Insurance Industry Can’t Paper Over Its Faults, Lloyd’s Chairman Advises

There are a number of things about the insurance industry that drive Lord Levene crazy but nothing more than all the paper.

“The paperwork is nuts,” the Lloyd’s of London chairman exclaims.

He tells the story of a broker inputting information into his computer, so that he can then print it out, write notes on the page, and then hand it to someone else who re-inputs the information. And on and on…

His own corporate background includes defense systems procurement and banking, but Levene says he has never seen anything like the paperwork in the insurance industry.

But paper is neither the only nor most important subject on Levene’s mind. The Lloyd’s emissary spoke about terrorism, transparency, catastrophes and the “antiquated” practices of the industry in remarks before Boston area insurance professionals at the British Consulate General in Cambridge, Mass., and in a sit-down with Insurance Journal.

While he’s never seen anything like the paperwork in the industry, the industry has never seen anything like 2004, Levene reminded his audience as he recounted the year of catastrophes, investigations and blows to the industry’s image.

Silverstein contract
The Silverstein trial over the insurance contract for the World Trade Center was among the more dramatic events of 2004. The case centered on whether the terrorist attack should have been considered one event or two events for insurance purposes.

Even with all the paperwork the industry produces, the most important piece of paper–the actual insurance contract–is too often very late in surfacing or, in the case of the World Trade center arrangements, nowhere to be found, according to Levene.

As he followed the Silverstein trials, Levene said he realized that the litigation was complicated by one fact: there was no contract. As he put it, “the participants in the many placements that made up the $3.5 billion in limits had not reached a common, final policy wording before 9/11.”

This, he said was “extraordinary … absolutely ridiculous … and would not be tolerated anywhere else,” except in the insurance industry.

Imagine, he suggested, buying a house or a business and having the closing agent explain that the contract would be worked out later and everyone agreeing that was just fine.

“In what other industry would sophisticated parties find this acceptable?” he asked.

New York courts eventually ruled that the 9/11 attack met the definition of one occurrence under the prevailing WilProp form for the 10 insurers who claimed they bound coverage on this form.

But in the second of the Silverstein trials, which involved nine insurers not bound by the WilProp form, the jury concluded that two distinct occurrences had taken place according to the language of the policy that they said they had bound.

Levene said the case made him wonder about the harm such litigation does to the image of the insurance sector, an image already in trouble. “Why, I wondered, is it that participants so often fail to agree on final policy wordings for commercial insurance contracts prior to inception or even, as here, prior to loss?”

Contract delivery
Or why does the industry take so long to deliver its contracts? Levene cited a survey that found that only 23 percent of risk managers received their final policies in a timely fashion, which he said was an “appalling” statistic indicative of poor customer service and even laziness.

“It seems almost comical to conclude that this was a big improvement on the year before, when only 8 percent of risk managers responded positively,” he added.

“The truth is that final policies for many commercial risks are simply not produced on time. Mistakes are too frequent. And, as last year’s court cases (Silverstein) showed, the stakes can be huge.”

In his talk with Insurance Journal, Levene candidly admitted that if the insurance industry is behind in the race to get rid of paper, Lloyd’s might be among the worst offenders. At Lloyd’s, employees lugging stacks of paperwork several feet high, or pushing trucks overflowing with documents, from floor to floor are not uncommon encounters.

But he has also come to learn that it’s not easy to change habits in the industry. He cited one triumph. Lloyd’s has finally standardized its slip forms, those pieces of paper that collect basic information on a risk and the contract.

“It’s only taken 300 years,” he quipped. “It’s absurd. This industry has got to get its act together. It’s not that difficult.”

Lloyd’s is also implementing a new technology system, called Kinnect, which should further reduce paperwork and errors by allowing the computers of Lloyd’s and all its intermediaries to communicate with one another.

“There is more to be done but we must get there,” he said. “2004 confirmed that the standards which the commercial insurance industry has inherited are no longer acceptable, and that everyone has an interest in seeing that change comes fast.”

Clarify and communicate relationships
The standards of the industry have also been under attack for their lack of transparency, Levene continued, citing the investigations of New York Attorney General Eliot Spitzer who, he added, “seems determined to drive a fundamental overhaul of how commercial insurance and reinsurance markets work.”

Levene suggested that the Spitzer investigation has highlighted the industry’s lack of openness about how it operates. “It demonstrates that the antiquated practices of the insurance sector lag behind what an open, transparent 21st century business environment expects. It shows once again that serious overhaul is needed.”

In response, he said the industry must clarify its relationships with others and he applauded those large brokers that have already taken action to abandon contingent commissions.

“But there is a wider imperative for the insurance industry as a whole: we need to take careful stock of our inter-relationships and working. So far, the investigation has highlighted a considerable deal of ambiguity about these relationships. But today’s businesses want to understand exactly what they are getting when they buy insurance, and why. So we need to be clear and unambiguous on who is going what exactly, for whom, and at precisely what cost.”

That clarification by itself is not sufficient. “Then we need to communicate these workings better to those outside our industry. The business community at large does not differentiate between one segment of the industry and another. The reputation of the entire market is tarnished and collectively we need to rebuild trust with buyers, politicians and leaders.”

He suggested that if the industry does not make progress in 2005 to improve its transparency, not only will its image with the public continue to deteriorate but also it may find itself losing clout in important debates such as terrorism insurance and tort reform legislation.

Lessons from catastrophes
The past year has had more than its share of natural catastrophes with the series of hurricanes in the U.S., Japan’s worst typhoon season in its history, and, most recently, the deadly tsunami that devastated parts of Asia.

(Levene happened to be vacationing on a beach in Malaysia with his family when the deadly Asian tsunami struck several weeks ago. While he and his family were lucky enough to get out alive, hundreds of thousands died. He said that while the catastrophe may not involve a lot in insured losses, “this does not mean we don’t care.”)

The losses from natural catastrophes are rising, Levene noted, naming as driving forces the rising population densities, growing concentrations of people and businesses in catastrophe-prone areas, and failure of the world to do enough to prepare for disasters and mitigate their effects.

“The world needs to prepare for the most unthinkable disasters,” he advised. “Risk management should be addressed by everyone. Events in recent years–from the string of storms to the huge corporate scandals–show that even where the risk itself is slight, the consequences may well be great enough to warrant better preventative measures. And whatever the risk, we need to improve our early warning systems.”

The major catastrophes of 2004 are bound to revive the debate over global warming, a debate Levene said the insurance industry should be more involved in. For him, global warming is not a political issue. “We all have to wake up. It’s for real,” he stated. “We see it everyday.”

Finally, he added, the catastrophes of 2004 should also remind the industry of the importance of pricing risk correctly. “Critically, we can only cover claims if there are sufficient funds to do so and that means that every insurer, every underwriter, must ground their underwriting decisions on economic reality.”