Australia: A conversation with Adrian Humphreys, Lloyd's Australia

Adrian Humphreys moved to Australia in 2010 to become the managing director of Lloyd's Australia. Under his leadership, Lloyd's Australia grew past the $2 billion premium barrier in 2012 and became Lloyd's third largest country.

Q1: You have been the Managing Director of Lloyd's Australia since 2010 – what do you consider to be your most significant achievement during this time?

Australia has always been a significant market for Lloyd's and I was very lucky to take on such a solid platform from my predecessor, Keith Stern. Keith had really worked hard to get Lloyd's Australia to a place where it was robust and operated efficiently and effectively within Lloyd's compliance parameters. Professionally, I think both Lloyd's Australia breaking the $2 billion premium barrier in 2012 and becoming Lloyd's third largest country globally, after the US and UK, would be the most significant achievement. Lloyd's wasn't considered part of the local market, even though we've underwritten risk in Australia since 1860, and we've had to work hard over the past few years to change this view.

For me personally, it was being voted on to the board on the Insurance Council of Australia, as it reflects how Lloyd's is viewed as a key player in the Australian market. This has also been a fantastic opportunity for me to learn from the key influencers. I've also been working more closely with the Underwriting Agencies Council, which is a fantastic organisation. It's really important for us to develop relationships and work with associations and regulators and take an active role in the insurance industry.

Q2: What are the key issues for the insurance industry in Australia at the moment?

The affordability agenda for bushfire and flood prone areas. In the case of Far North Queensland, rates were too low for a number of years to adequately account for the exposure. After the floods we saw a market correction. As more data is collected, insurers will be able to identify the areas, even down to individual addresses, that are at greater risk. This data will help the industry work with governments to identify where mitigation programs will be of the greatest benefit. It will also help with town planning and safer and more resilient building design. Insurance should be very much the last fail safe at the end of the risk management process.

In the commercial space, managing the insurance cycle (in terms of the current low rate environment) is the immediate challenge – as this is key to sustainable growth and profitability. Obviously, when rates are increasing you want to write more of the right type of business and when they're declining, you want to adjust your portfolio accordingly. One of my key objectives is to ensure that we have the correct management information and relationships in place for the Lloyd's market to make the right decisions.

Finally, talent. Insurance is risk adverse enough, so the insurance industry needs new vibrant minds from diverse backgrounds to push boundaries. Our wants, needs and the way people do business changes – the challenge is to find the right talent to keep up. We run a number of award-winning graduate programmes that have been very successful in competing with the banks for the top graduates. One of our Lloyd's Vision 2025 key goals is to be a diverse market by gender, age and ethnicity to match our client base. Lloyd's already has a good story to tell, globally 50% of our employees are female and Inga Beale, our first female global CEO in 325 years, started on 27 January this year.

Q3: What global trends do you see affecting the local market?

There are three trends that I see affecting the local market.

First, lower investment returns are an issue. To put this in perspective, when compared to 1985 our underwriters need to achieve a combined ratio 20% lower to realise the same ROI. Combine this with a soft market, and you have a significant challenge. One advantage we have over most of our competitors is that our underwriters tend to use local underwriting agencies to write SME business and manage their portfolios centrally. This enables underwriters to flex the deployment of capital all over the world to take advantage of the best rates without the infrastructure costs. The downside is that acquisition costs are higher.

The second trend is new capital. There's been much talk about new capital being the major cause of the soft market, although there are many factors which have contributed and you can't just point the finger at one. However, I am wary of any capital that is detached from the risk it's supporting, we have seen this before in other industries as well as our own and the outcome is not always good.

Finally, the above factors which are contributing to the soft market are placing both insurers and brokers under pressure. In order to maintain profitability, there are two trends increasing in prevalence. The first is for insurers to reduce acquisition costs by going direct to the insured. The second is for intermediaries to manage their own facilities. This protects their business and provides greater scale and buying power when negotiating rates and coverage. However, we've written business via intermediaries for 325 years and we don't have any plans to change this, again this is why we focus on risk selection

Q4: Has the local reinsurance market recovered from Australia's spate of recent catastrophic environmental events?

The popular view that insurance happens locally in isolation is a misconception. Reinsurance tends to drive rates and is global by nature. Reinsurers have a global portfolio to balance their books and to spread risk, by class and by geography.

After I arrived here in 2010, Australia experienced catastrophic environmental events, there were also other events that impacted reinsurers around the same time, such as the New Zealand earthquakes, the earthquake and tsunami in Japan, and flooding in Thailand. I think it's a testament to the strength of the global reinsurance market that it absorbed these claims,. There was never any question about failure in one of those reinsurance markets.

Focusing back on Australia, in 2010 outward reinsurance program accounted for US$8 billion, and US$16 billion flowed back in to pay claims. For most insurers, including us, at current rates it will take a number of benign years to recoup for these events. However, paying claims is what we're in the business of doing and we are more financially secure than ever before, our A+ rating is evidence of that.

Q5: The Australian insurance market is one of the most highly regulated in the world. How does Lloyd's find it operating here compared to other countries?

Regulation is a good thing. It gives stability to markets and provides insureds with confidence their insurer is going to be around to pay claims. I believe APRA are at the forefront of global regulation. The Australian industry is well regulated and well capitalised.

Regulation also means that if insured's, whether directly or through their broker, have a problem, have been treated unfairly and want a right to reply, or want to question why something has happened, then they have the ability to question. Lloyd's is a member of the Insurance Code of Practice, which sets out the parameters on what insureds can expect from their insurer.

Of course regulation impacts costs and prices, so we need to ensure it's proportional. The Financial Services Inquiry is an opportunity for the industry to work with government and the regulator to ensure the correct balance is maintained.

Q6: Looking over the horizon – what do you see as the biggest challenges and opportunities for the industry in Australia?

The biggest growth markets are the emerging economies, particularly China, Indonesia, India and the African region. It's going to be interesting to see how the Australian insurance industry takes advantage of our comparative geographical proximity and uses our financial strength. The challenge will be to grow abroad, while protecting local profitable retail business from new entrants. These new players are typically nimbler and more flexible that the large traditional players. For me, the most interesting opportunity is the increasing globalisation of industry whilst understanding and appreciating local risk and business culture.

Q7: What are Lloyd's Australia's key priorities for the next year?

For the last few years, I've concentrated on raising our profile in the local market via our Australian Underwriting Agencies. This year, while maintaining this, I'm going to be spending more time with our customers, brokers. It's easy to get distracted by the day-to-day requirements of running an office; however, you need to hear feedback first-hand, so I expect to be on the road much more in 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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