it’s nevertheless still a “reasonably small market”, relatively speaking, and 85% of cyber cover sold by Lloyd’s is purchased by US corporations.
The rest of the world “hasn’t really woken up to the risk”, Mr Carnegie-Brown says, although events like the Optus breach in Australia are raising local awareness.
“There’s much more focus now, in cyber insurance conversations, on mitigation,” he says.
“When cyber policies were first issued they were a bit like household policies, where you were allowed to leave the front door open.
“But the sophistication of things like ransomware activities means that customers have to put in mitigation plans to provide defences against these kinds of challenges in order for the cyber insurance to operate effectively.”
The industry has great expertise that it can pass on to customers beyond simply writing a cheque, but the problem with cyber is the potential scale of the largest losses.
“We commissioned research on these things and we’ve looked at, say, an intervention in the US in their electricity grid system and what impact that would have on the economy if a cyber attack was to take it down.
“Some of the numbers are pretty staggering in terms of not just the economic costs but also the impact on people’s lives if they were denied access to electricity for a sustained period of time. Those [numbers] are helpful in initiating conversations with government.”
Lloyd’s is also talking to governments about pandemics, but Mr Carnegie-Brown says many are still focusing on the current situation rather than looking ahead to the next.
Policy wording issues, most notably in Britain and Australia, that required legal clarification were “unfortunate”, and he believes the industry has a responsibility to be clear about what is and what is not covered.
Where there are gaps, he expects governments will be needed – but governments also need to give clarity.
“What government is willing to do and what government is not becomes quite important.
“I think there’s quite a lot of moral hazard in the way things have developed for governments over the last 10 years.
“Increasingly, the citizen expects the government to step in. And governments increasingly are stepping in with colossal amounts of money – things that before would have been thought unimaginable in terms of government budgets – particularly around covid, and now around energy supply pricing.
“I don’t know whether we can get there, but I think governments need to be clearer with the citizen on where the boundaries are – what is a citizen’s responsibility for sorting out and what is a government’s, because otherwise I think governments are just going to increasingly own these risks.
“You can see why there’s a sort of voter imperative around some government action. But again, it comes back to this resilience point that governments will support you if you’ve done smart things yourself.
“But if you are just putting yourself in harm’s way and expect the government to bail you out…
“There has to be some limit on that if you’re not behaving sensibly.”