Patrick Tiernan: War risk is being rewritten

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1:29Patrick Tiernan:freedom. I like that freedom. A gender equal world would be a better world for men too. We need this is fire. We need healing. We need trust. These companies don't really, they don't care what governments do. This is a war. The first thing that we want is the war to end. For this interview, I met Patrick Tiernan, CEO of Lloyds of London, the 337 year old insurance marketplace that operates in nearly all countries around the world. It can ensure almost anything, including Mick Jagger's lips. But their main areas are complex risks such as aviation, cyber and war. Patrick Tynan warns that huge changes are taking place when it comes to conflict, forcing a rethink on how risk is calculated and how it's ensured.

2:20Patrick Tiernan:The way war is ensured at the moment, it assumes that it'll build up, that there'll be breaks in there and that you can increase the cover. It's very possible that won't be the case as there is more drone warfare, that there is more artificial intelligence in the decision making. So we're going to have to completely reimagine how we cover that.

2:41Welcome to the interview from the BBC World Service with Patrick Tiernan. we 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 rumors 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 tasters taste buds, Tom Jones's chest hair. Any of that true?

3:13Patrick Tiernan:Yes. Yes. Tom Jones's chest hair. Yeah. And there's more. There's Mick Jagger's lips. Yes. I think Keith Moon's hands. You know, so it is, we have from the boring to the pretty exciting. And that's the beauty of it. We try and find a solution for everything. It's a weighty responsibility. How do you go about deciding how and who will insure 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 sort of 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.

3:54Patrick Tiernan: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. And the important part is it makes it makes the Lloyd's 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.

4:34Patrick Tiernan: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. Let'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. Over the years, we've faced individual risks.

5:15Patrick Tiernan: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. There's four key pieces of infrastructure that we think about. The physical assets, the physical infrastructure around the world, buildings, energy plants, etc. The data and cyber infrastructure to allow, you know, so much of what we do today relies on data exchange.

5:57Patrick Tiernan: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 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 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 and company tables even kitchen tables to think about how to protect themselves from the uncertainty.

6:48Has there ever been a time like this before?

6:51Patrick Tiernan: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 you 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 because we rely on things that maybe won't be there tomorrow.

7:30Okay. 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.

7:46Patrick Tiernan: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. 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.

8:39Patrick Tiernan:So if you separate both, the first could be deeply crippling. 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. 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 a key part of the package is the insurance company is there to help you prevent the attacks, increase your patching.

9:14Patrick Tiernan:If you have an attack, they're there with you to make sure you're back up and running, your resilience is there. So 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.

9:59Do 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?

10:09Patrick Tiernan:Well, the thing I think about at 3am is where my teenage daughters are at the moment. It's summertime and it's... No insurance for that. Isle of Wight concerts last weekend. Yeah. But 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 that, to the financial services industry being resilient to movements of money as well. So all these things do have that critical linkage.

10:50Patrick Tiernan: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. 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.

11:33Patrick Tiernan:So with the worry comes privilege.

11:39You're listening to The Interview from the BBC World Service.

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12:46One of the things that really stood out to me in this interview with Patrick Tynan was his attention to detail. So the backdrop in the studio was green. He knew it was going to be green and he'd chosen proactively to wear a green tie to match. And I wonder if it's that focus on detail that you need if you're going to manage risk across so many different sectors. You need to really absorb information like a sponge. OK, let's return to my conversation with Patrick Tiernan. Events can overtake us very, very quickly, can't they? A 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.

13:24That 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?

13:34Patrick Tiernan: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, I 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.

14:15Patrick Tiernan:Back 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. 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 and capacity for the continuation of shipping in the region? And the answer was no. So quotes continued to be issued. Anybody who wanted to get insurance at that time could get it. What actually became quite difficult, and I think this was new to this particular crisis, there was confusion about why ships weren't moving.

14:58Patrick Tiernan:There was a conflagration of, is it because of the price of insurance, which was going up because the risk was going up, 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. It's not about allocating who's responsible. It's about quickly moving into solutions. And I think that's where Lloyd's in particular, we are apolitical. We do operate in the rooms that matter quietly and discreetly.

15:37You're managing risk. one of the ways that governments manage that risk is through their defence spending. Does the UK spend enough on defence? Does NATO?

15:46Patrick Tiernan:I do think it will increase. I think spending on defence needs to increase across the NATO partners and in Europe in particular. I think spending on energy needs to increase. The amount of energy spending that is needed across the world over the next 25, 30 years is extraordinary. You see figures like 50 trillion of increased investment needed. And that is just to keep up with the demand of electricity and power today. And then infrastructure. We have a lot of infrastructure that we need to improve. And as we talk about boosting growth, I think the one thing that you see correlation with is correlation with investment in infrastructure helps drive economies forward.

16:31Patrick Tiernan:And actually take up of insurance helps drive economies forward as well. So making sure that we can make that economic case, make that link, I think that's what we've got to make sure we focus on. What about the challenge on the other side, though? Are you looking at the risk of changing warfare, drone attacks, those kind of increased smaller warfare risks? Absolutely. So much of the conversation today is about AI. And often we talk about it in terms of the impact on operations. At Lloyd's, I think about the impact of AI on the underlying risk itself. So you mentioned the theater of war. That is the area that we've probably looked at most.

17:10Patrick Tiernan:And this has been talked about by folks like Henry Kissinger for years, that if you have the decision making in the munitions themselves, in the delivery vehicles themselves, then we don't have what we're used to having, which is smoke signals or diplomatic signals that maybe slow down the escalation. So when we talk about the way war is ensured at the moment, it assumes that it'll build up, that there'll be breaks in there and that you can increase the cover. It's very possible that won't be the case as there is more drone warfare, that there is more artificial intelligence in the decision making.

17:45Patrick Tiernan:So we're going to have to completely reimagine how we cover that. And that is both an opportunity, but a very big difference in how risk is going to be calculated and ensured. in the theater of war. If we go to the other end, it's not all doom and gloom. If you look at the other end, you know, life sciences is a big area where insurance is to the fore, because traditionally new medicines, new treatments, you know, there would be humans involved in the testing process. Increasingly, it's large language models that are being used to test medicine, which is great because the deployment of new medicines, new treatments is increasing much faster, which is, great for getting people back to health or longer lives, etc.

18:29Patrick Tiernan:There's less risk there. So you've got to look at that in a different way. How big a risk is climate change? It is substantial risk. So I think when we talked earlier about those realistic disaster scenarios in Lloyds, and we talked about cyber, the biggest realistic disaster scenarios, the biggest risks to Lloyds as a business continue to be natural catastrophe. So wind risks, earthquake, etc. But in the last couple of years, we added three more new categories of risk that are related to climate. US flood, US severe convective storm, so tornadoes, hail, etc., cyclones, etc., and fire. So if we look at the science, when you look at flood, fire, and drought, they're on an upward trajectory.

19:13Patrick Tiernan:I think it's really important that we use the data and the science to make sure that we are informing decisions going forward, because the risk is going up from when it comes to climate change risk. There's a tension, isn't there, in that Lloyd's is an important marketplace for ensuring the net zero transition, but it's also a marketplace for ensuring fossil fuel expansion. And campaigners have criticised Lloyd's, they say you're an enabler of fossil fuels. Can you credibly talk about climate risk while the market, your market, It continues to ensure oil, gas, LNG expansion. Yeah, well, I think the important thing is to remember that we are a market.

19:52Patrick Tiernan:So a market has to accommodate different choices and different voices. That's not what your predecessor thought, because he had laid out plans to push the market towards net zero. And you scrapped that mandate, didn't you, that Lloyd's members should stop ensuring heavy polluting fossil fuel projects? I was just unequivocal and basically told it as it was. So it has always been the case that Lloyds cannot mandate bans on one form of energy that is legal and not sanctioned. However, you've got to use the advantages that you have and that the lower capital consumption that you have in the Lloyds market can lead to taking risks that otherwise you wouldn't be able to take.

20:34Patrick Tiernan:And I think just being really clear on what we can and can't do is it helps transparency, it helps predictability and that helps investment. Let's talk about culture then, because Lloyd's has had some historic and some recent challenges there facing really serious scrutiny of a bullying, harassment, sexual harassment, alcohol culture, essentially non-financial misconduct. Have you come through that time now? So I think as a leader of Lloyd's, as a leader of the market, my view is I will never be through it. So culture is something that I think about every day. And it is a huge responsibility on Lloyd's because we actually oversee culture and governance in the market.

21:24Patrick Tiernan:So we have to hold the highest standard. And when Sir Charles Roxburgh, who's the new chair, he started in May last year. I started in as CEO in June last year. We committed to holding the highest standards of corporate governance and culture to the organization. But we were really clear as well that we were going to we wanted to be judged on actions, not just words. And when it comes to what we've done, we've we've we've put a huge amount of additional governance in place. We've raised the standard of culture for ourselves as lawyers because we have to hold that bar and that mirror to ourselves first and foremost.

22:04Patrick Tiernan:And even though when we look at the stats and the data, when we look at the surveys where insurance is above the benchmarks of financial services, where we have improving and very commendable data in terms of the balance of who's in the workforce. It'll never be enough. It'll never be enough because we want to be the best. And it'll never be enough because insurance is a global family. Everybody feels a very big part of the insurance family. And so when we let ourselves down on non-financial misconduct, it feels very personal for everybody. So it's something that we'll continue to think about, continue to try and drive ourselves to be the very best.

22:49Patrick Tiernan:And in terms of how we measure it, we put out in the strategy for the next five years, you know, we talk a lot about financial return. We talk an awful lot about capital and cost. But right at the centre of it, we put a lawyer to be proud of. And we said that our engagement survey, our people's view of us and our net promoter score, everybody who deals with us is going to be measured. And if it's anything short of excellent, it won't be good enough. Is the insurance sector generally still too much for Boys Club? No, I don't think so. I think it is massively expanded to be inclusive over time. We have a good balance within, I talk about Lloyd's as a corporation itself.