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Calculating Career Risks and Rewards

12/2/2009 --

Lloyd's CEO reaps returns in transition from physicist to financier.

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ANN ARBOR, Mich. — As CEO of the famed specialist insurance market Lloyd's, Richard Ward deals daily with the risk-reward calculation of business. But it's on the personal career track that he'd like to see a little more risk-taking.

Ward, a scientist by training, shared tales of his "slightly strange" career trajectory with an audience at the Ross School of Business recently as part of the school's Leaders in Thought and Action speaker series.

"How the hell did I get from doing science to what I think is the best job in the city of London?" he said of a journey that took him from academia to finance by way of a petroleum giant, the trading floor of a petroleum exchange, and then to Lloyd's, one of the best-known brands in the world.

Ward earned his PhD in physical chemistry from Exeter University and was doing research on liquid crystals when he decided to explore the corporate realm. He approached British Petroleum and convinced them that much of what he did as a scientist -- arranging funding, studying models -- applied to the business world.

BP followed his logic, made the leap, and then made another one when they later asked Ward to move to London to trade in oil derivatives. It was a bold move, since Ward had limited knowledge of, and no experience in, financial markets or commodities trading.

"I didn't know what I was getting into," Ward said. "But I thought, 'If BP thinks I can do the job then it should be interesting.' So it was a personal risk for me and a risk for BP."

And it's the kind of risk he thinks more people should take and more companies should be willing to provide. Unfortunately, too many people map out their careers early in life and too few companies can afford to make such dramatic moves.

"My plea to all employers today is to give those types of opportunities to their employees when they see it," Ward said.

Eventually he left BP to join the International Petroleum Exchange (IPE), ascending to COO in 1999. Ward later led a hard-fought conversion of the IPE from open-pit outcry trading to electronic trading. The move was met with tremendous resistance: He received threats and at one point needed bodyguards to escort him through the building.

But the conversion succeeded, in part because Ward built "small cells of support" among the traders. He identified a few traders who preferred electronic trading and started with that small coalition. Ultimately, most of the traders "knew it was the right decision" and in 2005, the IPE went completely electronic.

In 2006, Ward had an opportunity to join Lloyd's, the world's leading special insurance market. Some people thought he would be "mad" to take it, but it was such a great opportunity he couldn't turn it down.

Not to say there weren't challenges from the start, Ward said. Lloyd's had a few serious crises prior to his hiring and, though it has weathered those storms, Ward remains focused on improving and modernizing the firm's business model.

Lloyd's is unique in that it serves as a marketplace. Other insurers operate at Lloyd's and underwrite policies in Lloyd's name. Often a company looking to manage its risk will obtain policies from more than one insurer at Lloyd's, which Ward says is akin to a "farmers' market" for managing risk.

Founded in 1688, Lloyd's has a central fund that supports the underwriting of the companies in its marketplace. So if an insurance company writes a Lloyd's policy and fails, Lloyd's can still support the claims.

The firm is perhaps most famous for insuring such odd commodities as celebrity body parts or a sommelier's nose. But it specializes in complex risk that's difficult to price. The company's bread and butter comes from insuring big items -- buildings, airplanes, oil rigs, and the like -- against catastrophes like storms, floods, and terrorism.

But Lloyd's has been on the brink of its own catastrophes a couple of times. In the 1990s, for example, the company faced losses of $15 billion when it was hit with sizable claims from several different events. It was on the hook for a big chunk of the Exxon Valdez oil spill as well as multiple asbestos claims. In response, Lloyd's separated its prior business into a new company called Equitas, capitalized it separately, and moved on from there.

Lloyd's capped liabilities after that, but Ward says the firm missed the chance to push more significant reforms at that time.

The company suffered a liquidity crisis again after the 2001 terrorist attack on the World Trade Center in New York, which forced considerable changes at the insurance market. For one, Lloyd's made all its insurers write up ironclad policies at the outset. The company also moved to more of a franchise structure in which every insurer operating in the market has to adhere to a set of standards on risk management and capital management.

Lloyd's got through the banking and financial market crisis of 2008 "unscathed," Ward said. It has $60 billion in capital supporting $33 billion of underwriting. That $60 billion is invested mostly in bonds and cash, with only about five percent in stocks. The returns aren't spectacular, but neither are the losses, he noted.

"We're taking risk in places were want to take risk, such as David Beckham's kneecaps or a building in Florida," Ward said.

The bigger issue for him today is to cope with new uncertainties on the financial horizon. Ward sees a landscape characterized by increased regulation, protectionism, government intervention, and a loss of confidence in business.

"What I'm faced with, and what you're all faced with, is restoring confidence in the financial service sector," he said. "You can change perceptions by getting your business model right."

Companies need to shift their cultures from one where nobody challenges the CEO to one where the top executive is constantly challenged, Ward said. "When I look at businesses and how they fail, it almost always starts at the top."

Companies need to create an environment where leaders have the opportunity to practice their management skills and rise through experience, he said. Not everyone is cut out for leadership and it's impossible to tell without seeing them in action.

Ward lauded the Ross School's in-company Multidisciplinary Action Project course for giving students a chance to leave the classroom and resolve an actual organizational challenge in the business world.

"What I've learned is through experience, real-life experience," he said. "A lot of the stuff you have to deal with in work you can't look up in a book, frankly." —Terry Kosdrosky

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For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu