The last year has seen a series of dramatic political and economic upheavals. Add to these the powerful forces of the InsurTech revolution and the agenda for insurers looks very challenging.
On the one hand, the global economy remains highly interdependent, with many businesses recognising that an international outlook remains essential to further growth and diversification. In contrast to this, we have witnessed an apparent political backlash in various parts of the world against free flows of capital, trade and people.
If the first real signs of this tension became evident with the shock decision of the majority of UK voters in last year’s referendum to leave the European Union, they assumed tectonic proportions with the election last November of Donald Trump as the 45th President of the United States. In that one moment, American voters elevated to the world’s most powerful office of state an individual who openly questioned many of the foundations of the international economic, political and security consensus that has existed since the end of the Second World War.
Effects on business
It is hard to overstate the potential consequences to business of the emergence of a greater political will to prioritise national interests over global ones. And while there is not yet absolute certainty as to whether that political momentum is sustainable in many parts of the world, its effects are already being felt to some degree. Consider some examples:
- Protectionism. The introduction by one government of tariffs or other measures aimed at protecting domestic industries can, over time, escalate into full-blown trade wars. Governments of countries adversely affected by such measures may face domestic political pressure to respond, rather than simply pledging fealty to principles of globalisation. For example, in response to threats by President Trump to impose duties on Canadian softwood lumber and dairy products, Prime Minister Justin Trudeau said he would consider calls for a ban on shipments of US thermal coal through Canadian ports.
- Foreign investment review. Suspicion of the motives behind inbound capital flows can result in the introduction or enhancement of foreign investment review laws. Recently, governments in France, Germany, the UK and elsewhere have all expressed intentions or desires to introduce formal review mechanisms for outside investment in certain strategic sectors. There remains widespread speculation that the Trump administration will expand the scope of the Committee on Foreign Investment in the United States, which has the capacity to block foreign investments deemed to threaten national security.
- Economic tools of foreign policy. Governments are demonstrating much greater propensity to see cross-border trade and investment as a way of leveraging broader foreign policy objectives. Sanctions remain the principal tool by which Western countries are pressuring Russia to change its policies towards Ukraine, for example. Many US government officials remain convinced that stringent sanctions were integral to bringing Iran to the negotiating table over its nuclear programme. Furthermore, compliance measures such as the Bribery Act and Modern Slavery Act offer new, more effective ways to deal with long-standing concerns about human rights and quality of governance. So long as governments remain willing to sacrifice some degree of economic benefit in favour of these broader principles, such measures will remain key tools in their policy arsenals.
- Living in a multipolar world. On the campaign trail, Donald Trump routinely questioned the value of America’s continued role as the world’s principal security guarantor through vehicles such as NATO and the ‘hub and spoke’ alliance system in Asia. A host of other countries have demonstrated a much greater willingness to be more assertive of their own interests in the international security environment and are developing the military capabilities to back this up. History tells us that multipolar worlds are inherently unstable and this, in turn, can have consequences for the global economy. It is no longer sufficient to assume that many of the international political and security norms which have prevailed for the past three quarters of a century will be sustained in their present form in the future.
Not all doom and gloom
It must be stressed, however, that while the world may currently appear to be at a potential transition point, we cannot say with absolute certainty that we are all turning inward. For example, while populist and nationalist rhetoric may appear to have captured the political narrative in certain parts of the world, it has been decisively rejected elsewhere with the election of overtly pro-globalist political parties and leaders in places such as the Netherlands and France. In fact, the example of populism in action may be galvanising a drive towards the political mainstream elsewhere.
Equally, a number of governments have learned that embracing such policies can have adverse long-term consequences in a global environment in which capital will gravitate to markets whose governments are willing to offer investors protection
and certainty. This has become a particularly strong refrain in recent times in a number of Latin American countries, where flirtations with overtly populist anti-investment policies have led to capital flight, economic weakness and subsequent rejection of some of the leaders who advocate such views.
Navigating stormy waters
As last year’s Insurance Market Conditions & Trends made clear, 2016 was not a unique year in terms of global economic and political upheaval. In the preceding decade, businesses have contended with a global financial crisis, the Arab Spring and the significant deterioration in relations between the West and Russia, among other events. The challenge for these companies and those who support them in their international strategies is to gain a better understanding of the circumstances which can beget events that are difficult to foresee, but are highly disruptive in effect.
Nor are these issues independent of each other. The legal services and insurance industries are only starting to get to grips with the effects of artificial intelligence and the InsurTech revolution. For manufacturers, however, the disruptive power of technology has presented both opportunities and challenges for some time and associated developments such as offshoring and automation are, arguably, contributing factors to the populist anger that has emerged in places such as the ‘Rust Belt’ of the United States. Equally, restrictions on inbound investment may be inherently tied up with broader politico-military issues, but they can provide a very convenient means of protecting a domestic economy from competition without labelling it as such.
The former US Speaker of the House of Representatives, Tip O’Neill, famously used to say that “all politics is local”. That statement is only gaining greater resonance in the current fractured and potentially inward looking geopolitical environment. Micro-level local, regional and national factors can be just as important determinants of the growth of global business as are the multinational issues with which we are often most familiar. Enhancing that awareness of local knowledge is, therefore, integral to gaining a greater understanding of these challenges and their potential future direction.
We may use blanket phrases such as ‘populism’ and ‘nationalism’ to sum up global challenges, but the shape and form of these phenomena are not universal. Only through a detailed, critical and holistic analysis of the dynamics driving these events will businesses gain a true picture of the risks and challenges presented by this current era of geopolitical disquietude.
Dame Inga Beale, Chief Executive of Lloyd’s of London, says the market must work together if it is to retain its prime position in the global insurance industry.
To maintain and strengthen our position as a leading global financial centre, and as the world’s hub for specialist commercial insurance, we need the freedom to trade with the world openly. This openness is what has made Lloyd’s and the City of London as a whole so strong.
With the Prime Minister setting out the Government’s direction of travel for the UK leaving the EU, remaining in the single market seems an unlikely outcome. UK insurance companies have been planning for the future against this backdrop of uncertainty. And while EU business is important, one of the main challenges confronting Lloyd’s and the London insurance market is access to global markets.
Securing future growth
Our future growth will be in emerging markets like Asia and Latin America which are driving global economic growth and are often the most underinsured. There is an enormous opportunity here to close the global protection gap – particularly as countries like India and China open up. But, even before the Trump presidency, we have seen a rise in protectionism, with a heightened number of restrictive trade measures implemented last year.
New research from the London Market Group shows that while the London insurance market has enjoyed growth from mature markets like the US, its share of insurance growth has declined in emerging markets. This decline is a real cause for concern, particularly when you consider that London’s insurance market employs 52,000 people and accounts for just over a quarter of the City’s overall contribution to UK GDP.
If we’re going to turn this situation around we need better access to these fast-growing markets.
We also need access to the world’s best talent, including those in the EU. Brexit and new immigration policies could make this much more difficult, particularly when it comes to grabbing the best talent or keeping hold of EU staff that we already employ.
We need the Government to prioritise access to talent and wide-ranging trade deals with the world’s fast-growing economies – that way we can protect and strengthen London’s reputation as a global financial centre now, and for the future.