Tag Archives: global business

What Happens if U.K. Exits the E.U.?

On June 23, 2016, the U.K. population will vote on whether to stay a part of the E.U.’s 28 countries or to leave. It’s a once-in-a-generation decision, and it is likely to dominate U.K. press for the next six months. But what impact would a British exit, or “Brexit.” have on the insurance industry?

A report by Euler Hermes, a consultancy backed by Allianz, indicates this exit would include:

  • Massive loss of U.K. exports, which could take 10 years to recover
  • A heavy hit to financial services
  • London’s loss of its supremacy as a financial center
  • The likelihood that trade barriers would be imposed by continental Europe

Global insurers would inevitably be affected. Zurich Financial Services says it is “monitoring developments carefully.” The AXA chief executive described the situation as the U.K. “playing Russian roulette” and predicted a severe negative impact on London. Moody’s says the U.K.’s credit rating would be hurt.

Despite the recent challenges of Solvency 2, the argument that there will be less regulation if the U.K. leaves the E.U. doesn’t hold weight with Lloyd’s of London, whose Chief Risk Officer Sean McGovern recently said, “None of the alternatives will be as beneficial for the London market as the current relationship.”

Companies are already indicating they will need to make stockholders aware of the consequences of leaving—if only to avoid directors and officers (D&O) claims down the line. Because most annual reports are published only months before the vote, there’s likely to be a swell of activity; social media analytics measuring citizen sentiment will have a field day.

In October 2015, U.S. administrator Michael Froman ruled out a separate trade deal with the U.K. in the event that it leaves the European Union. He said, “We have no free trade agreement with the U.K., so it would be subject to the same tariffs—and other trade-related measures—as China, or Brazil or India.”

At face value, staying in the E.U. seems like an obvious choice, especially as the U.K. population—like the insurance industry—is risk averse and often reluctant to change. But there are other issues at play here, especially those regarding the emotional response.

Some are suggesting that London would be at greater risk of terrorism if the U.K. remains part of the E.U. Others are concerned about the immigration issue and the effect of the Euro crisis. Others simply argue that that the U.K—which has the fifth-largest economy in the world, is the fourth-greatest military power, is a leading member of the G7, has more Nobel Prizes than any other European country and is one of only five permanent members on the U.N. Security Council—is entitled to greater autonomy to make its own decisions and should not be constrained by politicians who are not elected by U.K. citizens.

“After all,” say those in favor of an “out” vote, “isn’t the current safety and prosperity enjoyed by the U.S., Australia, India, Canada and others founded on the principles of democratic self-government created by those who were once prepared to take matters into their own hands?”

Luckily, even with an “out” vote, the exiting process won’t happen overnight. There will be processes to follow, some of which could take years. It’ll give plenty of time for insurers and intermediaries, (not just those in the U.K. or Europe) to think carefully about the consequences on their businesses, the economy and their customers.

Here are some issues that would have to be considered:

  • As London reduces its influence and there is a brain drain, where might the power shift to, physically, and will some of the big broking houses move house (again)? Where will the new powerhouse occur? Singapore or Shanghai?
  • If there are new trade tariffs, how will this affect the flow of global business? According to U.K. government data, in 2011, the U.S. exported $3.5 billion of insurance services to the E.U.—that’s nearly $1 in every $4 in global insurance services exports.
  • How might an economic squeeze in the U.K. over the next decade affect consumer behavior in terms of buying both property and life insurance, and will this lead to further consolidation of an already saturated marketplace?

There is a basic insurance principle used to establish negligence that dates back more than 100 years. It refers to the “man on the Clapham Omnibus,” a hypothetical character epitomizing the “common man,” who is described as reasonably educated and intelligent but nondescript and against which a defendant’s conduct is measured.

So, on June 23, 2016, everyone in the U.K. over the age of 18 will get to vote regardless of their expertise on the topic. On that day. it will not just be a matter for the entire U.K. population but for the “man on the Clapham Omnibus.” At this moment, we can only speculate whether his head will rule his heart, or vice versa.

Integrating Strategy, Risk and Performance

While many (including me) talk about the need for integrating the setting and execution of strategy, the management of risk, decision-making and performance monitoring, reporting and management, there isn’t a great deal of useful guidance on how to do it well.

A recent article in CGMA Magazine, 8 Best Practices for Aligning Strategy, Planning and Risk, describes a methodology used by Mass Mutual that it calls the “Pinwheel.”

There are a number of points in the article that I like:

  • “Success in business is influenced by many factors: effective strategy and execution; deep understanding of the business environment, including its risks; the ability to innovate and adapt; and the ability to align strategy throughout the organization.”
  • “The CEO gathers senior corporate and business unit leaders off-site three times a year. As well as fostering transparency, teamwork and alignment, this ensures that the resulting information reaches the board of directors in time for its meetings….The result: The leadership team is more engaged in what the company’s businesses are doing, not just divisional priorities. This makes them more collaborative and informed leaders. This helps foster a more unified brand and culture across the organization.”
  • “A sound understanding of global business conditions and trends is fundamental to effective governance and planning.”
    Comment: Understanding the external context is critical if optimal objectives and strategies are to be set, with an adequate understanding of the risks inherent in each strategy and the relative merits of every option.
  • “Strategy and planning is a dynamic process, and disruptive innovation is essential for cultural change and strategic agility. Management and the board must continually consider new initiatives that may contribute to achieving the organization’s long-term vision and aspirations.”
  • Key risk indicators are established for strategies, plans, projects and so on.
  • “Evaluation and monitoring to manage risks and the overall impact on the organization is an ongoing process….Monitoring is a continuous, multi-layered process. In addition to quarterly monitoring of progress against the three-year operating plan and one-year budget, the company has initiated bottom-up ‘huddle boards’ that provide critical information across all levels of the organization.”
  • “Effective governance requires a tailored information strategy for the executive leadership team and the board of directors…. This should include: essential information needed to monitor and evaluate strategic execution of the organization; risks to the achievement of long-term objectives; and risks related to conforming to compliance and reporting requirements.”
  • “Integrating the ERM, FP&A and budget functions can help to manage risks effectively and to allocate limited capital more quickly and efficiently.”

I am not familiar with the company and its methodology, but based on the limited information in the article I think there are some areas for improvement:

1. Rather than selecting strategies and objectives and only then considering risk, the consideration of risk should be a critical element in the strategy-selection process.

2. The article talks about providing performance and risk information separately to the corporate development and risk functions. Surely, this should be integrated and used primarily by operating management to adjust course as needed.

3. I am always nervous when the CFO and his team set the budget and there is no mention of how operating management participates in the process. However, it is interesting that the risk function at Mass Mutual is involved.

What do you think? I welcome your comments.