The head of a leading insurance broker rendered a harsh verdict on the insurance industry, calling it a business that spends more than it makes, drives underwriters and brokers to merge out of desperation rather than economic sense, and fails to make effective use of technology.
“I don’t think this industry has figured out how to make money,” said Joseph Plumeri, chairman and chief executive officer of Willis Group Holdings Ltd., in a speech to a conference at Lloyd’s titled “Will the Insurance Industry Ever Grow Up?”
Plumeri came late to insurance after a career in other areas of financial services. He was so untutored in the ways of the industry, he said, that he didn’t even know what a combined ratio was.
“It surely didn’t mean that you spend more than you make,” he said. “And then I found out that’s what they did mean.” The idea, Plumeri said, was to get the money back through investment. But, he added, the investment markets all too often have fallen short.
Plumeri said that it is in the interests of underwriters, brokers and clients for the industry to charge consistent, fair prices and avoid market gyrations.
He also said that people in insurance should be proud of the work they do. “Insurance is the DNA of capitalism,” he said. “Capitalism can’t exist unless insurance exists.”
Even so, noting that six of the top 10 brokers of 1990 were out of business in 2000, Plumeri suggested that consolidation has been pursued as a survival strategy. “That’s not good,” he said.
Plumeri also cautioned that corporate governance would intensify as an issue for the insurance industry. He cited the increasingly high-profile roles of the Securities and Exchange Commission in the United States and the Financial Services Authority in the United Kingdom. He also pointed to the effects of the Sarbanes-Oxley Act in the United States.
“The days of nobody looking are gone,” Plumeri said.
But Plumeri welcomes this closer scrutiny. “Companies that are well run,” he said, “companies that have figured out how to spend less then they make will thrive in this kind of world.”
Plumeri said the “people-oriented” insurance business has been slow to adopt information technology. Instead of embracing IT as a means of recording and defining transactions, Plumeri said, the attitude has tended to be: “You shake hands and then you figure out later what you shook hands about.”
Plumeri said the insurance industry should learn from the decision of the New York Stock Exchange to introduce automated trading. Rather than wiping out jobs, as had been predicted, Plumeri said, the change created work by bringing about an explosion of trading activity.
“Technology has got to drive our industry,” he said.
Meanwhile, Lloyd’s Chief Executive Nick Prettejohn told the conference that the insurance industry needs to charge higher, more realistic premiums. “The industry still has not made a profit on its core activity–underwriting–for the last 25 years,” Prettejohn said.
Prettejohn emphasized Lloyd’s determination to encourage the insurers that operate within its market to pursue underwriting profits. He said that some insurers don’t have their performance priorities right.
“What does stagger me,” Prettejohn said in answer to a question, “is that there are people out there in the industry who are remunerated on the basis of their premium income or their market share rather than their profitability.”