June 2016
The role of the CFO has evolved from concerning financial management only to being an essential component of overall company strategy, delegates at The Insurance Insider‘s CFO forum heard last week.
Panellists at the City of London Club told delegates that the burden placed on CFOs had increased exponentially.
Sompo Canopius group CFO Paul Cooper said underwriting profits would probably remain severely pressurised by continually falling rates, and added that the excess capacity behind the rating declines was unlikely to leave the market in the near term.
He said the expense base remained an area where companies could improve margins, but warned that it would prove a substantial challenge to do so.
Lloyds Bank’s global head of insurance and specialist finance Bill Cooper said the increased regulatory requirements introduced in the wake of the 2008 financial crisis had proved a significant burden, as they constantly increased.
He said: “Across the whole of financial services, especially in the UK, the regulatory work, government-related and others, does not ever seem to reduce.
“It is a ratchet, not a pendulum, and I don’t think it is going down any time soon.”
The panel also raised concerns over ultra-low investment returns, as carriers have struggled to squeeze returns from previous safe havens in EU and other government bonds while yields have turned negative and equity market volatility has continued.
Matthew Lovatt, global head of business development at Axa Investment Managers Framlington Equities, said 1 percent returns had become the new 10 percent returns and that investors were terrified by the tumultuous equity markets and negative bond yields.
He noted that the economic recovery from the 2008 recession had taken much longer to arrive and was much less vigorous than those in previous economic cycles, saying we were entering a much slower economic world.
However, Lovatt said he believed investors could find returns in equity markets, and that alternative investments such as convertible bonds could provide equity-style returns with lower volatility.
The impact of the wave of market M&A in 2015 was also analysed, with the panel broadly agreeing 2016 was likely to prove less intensive as the dust settled over deals of the preceding 18 months such as the Ace-Chubb and XL-Catlin mergers.
Ark CEO Ian Beaton said M&A activity would probably be “on a pause” this year as the industry digested 2015’s deals.
However, he said there could be another burst of activity in the near future as carriers looked to defensive M&A to defend bottom lines and remove expenses.
London Market Group (LMG) CEO Ben Reid opened the event with a speech that criticised the industry’s willingness to and speed of change and emphasised the need for the group’s Target Operating Model (Tom).
Reid said the insurance industry is “playing catch-up” to other sectors that have embraced modernisation more openly.
He said the London insurance market was significantly behind other global business centres that have already implemented similar reforms.
Reid further emphasised the need for LMG initiatives such as Placing Platform Ltd, delegated authorities and the Central Services Refresh Programme. However, he also acknowledged the challenges of convincing the remaining pockets of scepticism in the market.
He said: “There is a population in the market of which we are well aware who think that this is somehow dangerous or disruptive, and of course that is a change management challenge we have to address.”
Reid also defended the Tom from critics, saying the initiative was even more necessary given the common challenges currently facing the market as a whole.
The persistent soft environment had pushed consensus towards the view that the Tom was a necessary initiative, he argued, saying previous positive market conditions had belied the need for substantial change.
“Some initiatives to modernise our market have stalled in recent years; sometimes because they haven’t had a business case that stacks up across the whole value chain, and to an extent because market conditions were better and there wasn’t a pressing need to be delivering stretching operational efficiencies.
“I think now that market conditions have changed there is a consensus that the Tom is a credible programme that looks across the whole insurance value chain” he said.
