XL Group CEO, Mike McGavick, asked a provocative question in a keynote speech at the European Insurance Forum in Dublin last week. How relevant is the insurance industry in today's globalised world?
“The [percentage of] value insurance adds to the economy has doubled over the last 40 year”, he said, “from one per cent to two per cent”.
By contrast, the “technology sector has grown from two per cent of global GDP to five per cent in 20 years”. Technology now plays a major role in daily life, as does insurance, but what McGavick questions is why the insurance industry’s role has not gained a great deal more over the past several decades, and in some instances has actually declined.
He said that the growth in insurance services has been “puny” compared to the growth in the technology sector. “Cyber liability? There’s been little take-up. Intellectual property? It hasn’t been that good”- are some of the examples he gave.
McGavick also considers the fact that most publicly-traded insurance companies are currently trading at below their book value to be a problem that must be addressed. “The soft market is changing”, he said, “but not fast enough”. The industry will need more capital, if it is to grow, and to face the demands of new regulations, specifically the EU’s Solvency II requirements, which will make things even more difficult on the capital side.
There are some bright spots amid the gloom, however. “Regulators are necessary; they add sureness”, McGavick said, pointing to the AIG debacle, as an example of what should have been regulated, but wasn’t. “The P&C industry is very good at dealing with financial crises”, he continued. Instead of “bank regulators telling insurance regulators what they should do, it should be the reverse”.
Changing the way the industry does business requires innovation and thinking outside the box, looking for “ways to add value for its clients”. "XL’s capital is around $11 billion, and it employs over 4,000 people, but we are recruiting,” McGavick said. “The industry needs people, and we need to make it [the insurance industry] cool.” Now is the time to do so, as the financial [banking] sector is less attractive to graduates than it has been.
McGavick’s analysis and his suggestions are quite timely. His remarks were discussed continuously as the European Insurance Forum proceeded. If they are heeded, and more importantly acted upon, there will be some changes within the industry, and they will be for the better.
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