Lloyd's of London CEO: Autonomous Weapons Are Rewriting War Risk

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0:59Hello, welcome to Big Boss Interview. I'm Sean Farrington and it's Fliss Hanna who's alongside us today. Hello. Hello, Fliss. Chief executives, by their very nature, are paid to plan for worst case scenarios for their business. But you've been speaking to someone who is by all accounts a bit of a professional worrier. They probably need to be on behalf of a load of businesses. He's at the top of one of the UK's oldest institutions as well. Please explain all. Yes, although he didn't seem actually that worried in the flesh. He seemed remarkably relaxed for who he is. This was Patrick Tiernan. He is the boss of Lloyd's or Lloyd's of London.

1:36I should be really clear, not Lloyd's Banking Group. I feel like he has to say that a lot. But actually, in fact, the insurance marketplace. And it is one of the city's oldest institutions. This is 337 years old. And what they do is they are a marketplace for insurance. They monitor risk, verging from catastrophic risks associated with state-sponsored cyber attacks that could take down the global financial systems to earthquakes, climate change, AI. And I think what people really want to know, Sean, is that they are, in fact, also managing some rather brilliant risks. For example, Mick Jagger's lips, Tom Jones's chest hair.

2:15It's not actually rumours these are things that have been ensured, which I'm going to say was my main takeaway from the interview. But the cyber attacks, the AI stuff, that's probably more important. Well, quite. And I guess, though, this is a pretty timely interview. When you look at some of the issues you've laid out there, the government just announcing its defence spending. The world has changed a lot in recent years. We keep being told about how the world works has changed a lot. I suspect that quite a bit of that has come up in how he and Lloyds of London view risk. Yeah, and I think that a lot of what's really focusing the government's mind on risk and the changing nature of warfare and why they need to be really savvy about their defence spending is also the kind of risk that an organisation like Lloyd's has to consider and has to re-evaluate all the time.

3:00So we talked about, for example, the growing risk of drone warfare and what that means for the risks that they're ensuring for the theatres of war that they're having to consider. Let's hear it then. Here is Fliss talking to Patrick Tinn and the Chief Executive of Lloyds of London.

3:21Patrick, welcome to Big Boss Interview and thank you for joining us because I believe you were at a late night in the city last night. Well, thank you for having me, Felicity. Late for me. I was with the Marsh Rising Professionals yesterday and they were bopping away to Ollie Moore's when I left them at about 11. I think nobody wants the boss dancing around at midnight. So I left them to it. Probably for the best. This is unusual for such a big organisation, but I think we have to start off by just getting your name right. You're Lloyds, sometimes known as Lloyds of London. You are not Lloyds Banking Group.

4:01Do you spend your life saying that? Some of it. I think the Lloyds of London helps, or Lloyds with an apostrophe. But what really helps is that people do associate us with our building. So our building is pretty unique in EC3 and Lime Street because it has all of its complexity on the outside. You know, it looks, I think the king once described it as a carbuncle, but we love it. And I think it's sort of, it's a nice image for what we do in Lloyd's. We are a market. We are a little bit quirky. You know, we're a global market that trades risk, headquartered in London. So we operate in, you know, nearly 200 countries around the world.

4:44Most of the risks that we trade are pretty complex, you know, so it's less motor and home, things that people traditionally associate with insurance. And it's aviation, satellites, cyber, marine war, you know, things that you sort of read on the news. and I think we feel that we're pretty innovative even though we're a pretty old institution, a 336-year-old innovator. But we're a market of firsts and we love that. We had the first motor policy over 100 years ago and it was so foreign to folks. It was called a marine on land policy and then we had the first aviation, first space, first cyber. So we go in there every day and we hope we have another day of firsts.

5:25So it's a pretty cool, it's a pretty exciting place to be. And just if you can do it sort of briefly and simply, explain how you work to listeners who aren't familiar. Because you have syndicates, you have names. How do you operate and how is it different from what people might think of as just an insurance company? Yeah, I think that the simplest way to think about it is that we are a marketplace where people come to trade risk. So brokers come with their clients' risks. They don't want to hold the risk for earthquake or for litigation. They come and they say, well, we want to give this to an insurance company.

6:06And unlike elsewhere where you might have one or two big insurance companies, Lloyd's has about 100 insurance companies that we call syndicates. And those syndicates are backed by capital from all over the world, right from the biggest private capital companies that you see on Third Avenue in New York, right down to individuals. We still have 10 % of the capital supplied by individual, what we call names, who are individuals who want to put their assets to work underwriting risk. So we have the full gamut, 300 odd years of experience, and we have the very biggest of the very smallest. And it's a pretty unique, but a very vibrant and thriving market in today's commercial world.

6:55We have so many important risks to talk to you about. But I just, when you're touching on how you can ensure pretty much anything, there are rumours, There are things reported in the press over the years that Lloyd's has helped ensure. And I just wonder if you know whether any of these are true. So I have read Charlie Chaplin's voice, David Beckham's legs, one of the Cadbury's taste buds, Tom Jones's chest hair. Any of that true? Yes. Yes. Tom Jones's chest hair. And there's more. There's Mick Jagger's lips. Yes. I think Keith Moon's hands. So we have from the boring to the pretty exciting. And that's the beauty of it, that we try and find a solution for everything.

7:47It's a weighty responsibility. How do you go about deciding how and who will ensure Mick Jagger's lips? So my job as running the society and the corporation of Lloyd's is actually to make the market work, to provide all the infrastructure for the market. The decisions on who's going to underwrite what are taken by the syndicates. And we are less directive. We have a set of principles that we operate by. And what Lloyd's does uniquely, different to any other insurance market anywhere else in the world, is we backstop it. So Lloyd's has this thing called a central fund. So we actually provide the backstop for all the risks that are taken around the world, which is boring but important.

8:31And the important part is… Sounds terrifying, not boring. It makes the Lloyds market incredibly capital efficient. So it means that we can insure things that really will be virtually impossible to insure elsewhere because the risk is syndicated. The risk is spread quite widely and then backstopped by the central fund and the corporation. And the depth of that chain of security, as we call it, is over$150 billion. So it's a really deep pool of capital backing the most complex, the most volatile, the most unpredictable, and in some cases, the most exciting risks in the world. So you are Mr. Risk.

9:12Let's get properly going with a nice big question. What's the biggest risk right now? So I think if Roger Hargreaves was writing me, it wouldn't be Mr. Risk, it'd be more Mr. Worry. So I think my job is to be the professional worrier and to sort of think ahead of the basket of risks, both individual and collective.

9:31Patrick Tiernan:Over the years, we've faced individual risks. You know, there's been world wars, there's been trade wars, there's been cold wars. What's really unique at the moment is that all of the critical infrastructure that we rely on is actually in flux, is in risk at the same time. So we have this connectivity, this unique period where things are very interdependent, but they're all out of order. It's a very disorderly period. If I try and paint a picture for you, so there's four key pieces of infrastructure that we think about. The physical assets, the physical infrastructure around the world, buildings, energy plants, etc.

10:14The data and cyber infrastructure to allow so much of what we do today relies on data exchange. Then the financial services, the clearing, the banking infrastructure, and then the international order of things, the rules that we rely on, be it the WTO or whatever the international norms. All of them are in flux at the moment. All of them are under threat. And so my number one worry at the moment is the interconnectedness of all of those risks. And it is very, very difficult at the moment to decipher noise from signals. So what actually is most likely to happen next?

10:53Patrick Tiernan:And I think the way I think about it at the moment is to try not to be too specific about predicting what the next risk, the next choke point, the next area of conflict will be. But actually think a bit more broader and encourage folks to, you know, around boardrooms, company tables, even kitchen tables to think about how to protect themselves from the uncertainty. So think about broad, broad covers rather than trying to predict it on an individual basis. Has there ever been a time like this before? I'm not sure there has. I think there's been times where one of those four has been far more charged from a risk basis.

11:31You know, there has been wider conflicts. There has been more international disorder. But what's unique at the moment is we've, you know, over the last 40, 80 years, we've built an international system of reliance. We rely on these things as normal. We rely on the availability of data. 300 years ago for shipping, there was no data, but we weren't relying on it. So now, because we have this reliance built in, I think we are very underprepared for the risk that we're facing

12:02Patrick Tiernan:because we rely on things that maybe won't be there tomorrow. So I think this is quite a different period and a period where there needs to be a separation of the things that we can protect ourselves from those that we can't. We talk about protection gaps in insurance and the difference between if something happens, the economic losses and the insured losses, and they are yawning gaps. There's a perception that governments are going to be able to pick up the tab if private capital doesn't. But I'm not sure governments have the financial firepower that they had in the past to actually fill the gap.

12:38I think that's something we've got to start talking about. And is that because the risks are so much more severe or because government firepower is so reduced?

12:48Patrick Tiernan:So I think it's twofold. I think it's a statement of fact that the firepower is reduced because, you know, just look at debt to GDP levels from when we faced these crises before. There are very elevated levels in the developed world because of the crisis that we've had in the past, be it the global financial crisis, pandemic, etc. But also, I think there's a little bit of a lack of clarity as to where the book stops. So we often talk about public-private partnerships. I think what's really needed is that public policy actually spells out what governments are going to protect and what they're not.

13:25And that can inform private capital to say, well, OK, well, we can now price that risk. It's not hard. It's not impossible to price these risks. It's difficult, but it's not impossible. We've got an abundance of data and we can say, well, the probability of this happening is X.

13:40Patrick Tiernan:So I'm going to pay, you know, Y, which is usually a small percentage of X to protect ourselves from that. And I think it's at the moment we have a bit of a risk that companies are being willfully ignorant to those risks. And I think it would be better if public policy stated this is what we're going to cover. This is what you guys need to cover in the private sector. Get on and do it. And it's because it's not just for the protection. Insurance, yes, it is an indemnity if something goes wrong. But the brilliant part of insurance is it should be sleep easy and allow you to take the opportunities of now.

14:15Patrick Tiernan:because we talk about the downside risks. There's so much investment at the moment, so much changing, so much dynamism in the economies. So you want to be able to be in the game when those opportunities arise. So there's two reasons to use insurance. Okay. I want to pick up on what you were saying about the world never being more interconnected and relying on data and cyber. That sort of suggests to me that you consider a major cyber attack potentially one of the biggest threats to the global economy. Yes. I mean, I think the way we think about it at Lloyd's is we do think about the major risks, both in terms of the economic impact and the insurance impact.

15:02Patrick Tiernan:And cyber attacks are one of those what we call realistic disaster scenarios that we plan ahead for. The biggest risks are still natural catastrophe, but cyber is increasing in its severity if we do have a major global cyber attack. And I would separate them into two different buckets. If it's a state-backed cyber attack, if the state infrastructure involved, they can be incredibly severe. Or else you have the more ransomware attacks, which is much more criminal gangs actually trying to extort money from the global financial sector. So if you separate both, the first could be deeply crippling.

15:51Patrick Tiernan:The second, the ransomware is increasing and it sort of comes in waves and we're in an increasing wave at the moment. But I'd say, Felicity, the thing to think about is the take-up rate of cyber is nowhere near as high as it should be given that risk. Of cyber insurance. Correct. Yeah. And it's, you know, again, there's two reasons that it would be better for all of us if the take-up rate was higher. If you have cyber insurance, one of the things that's really, that's a key part of the package is the insurance company is there to help you prevent the attacks, increase your patching. If you have an attack, they're there with you to make sure you're back up and running, your resilience is there.

16:31Patrick Tiernan:So the damage, the economic damage to your company is limited. And so I think it's really important that we educate, you know, not mandate, but educate folks as to what those dangers are and help people understand how best to protect their businesses. How big do you think the gap is? It's yawning. It depends on which country. North America has the biggest take-up rate, probably because they are a more litigious society. The UK is probably in the second division. But SMEs beyond the UK and the US into Europe, the take-up rate is nowhere near as high as it needs to be. And I think that's where you need that clarity in public policy.

17:15Patrick Tiernan:So people know if something, first of all, they know that it's a good idea to have it because it prevents more severe attacks. And secondly, that they, if it does happen, that they're responsible as directors and board members to actually, to their shareholders and to their investors, to not leave them hanging. OK, well, let's talk then about one of your realistic disaster scenarios, because you've actually previously modelled a major cyber attack that causes trillions of dollars of economic losses. Could the world cope with something like that? Could private insurance markets really cover something that massive or would surely governments have to step in at that point?

17:56Patrick Tiernan:So I think there's catastrophizing and there's realistic disaster scenarios. So I think in terms of... Hard to spot which is which. Yeah, I think in the near term, I think the economic damage is, it is limited by geography. So we do talk about, well, if a major cloud provider went down, everybody who used it would be damaged. There is breaks in the system to actually prevent it going too global too quickly. So there are elements in the system that can help prevent the damage. I think whatever way you put it, it would be very damaging economically. And it would be very damaging in terms of the speed for folks to get back on their feet.

18:45Patrick Tiernan:So I think it would be very damaging. And I think it is incumbent on us to drive that education, to drive that clarity of where the book stops. So people do act ahead of time to prevent themselves because it also does what insurance has been doing for hundreds and hundreds of years, which it mutualizes the risk. And it spreads that damage over a wider group of folks. So the individual damage is easier to recover from. And I think that's really important because it's the ability to, I think there was a football manager back in the day that talked about bounce-back ability. And I think that's a really important part of insurance, that you can bounce back, that the company's back on its feet and jobs aren't lost, supply chains aren't damaged, customers aren't let down, and you have that ability to keep trading, which is really important at a point for most of the world where growth is really the key thing on most policyholders' minds.

19:45Our producer, Ollie, is telling me that that quote is Ian Dowie, the football manager. So I'm glad to have him on the team. I think he was Crystal Palace manager at the time. Tell me, do you feel like a major attack, a bigger attack than we've seen so far feels inevitable to you? Is it the thing you think about at 3am? Well, the thing I think about at 3am is where my teenage daughters are at the moment. And it's summertime and it's no insurance for that. Isle of Wight concerts last weekend.

20:13Patrick Tiernan:Yeah. But so what I'm not thinking when they're at home, the danger is trying to be too predictive about a single event. So it is one of the things that I think about. But it is the potential damage of a cyber impact is linked to geopolitical stability. It is linked to security of subsea cables at the same time. It is linked to the financial services industry being resilient to movements of money as well. So all these things do have that critical linkage. So it isn't the one thing I'm thinking about, but it is one of them. It's not always easy being Mr. Worry. Yeah, there's always a happy ending, isn't there, in those Mr.

20:58Patrick Tiernan:Man books? So it is a huge privilege, to be honest, to have the worries of the world as part of your job, because it means that you end up in the rooms that matter. I end up in rooms where these decisions are being made. And I think what my job is to make sure I bring the best available intel and insight to decision makers, whether they're in boardrooms, cabinet rooms or tea rooms. it is important that we give people those insights to act before the event, to react in the event, and then to sort of plan into the future. So it's just with worry comes privilege. Events can overtake us very, very quickly, though, can't they?

21:44A lot of the businesses I talk to every day have been really affected by the conflict in Iran, the closing of the Strait of Hormuz. That is the kind of risk you have to literally price up. What has that conflict, what has that specific closure meant for ensuring shipping and businesses operating in the Middle East?

22:01Patrick Tiernan:It has meant, I think I think about it over three things. So we, when an incident like this breaks out, the first thing we do is quickly think about the past, present, future. So has this happened in the past? And do we know, can that help inform us what's going to happen? And yes, there was shipping interruption in the Gulf in 88, 89 at the end of the second Gulf War. And Lloyd's and the international shipping industry did learn from that, did learn how pricing would move and how damaging a choke point like the Strait of Hormuz would be. We also learned through the Black Sea closure in Ukraine how important it was to work across boundaries in order to open these shipping lanes.

22:51Back then, again, it was about not just oil prices, but actually some of the nitrates, some of the fertilizers to actually allow the food growth that really, really impacts the southern hemisphere.

23:05Patrick Tiernan:So we quickly learned those lessons and then you move quickly into the present. Is this an event that's going to damage insurance companies such that they won't be able to provide quotes in capacity for the continuation of shipping in the region? And the answer was no. So quotes continue to be issued. Anybody who wanted to get insurance at that time could get it. But what actually became quite difficult, and I think this was new to this particular crisis, there was confusion about why ships weren't moving. There was a conflagration of is it because of the price of insurance, which was going up because the risk was going up?

23:43Patrick Tiernan:Or was it because of the safety and security of ship owners, their captains, and wanting to keep their people out of harm's way? The dominant factor was that there wasn't the secure passage through. And that was why ships were being held in place. That was why we had this choke point of nothing moving. but that it doesn't matter at that point it's not about allocating who's who's responsible it's about quickly moving into solutions and i think that's where lloyd's in particular um we are apolitical we do operate in the rooms that matter quietly and discreetly and so we have been working through this period in order to make sure the capacity was there and to make sure more importantly the amount of capacity is there as the straight opens.

24:34So we're in a period now where there's been much more traffic over the last couple of weeks. The price of insurance has gone down. The price of oil has gone down.