CRE December 2016

www.commercialriskeurope.com

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Volume 7

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#10

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December 2016 / January 2017

IN FOCUS: REPSOL

HOT SEAT: BERKSHIRE HATHAWAY

CRE visits Bilboa to discover how Repsol runs its $110m insurance programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Berkshire Hathaway Specialty Insurance seems to be able to buck the trend and continue to grow without making acquisitions. CRE asks: How and why is this possible? . . . . . . . . . . 12-14

EUROPEAN RISK MANAGEMENT AWARDS 2016.

Laukkala named European Risk Manager of the Year at launch event with Ferma in Brussels Adrian Ladbury aladbury@commercialriskeurope.com

[BRUSSELS]—HELJO LAUKKALA, vice-president, corporate risk management at Metso Corporation, the Finland-based international industrial services company, was named European Risk Manager of the Year at the first European Risk Management Awards dinner in Brussels in early December.

Mr Laukkala, a former president of Finnish risk management association Finnrima, received his award from Ferma president Jo Willaert and Chris Fischer Hirs, CEO of lead awards sponsor Allianz Global Corporate & Specialty (AGCS).

RECOGNITION The annual awards were launched by Commercial Risk Europe in partnership with Ferma. They are part of a combined effort to raise the profile of the corporate risk management profession. The awards recognise innovation and excellence among the risk management community and core service providers such as insurers and brokers.

Mr Laukkala, described by his association as a “beacon” for good risk management, internal control and corporate governance, told Commercial Risk Europe that he was “deeply

Ms Bicanová was joined in the final round of this prestigious category, sponsored by Generali, by Hans Jörg Schill, risk manager at Airport Assekuranz Vermittlungs-GmbH in Germany; and Ignacio Martinez de Baroja, risk manager at Hispasat in Spain.

The second of the three awards categories announced was Industry Leadership.

Evan Greenberg, chairman and CEO of Chubb, was named Insurer Leader of the Year, while Nikolaus Von Bomhard, outgoing CEO of Munich Re, was granted the Lifetime Achievement award.

Few will argue the case against Mr Greenberg. He has forged a highly successful leadership role in the international insurance industry during a period of many years.

honoured” to receive his award.

The decision to reward Mr Laukkala’s recent and longer-term efforts was not an easy choice, given the competition. The ten judges, who represented different risk management associations across Europe, deliberated long and hard on who should be the eventual winner.

Mr Laukkala had to compete with highly impressive entries submitted for fellow finalists Olivier Moumal, director, audit and risk at The Proximus Group in Belgium; and Kristine Raffel, group risk manager at CPH, Copenhagen Airports in Denmark.

INDIVIDUAL WINNERS Three other individual risk manager winners were announced at the dinner, which was attended by more than 250 guests and followed Commercial Risk Europe’s annual Risk Frontiers conference, organised in partnership with Belgian risk management association Belrim.

Pauline Davoust, risk manager for Gate Group in Switzerland and a member of Swiss risk management association Sirm, was named Rising Star of the Year — in a category sponsored by AIG. Ms Davoust fought off tough challenges from co-finalists Phillipe Cotelle, risk manager at Airbus in France and a member of local

association AMRAE; and Elena Gil Valentin, risk manager of INECO based in Spain.

Michael Dehert, risk manager at The Brussels Airport Company and Belrim member, was revealed as the winner of the Innovative Insurance Programme of the Year.

The other two highly commended finalists in this category, sponsored

by Chubb, were Branislav Lacko, risk project analyst at Technical University of Brno in the Czech Republic; and Luis Ros Arnal, risk manager at Enagás in Spain.

Jana Bicanová, founder and president of Czech risk management association ASPAR, was presented with the Risk Manager Lifetime Achievement award.

TRANSFORMATIONAL Mr Greenberg took over at ACE from founding CEO Brian Dupperault, to successfully continue the transformation of the Bermuda-based insurer into a truly global insurance group that is now the biggest listed insurance company in the world.

He has achieved this through a combination of profitable organic growth and successful acquisitions, which culminated in the recent AWARDS: Turn to p18

POLITICAL RISK.

CYBER.

RISK FRONTIERS.

Populist surge signals big change in political risk

Buyers warned to expect exclusions for cyber as regulatory pressure grows

Annual renewal hinders wider solutions, say risk managers

Stuart Collins news@commercialriskeurope.com

[LONDON]—THE RISE IN POPULIST politics and nationalism is adding a new and worrying dimension to already heightened political risk, with implications for trade and supply chains, according to consultants, brokers and insurers.

PARADIGM SHIFT In recent years, political risk has been driven by terrorism, the impact of falling commodity prices and conflicts in the Middle East and Africa. But the US election result, Brexit and the more recent Italian referendum, POLITICAL: Turn to p16

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insurers exposed to unexpected large cyber losses. news@commercialriskeurope.com The PRA’s move is part of a trend towards increased regulatory [LONDON]—LAST MONTH’S MOVE interest in cyber exposures. Under by the UK’s regulator to force insurers the National Association of Insurance to get a grip on their cyber exposures Commissioners, US regulators are is likely to lead to more exclusions in currently developing cyber reporting traditional policies. standards, while Lloyd’s has In November, the UK’s also taken steps to manage Prudential Regulation cyber exposures in the Authority (PRA) announced market. plans for new supervisory The PRA consultation guidelines aimed at making has significant implications insurers identify, quantify for how UK insurers provide and manage their cyber cover for cyber risk under exposures. In particular, cyber and non-cyber policies, the PRA expressed concern Nigel Pearson according to Hans Allnutt, over so-called silent cyber partner and head of the cyber cover, where an absence of risk and breach response exclusions or ambiguous wordings in team at law firm DAC Beachcroft. traditional insurance policies leaves “It will prompt the more cautious

Stuart Collins

insurers to apply cyber exclusions to non-cyber specific policies where they can. Assuming there will be more exclusions, insurers will need to offer alternative solutions for cyber risk,” he said.

Ben Norris bnorris@commercialriskeurope.com

REGULATION Regulatory pressure should result in increased clarity of cover for insurance buyers, according to Nigel Pearson, global head of fidelity at Allianz Global Corporate & Specialty. The drive for understanding exposure aggregation will result in insurers excluding or implicitly including cover in traditional policies, he said.

“Some lines of business are silent on cyber while others are happy to not exclude the risk, although they do

[ BRUSSELS ]—RISK MANAGERS have urged insurers to deliver multiyear insurance contracts, so that they can stop wasting time on annual renewals and get on with the job of mitigating the increasingly complex threats they and their boards want to focus upon.

The speakers also advised brokers to spend more time and effort adding wider value to their clients, rather than chasing a few percentage points on rates at each renewal.

CYBER: Turn to p18

RISK FRONTIERS: Turn to p16

9/12/16 16:02:02

I am your employee.

Protect me.

I travel to clients everywhere and don’t want to worry about unforeseen events.

I want to know I will be taken care of if I am sick or caught up in a security situation while abroad.

I’d like to work for a company that always helps keep me safe.

I want more than just insurance.

I want the kind of insight and support that comes from decades of experience insuring employees against the accidental risks they face when travelling.

A level of protection and personal service that only Chubb provides.

Not just coverage. Craftsmanship.SM Not just insured.

Chubb. Insured.

SM

©2016 Chubb. Coverages underwritten by one or more subsidiary companies.

Not all coverages available in all jurisdictions. Chubb®, its logo, Not just coverage.

Craftsmanship.SM and all its translations, and Chubb. Insured.SM are protected trademarks of Chubb.

02-CRE-Y7-10-Chubb.indd 2

chubb.com

9/12/16 12:50:19

NEWS Kidnap & ransom

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K&R emerges as broader crisis solution Stuart Collins news@commercialriskeurope.com

[LONDON] WITH CHANGES IN THE GEOpolitical landscape, kidnap and ransom (K&R) insurance is morphing into a much broader crisis management solution for corporates.

Demand for K&R insurance has grown, while the product has broadened substantially to meet the changing needs of corporates, according to Lucy Higgins, a K&R broker at JLT Specialty.

JLT has seen an increase in K&R enquiries from companies – including a number of European firms – that want to use K&R insurance to address a wider range of employee security and terrorism risks.

“There has been a realisation that people security risk is a fundamental issue for social corporate responsibility, corporate liability and reputation. So we are seeing a more proactive approach from clients,” said Ms Higgins.

Chris Holt of Hiscox said the focus on security risk, which has been building for more than a decade, has “fundamentally shifted” during the past two to three years.

“The shocking [terrorist attacks] in Europe and elsewhere in recent years have focused the minds of risk managers and changed the nature of security risk. This has happened at a time of increased focus on corporate governance and a desire by companies to demonstrate a duty of care to employees,” he said.

BROADER RANGE Where companies previously focused their attention on high risk locations and kidnap risks, they are now looking for solutions to a wider range of security threats, explained Mr Holt.

“The concerns of risk managers are not only international, but now also domestic. They are not only concerned with risks directly targeting their organisations, but also systemic events that cause people loss,” he said.

Corporates are increasingly looking for risk management and crisis management responses to changing geopolitical risks, believes Mr Holt. “The question increasingly posed by organisations is: whom should we call for an immediate response?” he explained.

A number of insurers are now revamping their K&R cover to address a wider range of risks.

“Many assume K&R insurance just covers kidnap and ransom, but the product has broadened to cover a much wider range of perils and has developed along with the evolving security risk environment,” said Ms Higgins.

For example, enquiries for emergency evacuation, active shooter and hostage siege cover have been rising as employers look to make more robust plans to protect employees, she said.

K&R insurance has evolved to respond to the changing needs of companies and evolution of employee related risks, according to Ms Higgins.

“Terrorists are not just focusing on property but also people, so

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buyers are looking for solutions to new perils, such as a hostage crisis, lone-wolf active shooter and hostage attacks, and emergency evacuation,” she said.

In response, K&R insurers have adapted policies to cover short-term hostage scenarios such as the 2014 siege at a coffee shop in Sydney, Australia. The K&R market has also developed cover for lone shooter and other similar terror attacks that target people.

Such incidents would traditionally have fallen outside the scope of K&R cover but are now often available as standard, according to Ms Higgins.

K&R is changing to such an extent that some believe it’s time for a rebranding.

“The product has evolved to

the point that the K&R moniker is not always appropriate. What we now have is a much broader crisis risk management and insurance solution,” said Mr Holt.

Charlie Matheson, global head of K&R at XL Catlin, agreed that K&R insurance is now a much broader security product protecting employees and individuals.

TIME FOR A REBRAND? “It now addresses a wide range of security risks companies and individuals are facing today, and this is constantly evolving. Kidnap is still the headline act of a K&R policy, but it is one of a number of risks we cover and accounts for less than half our claims,” he said.

Risks to individuals are varied, and employees can be affected by a

wide range of risks at home or when traveling, explained Jon Gregory, K&R global product head at AIG. These threats can arise from a hostage crisis, terrorist attack and violent crime to civil unrest or a disease outbreak.

Approximately 25% of AIG claims in 2015 arose in the UK, US and Australia. It is not unusual these days to see claims for shortterm abductions, home intrusion and assaults, the firm said.

Core K&R insurance covers kidnap and ransom, detention, extortion and hijack, but insurers offer an increasing range of extensions including business interruption, emergency evacuation, stalking, disappearance and workplace violence.

“The product should be seen

Latin America the riskiest region for violent crime Sarah Jolly news@commercialriskeurope.com

THE LATIN AMERICAN REGION CARRIES the highest risk of violent crime, according to Verisk Maplecroft’s recently published Criminality Index.

While Afghanistan tops the ranking as the world’s riskiest violent crime country, six Latin American countries were rated as ‘extreme risk’. These are: Guatemala in second place, Mexico in third, Honduras (sixth), Venezuela (seventh), El Salvador (eighth) and Colombia (12th). Brazil and Argentina were considered ‘high risk’ and ranked 31st and 43rd respectively.

EXTREME RISK Of the 198 countries polled, 13 countries were assessed as posing ‘extreme risk’ to populations, business and economies from violent crime. The top ten countries in the Criminality Index are: Afghanistan, Guatemala, Mexico, Iraq, Syria, Honduras, Venezuela, El Salvador, Somalia and Pakistan.

In Mexico and Central America, Verisk Maplecroft said drug trafficking organisations are the major driver of violent crime. This threat is estimated to cost these countries up to $200bn each year.

Verisk Maplecroft said drug organisations

have recently extended production of drugs such as methamphetamines to Central America, from Mexico and the US. This has brought additional risks of kidnappings, extortion and robbery.

“The burden of which is passed on to businesses through increased security and insurance costs and lost productivity,” Verisk Maplecroft said.

In Mexico, the cost of violence – driven largely by the drug trade – was estimated at $134bn last year.

GAINS LOST “President Peña Nieto’s early security gains have unwound and homicide rates have once again begun rising,” said Grant Sunderland, Verisk Maplecroft Mexico analyst.

“With the security forces facing budget cuts, a deterioration in the overall security environment is likely, leaving investors exposed to risks such as extortion, theft and potentially the kidnapping of personnel.”

Verisk Maplecroft said Brazil has tackled high crime rates during the past ten years, but the recent deep recession and cuts in security spending have left it vulnerable.

“This could enable the country’s large organised criminal groups, which are also involved in extortion and kidnapping, to regain some of the ground they have lost, including in the favelas of Rio and São Paulo,” Verisk Maplecroft said.

as a holistic insurance and risk mitigation product to protect employees in domestic and foreign circumstance,” said Mr Gregory.

K&R insurance gives companies access to risk mitigation and crisis management consulting, explained Mr Gregory. This can include advice on establishing crisis teams, crisis response, security and evacuation planning.

“We see greater appetite from risk managers to use the premium rebate for consulting, which was not always utilised as effectively as it could have been in the past.” said Mr Gregory.

According to Mr Matherson, there is a danger that K&R is bought and forgotten about in the hope that it never has to be used. But if used proactively, many features can be used to reduce risk and help companies better understand their risk management and security needs, he said.

Some corporates are more exposed to kidnap than others but extortion, cyber extortion, on-premise terrorist attacks and political evacuations can affect all kinds of companies operating across all types of environments, according to Mr Matheson.

“K&R not only provides financial protection in these situations but also provides essential access to crisis management advice and response,” he said.

“It helps companies plan and be more prepared for a crisis, whatever that crisis might be. It helps mitigate these risks and ensures companies are ready for when a crisis does hit, to ensure that the incident is handled effectively and safely,” he said.

Increasingly, K&R insurance will need to evolve to more closely fit the concerns raised by clients, said Mr Holt.

RISKIER WORLD “Whether K&R, terrorism or business travel, we think clients need broader cover to respond to a wider range of security incidents,” he said.

Mr Matheson explained that XL Catlin’s K&R team recently launched a new standalone evacuation cover to help companies evacuate employees affected by a political emergency or natural disaster. It gives companies immediate access to expert logistical support and covers potentially significant costs of transportation, accommodation and salary continuation.

K&R is not the only product to have evolved. The terrorism market has also been adapting cover to include people risks, as well as beginning to address cyber and nondamage business interruption.

Risk managers will soon have a more comprehensive suite of related covers that can address various security risks, both in terms of risk transfer and crisis management.

“The CEO’s concern is for risks to people, operations, brand and reputation and potentially cyber.

But insurers tend to see security risks from the perspective of terrorism, K&R and cyber products,” said Mr Holt.

“Part of the journey will be to help risk managers buy a mosaic of covers that better fit the gap that exists in cover,” he added.

9/12/16 11:57:07

Chubb

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NEWS ANALYSIS

‘Most challenging’ market conditions unlikely to ease for insurers: Kendrick first time in four years; and secondly, Lloyd’s’ first-half results saw a deterioration of 8.5 points to 98%.

“Discipline, risk selection, smart portfolio management, better use of the data we have… how well insurers make use of these skills and capabilities will mark out the winners from the losers over the next few years,” predicted Mr Kendrick.

Tough market conditions will likely lead to further consolidation in the commercial insurance market, driven by the need to deliver better returns, reduce expenses, respond to changing technology and, above all, deliver growth, believes Mr Kendrick.

“In today’s conditions, revenue growth is very difficult for any European insurer,” he said.

“Frankly, some business models will simply not be sustainable unless they undergo radical change,” continued Mr Kendrick. “Today, navigating change is becoming part of all of our day jobs, every single day. We need to be agile.

We need to become comfortable with the uncomfortable…

So across the insurance industry, the reinsurance sector and the broking community alike, we should be ready for more consolidation.

Ben Norris bnorris@commercialriskeurope.com

[LONDON]—THERE IS LITTLE prospect of a change in commercial insurance market dynamics anytime soon, despite the fact the rating environment is tougher than ever for insurers, argued Andrew Kendrick, senior vice-president of Chubb Group and regional president for Europe, in a recent speech at the AM Best European Conference.

In an honest appraisal of market conditions, Mr Kendrick also said that alternative capital appears a permanent factor in the insurance sector, and warned that the real test for his profession will come when the benign loss trend reverts to normal.

He went on to say that more consolidation is likely in the insurance market and warned his fellow insurers that they must work harder to stay relevant to customers.

Mr Kendrick told the AM Best conference that the insurance market simply could not bet on market conditions getting any easier from their perspective.

“The cycle seems to have changed, with flatter peaks and shorter, more modest phases. Some say we are reaching a bottom again. But I believe we simply can’t afford to bet on it. With so much capital everywhere, and more waiting in the wings, it is hard to see why conditions should change significantly in the near term. This is simply the reality of the market we are now operating in here in Europe,” Mr Kendrick said during his ‘Lessons From A Remarkable Year’ speech.

UNSUSTAINABLE This is despite the fact he believes that insurance rates have reached, or are in danger of reaching, unsustainable levels in too many classes.

He noted that property rates have fallen by more than a third in the past ten years and in some lines by even more. In addition, he pointed out that S&P expects price decreases of around 5% on average this year and a similar amount in 2017.

All this is adding up to the most challenging environment for insurers that Mr Kendrick can remember.

“When you put where we are today in context, I honestly can’t remember another time when the rating environment has been more challenging. During the past 12 months it has only got tougher; particularly in the large account space, and especially in the UK and London markets,” he said.

“I don’t know about you, but 2016 feels like it’s been a longer year than usual to me! The insurance industry environment here in Europe is incredibly challenging. I firmly believe we have to plan ahead on the basis that market conditions won’t get any easier, and the industry around us is likely to continue on its path of consolidation We can’t bet on market conditions getting any easier,” he added.

Part of the squeeze is due to the

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SYNERGY Andrew Kendrick unrelenting growth in capital from alternative sources.

The insurance industry has now attracted more than $75bn of new capital from hedge funds, pension funds and other alternative sources.

There have been 200-plus recent startups challenging the traditional insurance industry model.

Mr Kendrick expects this to continue and such capital to feature in the long term. He believes the question is not whether alternative capital is here to stay but how much more is to come.

“A few years ago, the question everyone was asking was: ‘Is

alternative capital here to stay?’ I think this is now unarguable. The question today is: ‘How much more is out there?’” Mr Kendrick told delegates.

The soft market and rise in alternative capital are all taking place during – and in part as a result of – an unusually benign loss experience.

HIGH POINT As a result of low losses, the commercial insurance industry has continued to benefit from high levels of prior-year reserve releases. At the end of last year, releases had reached

their highest level for 30 years.

At the same time, cat losses have remained fairly benign and below the projected average. The real test will come when losses revert to type or a big event hits.

“The big question is therefore: what will happen when these trends revert to the mean, as surely they will do?” Mr Kendrick said.

He went on to note that two of the insurance market’s “most predictable bellwethers” have shown notable signs of weakening.

Firstly, the US property and casualty industry could be heading for a combined ratio above 100 for the

CHUBB AND WIDER MARKET WILL DELIVER POST-BREXIT SAYS EUROPEAN HEAD ■ Andrew Kendrick, senior vice-president of Chubb Group and regional president for Europe, used a recent speech to reassure his customers that Chubb and the wider insurance market are working on solutions to deliver, post-Brexit.

He is confident that the industry will be able to respond and explained that Chubb is making plans that will enable it to adapt if needed.

Mr Kendrick explained that almost two thirds of risk managers surveyed at Chubb’s recent Multinational Risk Forum were very confident that the insurance industry will effectively manage the impact of Brexit. Only 4% said they were not confident in its ability to respond. Mr Kendrick shares this optimistic view.

“I think that sentiment is right. Like some others I am sure, at Chubb we have been preparing internally for the different possible Brexit outcomes for some time. We have a clear plan in place to help us respond,” he said during a speech at the AM Best European Conference. “Whatever happens, the insurance industry should be able to deliver continuity for its customers,” he added.

This will not be easy and nothing is certain of course. As Mr Kendrick made clear, nobody knows how things will play out with Brexit. We are in uncharted territory.

Insurers therefore need to work on strategies that provide the greatest flexibility, said Mr Kendrick. Chubb has been working on its plans.

“Whether there is a hard Brexit or a soft Brexit, Chubb has developed workable solutions to all scenarios. We will continue to monitor things closely, and make our decisions at the right time,” said Mr Kendrick.

He stressed that multinational clients will enjoy continued insurance solutions post-Brexit.

“In respect of Chubb’s multinational clients, our servicing model is already structured so that whatever changes are required, we will be able to implement them seamlessly. And while global programmes may need to be structured slightly differently in future, we are confident that we can maintain the same outcome for our insureds,” explained Mr Kendrick.

—Ben Norris

“And from personal experience, I wholeheartedly recommend embracing the opportunities it throws at us,” said Mr Kendrick, who added that the takeover of Chubb by his previous employer ACE is progressing well and delivering a range of benefits, both internally and for clients.

The third key message delivered

by Mr Kendrick is the need for the insurance industry to stay relevant for customers.

The insurer said he understands the frustration from some buyers on this issue. He does not believe that solutions to emerging risks are simply not possible.

“Innovation is not dead. Almost any risk can be insured when we have the expertise to underwrite it, and the information we need to understand it and price it. But there is no question that we must work hard at this,” Mr Kendrick urged his profession and others across the risk transfer chain.

Relevance demands new covers but also broader existing solutions that go beyond traditional indemnification and financial compensation to deeper risk management, loss control and crisis response, he continued.

He gave figures from Chubb’s recent Multinational Risk Forum, where 44% of risk managers polled said pre-event loss control is the area where the insurance industry most needs to improve. Another 13% said the industry needs to up its game on post-loss support.

“Make no mistake, these aspects will help ensure our continued relevance,” said Mr Kendrick.

Insurance also needs to ensure it becomes more diverse and demonstrates the right value and culture to deliver what customers want, and remain relevant, added Mr Kendrick.

9/12/16 11:58:20

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9/12/16 13:53:37

COMMENT

6

ASSOCIATION NEWS Airmic

Time to stop dancing around the big issues

I

T’S TIME TO STOP DANCING AROUND THESE ISSUES and do something about them,” commented Kerry Mckay, client relationship manager at XL Catlin, during the closing debate at our Risk Frontiers Brussels conference at the beginning of this month.

But what was he referring to? What are these big topics that the risk management and transfer industry have to stop dancing around and actually do something about next year?

And, as Andreas Berger of Allianz Global Corporate & Specialty pointed out during the debate, what are the demands that risk managers need to make on their risk transfer partners in 2017?

One thing is clear to us at Commercial Risk Europe. As Mr Berger suggested, risk managers really do need to be in the driving seat to force the market to come up with solutions that meet their needs and not necessarily the needs of insurance company and broker investors.

Based on the discussion in Brussels and our annual Risk Frontiers survey, the topics, questions and demands that need to be top of the agenda in 2017 are: ■ RISK MANAGEMENT IN THE BOARDROOM: What could and should the European risk management community do to ensure that the profile of the profession is raised in the boardroom, and greater value placed on the work carried out by risk managers? How can reporting initiatives be used to help support this effort? How should risk managers work more effectively with other departments and professionals to make sure they are a central part of the decisionmaking process? What skills and expertise do risk managers need to acquire to help them achieve this, and how can national associations and Ferma help them acquire these skills via Rimap and other channels?

■ CHANGING SHAPE OF THE INDUSTRY: What impact will the continued wave of M&A and arrival of fresh capacity worldwide have upon the corporate insurance market during the next 12 months?

Will the overall situation of excess capacity and a continued soft market continue, and is this good for corporate insurance buyers?

How can risk managers make sure that these deals are not just done for the benefit of shareholders, but for customers too?

■ THE RISE OF BIG DATA AND PROCESS REFORM: How could and should insurers and brokers invest in the latest technologies to make themselves more efficient and more valuable to their corporate customers? How can technology and Big Data be used to help improve the way that risks are identified, analysed and priced? How can the technology be used to speed up and simplify the payment of claims? How can insurers and brokers make sure that they ride the wave of technological innovation and are not swept aside?

■ LONG-TERM PARTNERSHIPS: The insurers say they are ready to work more effectively with customers to develop deeper and longer-term relationships that can truly deliver more bespoke and less commoditised solutions. What do risk managers need to do to make sure this actually happens? How can risk managers persuade fellow managers and their bosses that the emphasis needs to shift from a price to value perspective?

■ ROLE OF THE BROKER: How can risk managers help or persuade their brokers to shift from a transactional basis to a more consulting, fee-based role? If the silos are to be broken down and risk and insurance management carried out on a more enterprise-wide and longer-term basis, then the broker needs to join the party. But it will be difficult to do this while commissions continue to dominate the revenue model. How can this be tackled for the benefit of all?

■ THE RISE OF INTANGIBLE RISK: What are the big intangible risks that really need to be tackled by the market in 2017? Kyle Bryant of Chubb said during his presentation in Brussels that the cyber market is at an inflection point. If the market works together more coherently, then great strides could be made forwards in this area, he argued. Supply chain remains a big unknown for so many companies, particularly those that have expanded recently in search of new revenue and profit streams. Everyone is aware that this risk is inadequately identified, measured, modelled and managed. What can be done to properly address this big uncertainty?

■ CAPITAL MARKET SOLUTIONS: The capital markets are keen to investigate the potential to drive down the risk transfer chain from the reinsurance space into the corporate insurance market. Deals are being done and captives are the natural tools. The big reinsurers are keen to tap into this space. The technology that can be used to support structures such as insurance-linked securities and parametric solutions is fast evolving. What do risk managers need to do to ensure they derive maximum benefit from this market waiting to be tapped?

■ GLOBAL PROGRAMMES: What can the market do in 2017 to address the global programme conundrum? National insurance supervisors will not suddenly all come together and agree to take exactly the same approach for the benefit of the corporate risk management community and the providers of cross-border insurance solutions. This is a pipedream. But surely the International Association of Insurance Supervisors has to respond at some point to suggestions about a common approach to DIC/DIL at least?

These are the big topics that we think will be on the agenda for 2017. We look forward to working with you again in the new year to hopefully help shift the debate onwards, towards some tangible solutions.

EDITORIAL DIRECTOR Adrian Ladbury

ART DIRECTOR Alan Booth Tel: +44 (0)7817 671 973[M]

aladbury@commercialriskeurope.com

abooth@commercialriskeurope.com

PUBLISHING DIRECTOR Hugo Foster Tel: +44 (0)1892 320 300 [W] +44 (0)7894 718 724 [M]

WEB EDITOR /DEPUTY EDITOR Ben Norris Tel: +44 (0)7749 496 612 [M] bnorris@commercialriskeurope.com

hfoster@commercialriskeurope.com

DIRECTOR Stewart Brown Tel: +44 (0)1580 201 987 [W] +44 (0)7780 998 440 [M] sbrown@commercialriskeurope.com

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UK/IRELAND: Garry Booth, Stuart Collins, Tony Dowding, Nicholas Pratt FRANCE/SPAIN: Rodrigo Amaral, GERMANY: Anne-Christin Groeger, Friederike Krieger, Herbert Fromme

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06-CRE-Y7-10-Leader.indd 6

UK risk and insurance manager pay falls, finds Airmic survey Insurance spend rises despite soft market



[LONDON]—THE AVERAGE PAY OF UK RISK AND INSURANCE

managers has fallen during the past two years across nearly all age groups, according to the latest Airmic member survey.

The UK-based association’s biennial member Salary and Status Survey also finds insurance spend has risen since the poll was last carried out in 2014, despite softening market conditions.

The research reveals “a marked fall” in average Airmic member salaries across all age groups except the 40 to 49 age bracket, where they have risen from £88,000 to £91,000, said the association.

In the 60 and over range, salaries fell from £94,000 to £90,000; in the 50 to 59 age range, from £95,000 to £93,000; from £67,000 to £66,000 in the 30 to 39 category; and in the under-30s, from £49,000 to £44,000.

Airmic said the fall in average salaries is in part explained by a higher than usual number of very senior members retiring. However, “more investigation is needed to understand what is driving lower salaries in under-40s”, it added.

This year’s survey again shows that members’ salaries peak in their fifties at £93,000. The gap in earnings between those in their 40s and 50s has, however, narrowed to an average of £2,000.

There has also been a reduction in employee benefits enjoyed by Airmic members. Most categories of benefits have been curtailed since the previous survey, with significant reductions since it was first carried out in 2010. Defined contribution, final salary pension schemes and private medical health insurance are the only areas to have increased during the last six years.

Airmic members in the industrial and manufacturing sector receive the highest average remuneration package of £133,357, including salary and bonus. Financial institutions came next with an average of £125,344, followed by the food, drink and tobacco sector at £125,220.

Education was the lowest paid sector for risk professionals, with an average pay of £47,000.

The survey also suggests that Airmic members are buying more insurance. The estimated total spend for Airmic members in 2016 has increased to $6.8bn – excluding self-retained and captive insurance – at an average of £15.5m per member company.

Airmic noted that this is a “significant’ increase from the estimated $5bn total spend two years ago. This rise comes despite a softening market and the reason for the jump is unclear, noted Airmic research and development manager Georgina Oakes.

“The reasons for higher spend on insurance in a soft market are not immediately obvious. It is partly explained by growth in Airmic membership, but more research will be needed to ascertain whether other factors, such as growth in new classes of cover, are at play,” she said.

Slightly more than half of survey respondents make use of a captive – similar to the last six years. The total annual premium income placed into those captives has remained flat for the past two years.

In total, Airmic members spent an estimated £275m on broker fees this year. Total spend on risk management services was an estimated £58m. This was the first year that Airmic quizzed members on this issue, so no comparative data is available.

A high proportion of Airmic members continue to be based in London but the percentage has fallen from 45% to 38% since 2010.

There are a rising number of members in the midlands and northwest England.

Airmic continues to represent predominantly large companies with global turnover in excess of £5bn. It has, however, seen growth among companies with less than £1bn global turnover.

Overall, 40% of members have responsibility for both risk and insurance, while 34% deal with insurance only and 12% just risk. The most common reporting line for members is the chief risk officer or senior risk manager.

A total of 246 Airmic members completed the survey, representing more than 20% of its membership.

—Ben Norris

9/12/16 12:02:50

NEWS Corporate governance

7

Private firms could fall under UK Corporate Governance Code as consultation launched Ben Norris bnorris@commercialriskeurope.com

[LONDON] THE UK GOVERNMENT IS seeking views on how to improve corporate governance in the country and is considering extending its current standards and regime for public firms to large privately owned companies. It also wants to tackle excessive executive pay and strengthen the connection between boards and their employees.

UK risk management association Airmic welcomed the potential extension of the country’s Corporate Governance Code to private firms but has not seen any evidence that current standards fall below publicly listed companies.

A consultation on boosting corporate governance in the UK was announced late last month in a green paper by the UK’s Department for Business, Energy & Industrial Strategy.

GREEN PAPER The government said the green paper is designed to frame discussions on potential changes and ascertain whether any are needed. It also stressed that if corporate governance changes are deemed appropriate they could be achieved through industry standards rather than legislation.

“This green paper is designed to stimulate a debate on a range of options for strengthening the UK’s corporate governance framework,” said the government. It stressed it “does not have preferred options at this stage” on the various suggestions put forward.

The government said it wants to use the consultation to “understand the strengths and weaknesses of the different options and build a better evidence base before deciding which of them to develop further”.

It will also welcome other general suggestions to help improve

corporate governance at UK businesses.

The green paper puts forward several options under consideration by government.

It explores whether, and to what extent, large privately held businesses should meet higher minimum corporate governance and reporting standards.

The green paper suggests that the simplest way to ensure large, privately held businesses with limited liability status adhere to high standards of corporate governance is to extend the application of the UK’s Corporate Governance Code from premium listed companies.

However, it notes problems could arise because the Corporate Governance Code has been designed primarily with public companies in mind and some of its provisions will not be appropriate for privately-held businesses.

Therefore an alternative could be to invite the UK’s Financial Reporting Council, or a business organisation such as the Institute

of Directors, to develop a separate governance code for private firms, says the government in its paper.

“A new code would be able to draw on the various existing codes and standards which have been described earlier, but would need to be tailored specifically to the needs and challenges faced by privatelyheld businesses,” it says.

It went on to make clear that any new corporate governance standards would have to be proportionate to the size of company and practicable.

New standards could be voluntary, it adds.

VOLUNTARY CODE “Adoption of the principles of a code could be entirely voluntary; there could be a stronger expectation that companies would apply elements of a formal code, but it would remain a matter for their discretion; or consideration could be given to a “comply or explain” approach similar to the one used to apply the FRC’s [Corporate Governance] Code,” states the green paper.

“Such an approach could have considerable force. Encouraging better business behaviour through a voluntary approach has led to significant success over the past decade,” it adds.

Applying reporting standards more consistently is the other option put forward to tighten corporate governance at private companies.

This could see private firms forced to deliver the same level of reporting as their publicly held rivals.

Airmic said it “broadly welcomes” a potential extension of the Corporate Governance Code to private companies but stressed there is no evidence that current standards in such firms are not up to scratch.

“We have never seen any evidence that private companies are less well risk managed than public companies. Indeed, anecdotally, many of our private company members have excellent reputations for outstanding risk management that goes with the longer term perspective which many will have,” said Airmic CEO John Hurrell.

The green paper goes on to lay out several options to strengthen stakeholder voice – particularly of employees and customers – at board level in all large UK companies.

Creating stakeholder advisory panels, designating existing nonexecutive directors to ensure that key interested groups are heard at board level and strengthening reporting requirements related to stakeholder engagement are all under consideration.

PAY PACKAGING The section on executive pay considers options to increase shareholder influence over directors’ remuneration, increasing transparency and simplifying and strengthening long-term incentive plans.

Interested parties have until 17 February 2017 to respond to the consultation. This can be done by email to corporategovernance@ beis.gov.uk. The green paper and further details can be found at www. gov.uk/government/consultations/ corporate-governance-reform.

Executive liability rising, warns AGCS Sarah Jolly news@commercialriskeurope.com

COMPANY BOARDS AND executives are increasingly at risk from new liabilities and an anti-corporate litigation culture, warns Allianz Global Corporate & Specialty (AGCS) in a new report.

Since the financial crisis, corporate conduct and accountability has been under increasing scrutiny, which is leading to heightened risks for executives.

Analysis of AGCS claims found that non-compliance with laws and regulations was now the top cause of D&O loss, while mergers and acquisitions were also a key driver of claims.

The average claim for breach of trust and care is in excess of $1m, AGCS said in its D&O Insurance Insights: Management Liability Today report.

Directors and officers are “walking a managerial tightrope”

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as executive liability continues to increase each year, according to AGCS. It has seen a growing trend towards seeking punitive and personal legal action against executives for failure to follow regulations and standards that could result in costly investigations, criminal prosecutions or civil litigation.

GLOBAL REACH “While the legal landscape differs strongly from country to country, increasing shareholder or regulatory action has become a global phenomenon that needs to be given top priority within companies’ internal risk management departments,” said Bernard Poncin, global head of financial lines at AGCS. Litigation against companies and their officers is on the rise around the globe, according to AGCS. In the US, the number of security class action filings at mid-

2016 was on course for its highest annual total for 12 years. A marked increase in claims has also been seen in Germany, where the number of D&O claims for AGCS alone has tripled in the past 20 years.

While in Asia, countries such as Japan, Hong Kong, Thailand and Singapore are also moving towards a more litigious culture.

AGCS observes a general trend for lengthier and more costly D&O litigation. For example, the average US securities class action case takes between three and six years to complete, while legal defence costs average around $10m, rising to $100m for the largest cases. In the past six years defence costs have almost doubled for large US D&O claims, AGCS noted in the report.

The influence of third party litigation funding is also changing the global litigation map, according to AGCS. Litigation funders are behind investor actions against Tesco in the UK, as well as class action-like litigation brought

against VW in the Netherlands and Germany.

In addition executive liability is also increasing in tandem with emerging risks, most notably cyber and data privacy, as well as reputational threats such as modern slavery, environmental pollution and climate change.

“The landscape for executives is further complicated by a number of emerging perils, such as liability around cyber attacks and data privacy,” said AGCS in its report, noting that class actions have already been filed in the US related to data breaches.

TOUGHER PENALTIES Data protection rules are getting tougher, with severe penalties for non-compliance.

As a consequence, AGCS experts anticipate more cyber securityrelated D&O litigation in the US, as well as Europe, the Middle East and Australia.

“Many directors used to see

cyber as an IT issue and not an exposure for the board to consider,” explained Emy Donavan, regional head of cyber liability North America, AGCS. “But there is no escaping cyber risks and directors need to be adequately informed, otherwise they will leave themselves exposed.”

According to AGCS, companies need to employ a “highly sophisticated risk management culture” in the face of rising executive liability. For example, instilling first-class cyber and IT protection, keeping records of all information relevant to a managerial role and maintaining open communication with authorities, investors and employees, is advised.

“Executives should ask tough questions about compliance-related topics such as sanctions, embargoes, domicile registrations, price-fixing and fraud and also learn more about “classic” D&O exposures such as M&A, capital measures and IPOs,” AGCS said.

9/12/16 12:03:14

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9/12/16 12:49:32

LEGAL PERSPECTIVE Regulation in Germany

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German insurance regulator takes hard line on third country reinsurers

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HE GERMAN REGULATOR HAS CLARIFIED HOW IT WILL Deliberate targeting also occurs if a third-country insurer uses interpret and implement Solvency II guidance on the use intermediaries situated in Germany or abroad to contact German insurers of non-EU reinsurance. or to provide offers to the German market. Such activities would be BaFin (Bundesanstalt für Finanzdienstleistungclassified as carrying on insurance business in Germany and trigger the saufsicht) has taken a hard line in its ruling as many in the authorisation requirement. market had expected and third country reinsurers feared.

INSURANCE BY CORRESPONDENCE The BaFin has stressed that operating a reinsurance business without the proper authorisation is a criminal offence.

There is, however, no authorisation requirement if Through an interpretative decision dated 31 August 2016, reinsurance contracts are concluded by correspondence the German federal financial supervisory authority BaFin because such activities are not deemed carrying on has outlined specified aspects for the conduct of reinsurance business in Germany. business in Germany by insurance undertakings situated in a The crucial elements here are that, first, the third country – non-EU/EEA-countries. initiative to conclude the reinsurance contract must It refers to the conduct of reinsurance business by thirdcome from the German insurer and, second, the country insurance undertakings only. It applies to reinsurance reinsurance contract must be concluded by way of contracts concluded on or after 1 January 2016, including correspondence. renewals that require a contractual agreement between Taking into account the above clarification, Henning Schaloske parties. for a national insurer’s initiative to be given, the As a general principle, third country insurers need to respective third-country insurance undertaking obtain an authorisation and establish a German branch office if they wish to must not have distribution structures in Germany or have carry on insurance business in Germany. targeted the German market.

The German Insurance Supervision Act (Versicherungsaufsichtsgesetz), According to BaFin, insurance by correspondence which stipulates these requirements, provides for an exemption if primary also covers cases where a German insurance insurers or reinsurers from third countries carry out reinsurance business in undertaking, on its initiative, authorises a third Germany solely through the provision of cross-border services. party, such as a broker, to prepare and/or conclude a In addition, the European Commission has to decide that, in accordance reinsurance contract. with Article 172 (2) or (4) of Solvency II, the solvency regimes for CONSEQUENCES reinsurance activities carried out by undertakings in the relevant countries are equivalent to the regime described in the Directive - currently the case Insurers should bear in mind that by law the for Switzerland, Bermuda and Japan. supervisory authority is granted powers to order third-country insurance undertakings to cease CARRYING ON BUSINESS IN GERMANY conducting business immediately and run-off BaFin clarified that carrying on reinsurance business in Germany does not the business without delay. only include the execution of legal transactions, but also the main steps Also, the operation or commencement of reinsurance business without the necessary leading up to signing the contract as well as its performance.

The decisive element is whether the third-country insurance authorisation is considered a criminal undertaking deliberately targets the German market to offer reinsurance offence under German law.

This analysis was contributed by contracts to German insurers or to initiate such business. This includes Dr Henning Schaloske, a partner advertising specific products, an internet presence targeted at the German in the Clyde & Co Düsseldorf office, market or employees of the third-country insurance visiting customers with which opened on 1 September 2016 the aim of concluding reinsurance contracts.

LEGAL EYE: the briefs

■ OIL GIANT SHELL FACING MORE NIGERIAN CLAIMS Anglo-Dutch oil giant Shell has urged the English High Court to block pollution claims brought by more than 40,000 Nigerians, demanding the case be heard in Nigeria instead. Lawyers for the claimants want action from Shell to clean up oil spills that have devastated Niger Delta communities for decades. But Royal Dutch Shell lawyer Peter Goldsmith said: “The claims raise issues of Nigerian common law, customary law and legislation. The events are said to have occurred in Nigeria and the alleged physical damage is all said to be found in Nigeria.” The case involves Shell’s Nigerian subsidiary SPDC, which runs a joint venture with the Nigerian government.

■ FRENCH UPDATE ANTI-CORRUPTION RULES With effect from 10 November, 2016, France has modernised its anti-corruption enforcement regime and adopted the Law on Transparency known as Sapin II. Sapin II is France’s response to international criticism of its perceived hands-off attitude towards anti-corruption enforcement. The US Department of Justice, and other law enforcement and regulatory agencies, have sought $1bn in fines against French companies Alcatel, Alstom, Technip and Total for corruption. The tough new rules also affect non-French entities doing business in France.

■ UK’S PERSONAL INJURY RULES TO CHANGE The UK personal injury risk landscape is set for reform after proposed changes from government. Motor insurers could see their claims costs slashed following UK government plans to cap compensation for minor whiplash claims, potentially passing on reduced claims and costs to buyers. The Ministry of Justice wants to cap average compensation claims for whiplash from £1,850 to a maximum of £425. At the same time, it raised the limit for all personal injury claims that can be heard in the small claims court from £1,000 to £5,000. This is another measure designed to reduce the claims culture that has seen whiplash claims increase by 50% over the past 10 years.

09-CRE-Y7-10-Legal.indd 9

9/12/16 12:03:47

10

Repsol

IN FOCUS

Drilling down into the detail RODRIGO AMARAL explains Repsol’s $110m insurance programme

[BILBAO]

H

OW DO YOU MANAGE A $110M INSURANCE programme that requires six months of renewal negotiations and encompasses 30 different countries? How do you do that while the price of your company’s main product is on the slide and the firm is completing a major acquisition? That was the challenge faced by Antonio de la Torre 18 months ago when he took over the corporate insurance department at Spanish oil major Repsol. At a recent event organised by Spanish risk management association Igrea, the insurance buyer shed some light on the task he faces at Repsol.

Mr de la Torre gave detailed insight into the insurance arrangements required by his company, which produces 250 million barrels of oil a year and has pledged “zero tolerance” of security risks in its latest business strategy plan.

Repsol’s insurance programme requires more than 100 policies around the world, covering $60bn in physical damages and loss of production. It also involves the use of a Luxembourg-based captive.

The insurance programme was made even larger when Repsol acquired Canadian oil producer Talisman Energy in December 2014.

The programme is yet more complex due to the fact that Repsol’s activities range from convenience shops and gas stations to large oil refineries, offshore oil platforms and production projects.

Mr de la Torre explained that Repsol’s business is divided in two main activities – downstream and upstream energy.

Each presents its own set of risks and requires specific insurance arrangements.

RISK CONCENTRATION Downstream activities include gas stations, shops and marketing, but also petrochemical and refining plants. They are mostly located in Spain, with a refinery in Peru and a small amount in other countries. Downstream assets are dispersed, but potential losses are highly concentrated because the aggregate insured value of the six largest refineries – five in Spain and one in Peru – amount to $25bn, from a total $30bn to £35bn of downstream assets.

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Mr de la Torre said that every three years the risk management team visits each refinery for three or four days to assess the worst that could go wrong. Potential asset losses are assessed, as well as the length of time it would take to resume regular production levels. Business interruption is a major risk for the downstream energy business.

“It can take more than two years for a refinery to resume production levels after an event,” said Mr De la Torre. “We have business interruption coverages for up to three years for some of our assets. Refineries have very high limits and the business interruption element is [highly] relevant to them.”

Upstream business encompasses oil exploration and production. This activity demands long-term investments with significant uncertainty.

“Exploration means that the company will invest money for ten years with the expectation that, when it begins to extract oil, prices will be at an adequate level,” explained Mr De La Torre.

This activity carries high regulatory and political risk. This was made clear to Repsol when its YPF subsidiary was nationalised in Argentina back in 2012.

“Governments are often our partners, competitors and regulators, and thus they determine our reality,” Mr de la Torre said. “It is something that needs to be managed, and our experience with YPF in Argentina helped us learn.”

Oil exploitation demands large investments in oil fields that will one day disappear. Therefore, risk assessment involves variables such as oil market price and volume of remaining reserves. The former has presented real challenges for the industry. After reaching more than $100 a barrel in 2014, oil prices dropped to less than $30 a barrel earlier this year, before recovering to around $50 a barrel.

For the purpose of estimating insurance coverages, oil exploration wells can be valued at between $5m and $160m, depending on whether they are onshore or offshore, their location and the technologies involved.

Because loss of production income (LOPI) is an important part of the insurance programme, the fluctuation of oil prices affects the limits purchased, explained Mr De la Torre.

Repsol’s upstream assets have a declared value of $25bn.

The limits purchased in 2016 reached $1.9bn, of which $400m was placed with mutual insurer OIL. In total, Repsol’s insurance programme covers

$60bn of potential losses; $10bn of this amount is business interruption risk. The insurance programme has three main layers: a captive, the oil industry mutual insurer OIL, and the global market.

Mr de la Torre noted that each business within the Repsol group retains the first share of the risk, which ranges from €4,500 for gas stations to $1m for offshore oil platforms.

After that comes a Luxembourg-based captive called Gaviota, through which Repsol self-insures losses of up to $40m.

“Gaviota covers commercial risks of up to $15 million to $20 million,” he said.

More than half (51%) of the risks covered by the captive are linked to Repsol’s downstream business. A quarter of the premiums are linked to upstream physical damages and LOPI, 19% to casualty risk, and 5% to terrorism, aviation, directors’ and officers’, cyber, cargo and transportation risks.

Gaviota’s loss ratio hovered around 30% in 2016, which is similar to 2015 levels.

RISK CONCENTRATION “We do not retain only that $40 million,” pointed out Mr De la Torre. “We also have a relevant partner, Mapfre, to whom we, so to say, sell part of the risks that we retain, paying them a premium fee for it. It is a long-term relationship that is strategic for the company.”

The second element of the insurance programme is covered by oil and gas mutual OIL. Overall, 54 companies share and spread their risks through the mutual. It provides $400m of coverages for Repsol’s upstream business.

The OIL policy covers physical damages, terrorism, construction, pollution and well risks. Repsol’s share of the mutual stands at around $45m, which is paid over a period of five years.

After Gaviota and OIL comes the open insurance market.

Repsol’s biggest overall insurance partner is QBE, but Mapfre holds the largest share of downstream risks. The programme requires the issuance of more than 100 policies in 30 countries.

Mapfre is the fronting partner for the international programme and Marsh is the broker.

Mr de la Torre said the insurance programme totals around $110m a year, of which $70m is linked to upstream activities and $40m to downstream.

Placing such a large programme is of course no easy task, and time consuming. Mr de la Torre explained that he begins renewal negotiations in October for his annual 1 May renewal deadline.

9/12/16 12:04:13

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9/12/16 12:49:11

Gregor Köhler, Berkshire Hathaway Specialty Insurance

12

HOT SEAT

As many international corporate and commercial insurers struggle to find a way to make a decent return and deliver growth, Berkshire Hathaway Specialty Insurance seems to be able to buck the trend and continue to surge forward without making acquisitions. ADRIAN LADBURY asks: how and why is this possible?

BHSI OFFERING STABILITY TO RISK MANAGERS IN VOLATILE MARKET

T

HE CONTINUED PROCESS OF consolidation and mergers and acquisitions [M&A] in the international insurance and reinsurance market is forcing risk managers to take a closer look at where they place their coverage. The more stable and highly capitalised insurers, which are less likely to be targets of takeovers, are benefiting from this trend, according to Berkshire Hathaway Specialty Insurance [BHSI].

Last year saw M&A activity in the insurance market valued at more than $150bn. While the pace has slowed this year, the process has continued with big deals such as Sompo’s $6.3bn acquisition of Endurance.

Chinese conglomerate Fosun is seeking a buyer for Ironshore, the specialty insurer it acquired for $1.8bn only last year. Liberty Mutual is reportedly the most recent frontrunner for this deal, after it missed out last year.

At the same time, many of the big listed international carriers such as AIG, Zurich, AXA and Generali have announced serious strategic reviews, as new leadership teams work out how to cope with the stubbornly soft underwriting conditions and challenges posed by rapidly altered business models and technological innovation.

Corporate risk managers do not like uncertainty and will naturally seek ways to cut out the negative impact such change may have on their programmes.

This presents the hugely capitalised and extremely secure Berkshire Hathaway with a big opportunity, according to David Bresnahan, executive vice-president of the group’s primary specialty insurance arm BHSI, which was launched three and a half years ago by former AIG executive Peter Eastwood.

OPPORTUNITY KNOCKS Most of the leading international insurance carriers are struggling to maintain meaningful volume growth in the current market.

Prices are simply not high enough to justify continued growth in many core lines and territories. Therefore, attention is shifting to cost control in order to maintain margins.

‘Underwriting for profit’ and ‘walk away prices’ are the common phrases emanating from the mouths of insurer CEOs during recent quarterly analyst conference calls.

This environment, however, provides BHSI with a big opportunity, Mr Bresnahan recently told AM Best TV during an interview at the annual National Association of Professional Surplus Lines Offices conference.

“Given the competitiveness of the market, we are really pleased with [our] progress,” he said. Mr Bresnahan explained that changes on the carrier side from M&A and subsequent frequent movement of key individuals and teams, means that he and his colleagues at BHSI are seeing a change in buyer behaviour.

He said risk managers are asking themselves whether the underwriters they normally deal with will actually be around next year or whether their company may even be acquired, leading to great uncertainty.

Because of Berkshire Hathaway’s huge financial backing as part of Warren Buffett’s group of companies, BHSI is able to “trade on that”, said Mr Bresnahan.

The numbers appear to back up his claim.

Mr Eastwood and a team of three colleagues only launched BHSI in 2013. It has grown rapidly and now has 1,250 staff, based in 23 offices in nine countries.

The insurer this year broke into AM Best’s annual ranking of the top 10 biggest excess and surplus lines insurers. Mr Bresnahan said that this year the operation should hit between $1.35bn and $1.4bn in premium volume, from a start of zero when launched.

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This growth has been accompanied by profitability at a level rival insurers are struggling to deliver, he added. BHSI’s combined ratio remains in the “low to mid-80s”, he told AM Best.

Standalone figures for BHSI are not available. But by digging through the group’s quarterly filings one can find further evidence to support this story of rare profitable growth in a tough market.

The group divides its insurance business up into three core segments. These are General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group [BH Primary]. BHSI sits within the third group.

This group also includes: ■ MedPro Group, a provider of healthcare malpractice insurance coverages ■ National Indemnity Company’s primary group, underwriters of commercial motor vehicle and general liability coverages ■ US Investment Corporation, which underwrites specialty insurance coverages ■ Berkshire Hathaway Homestate Companies, providers of commercial multi-line and workers’ compensation insurance ■ Applied Underwriters, a provider of integrated workers’ compensation solutions ■ Berkshire Hathaway GUARD Insurance Companies, providers of workers’ compensation and commercial property and casualty insurance coverage to small and mid-sized businesses ■ Central States Indemnity Company, a provider of credit and Medicare Supplement insurance.

The group revealed that premiums earned by Berkshire Hathaway Primary in the first nine months of 2016 were $4.58bn, an increase of 16% compared to 2015.

“The increase in premiums was primarily attributable to volume increases from BH Specialty, MedPro Group, BHHC and GUARD,” stated the group.

Combined loss ratios were 61% in the first nine months of 2016, and 59% in 2015.

“The comparative increase in the loss ratio reflected comparative declines in favourable loss development of prior years’ loss events, partly offset by lower loss ratios on current year business,” stated the filing.

Berkshire Hathaway is certainly not the only insurance and reinsurance group to report reduced reserve releases or even additions in recent times, so this is no big problem.

Overall, it appears that the vast majority of the group’s rivals would readily welcome such numbers, particularly as they come without the cost and effort caused by acquisitions or disposals and, particularly in the case of BHSI, from organic growth.

Mr Buffett made it very clear in his last annual letter to shareholders that he sees no need to join in the current M&A frenzy.

He assured investors that it is “almost certain” that the group will not acquire a large commercial insurer as it continues to expand the BHSI business.

That growth will be based on the marketing power provided by the massive financial resources of the group, the addition of experts to expand into target specialty markets and the ability to deliver genuine bespoke insurance and reinsurance solutions for difficult-to-place risks and programmes.

The latest quarterly statement stressed the power of BHSI’s financial strength. It stated: “A key marketing strategy of our insurance businesses is the maintenance of extraordinary capital strength. A measure of capital strength is combined shareholders’ equity determined pursuant to US statutory accounting rules [‘Statutory Surplus’]. Statutory Surplus of our insurance businesses was approximately $124bn at 31 December 2015.

“This superior capital strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers.”

The acquisition of key people and teams to build the BHSI business on an international basis really got underway in December of 2014, when it received its non-life insurance licence in Singapore and named Marc Breuil, former head of AIG’s operations in Hong Kong and Taiwan, as regional president for Asia.

In January 2015, BHSI announced that it had received a licence to carry out all classes of general business in and from Hong Kong, as well as several key appointments.

In April, the company revealed that it had received a licence to provide all lines of general business in Australia, set up operations in Sydney and named Chris Colahan as president.

In June, BHSI received its licence from the Reserve Bank of New Zealand to commence a new business based in

9/12/16 15:54:50

HOT SEAT Gregor Köhler, Berkshire Hathaway Specialty Insurance

13

FOCUS ON VALUE OF INSURANCE IS KEY TO CONVINCE THE BOARD GREGOR KÖHLER, HEAD OF BERKSHIRE HATHAWAY Specialty Insurance (BHSI) in Germany and northern Europe, is convinced that an industry-wide effort is needed to teach the wider business community about the value of insurance.

A lack of understanding about the true value that strategic insurance can bring is clearly a problem in emerging regions of the world such as Asia-Pacific and Africa.

Franck Baron, founding president of the Pan-Asia Risk and Insurance Management Association, said during this year’s GVNW Symposium in Munich that one of the biggest challenges facing his fast-growing membership is to convince their bosses that insurance is more than a mandatory requirement or an expense that needs to bought at the cheapest possible price.

But this is not just a problem in Asia. It is also still something of a problem in the supposedly mature economy of Europe, particularly as risk and insurance budgets come under unprecedented levels of pressure.

“Brokers, clients and carriers all have to deepen the understanding of what insurance actually offers. I do not think the value of insurance is properly communicated,” said Mr Köhler.

“Former Willis CEO Joe Plumeri gave a speech at the DVS Symposium a few years back, when he described insurance as the ‘glue’ that fits the economy together. He was dead right.

If you go to a building site and they do not have the certificates in place, no work is done. If you are a smaller company and

Auckland under the leadership of country manager Cameron McLisky.

The Asian, Australian and New Zealand businesses have expanded rapidly with the addition of a range of expert people and product launches.

The big move in Europe came in March of this year when Berkshire Hathaway International Insurance Ltd [BHIIL] announced it would start offering specialty insurance solutions to European customers via BHSI. The group named Tom Bolt, former director of performance management at Lloyd’s, as president, UK and southern Europe. Gregor Köhler, former risk and insurance manager at German chemical giant Bayer, was named president of northern Europe.

Mr Bolt would assume the role of CEO. He and Mr Köhler were also named as BHIIL board members.

“Establishing European capabilities is a natural next step in the maturation of BHSI, and an important milestone in growing our global footprint,” said Mr Eastwood at the time. “We are pleased to have the top-calibre talents of Tom and Gregor to lead the efforts to build a team in the UK and Europe.”

Those who know Mr Köhler, such as his former

Risk Frontiers London

Africa: Growth, Opportunities and Risks SAVE THE DATE - 30 March, 2017 GRANGE CITY HOTEL LONDON, UK In association with

you do not get the certificates, you cannot open the factory and you can secure no credit line,” he said.

“Insurance is a substitute for equity and if you need to borrow money it is cheap, at a cost of perhaps 2.5% depending on the company or insured’s rating. If a company is not insured and a claim occurs, you have a problem because

colleagues on the committee at the German risk management association GVNW, will not be surprised to hear that he did not hang around.

By June, the group was ready to announce an established northern European headquarters in

Lack of information on the Africa risk and insurance markets continues to be one of the main reasons why foreign companies are reluctant to make direct investment within countries in the region.

Following on from 2016’s successful inaugural conference, Commercial Risk Africa and sister publication Commercial Risk Europe will host a oneday conference to identify the main risks faced by international companies and investors in Africa.

The conference will once again gather an expert group of speakers from Africa and the international risk and insurance markets to discuss how to best identify, measure, manage and transfer risks associated with investment in and trade with this fast-growing continent.

most companies are leveraged and you have to pay back the loan if insurance was not sufficient or just not there. There is a missing discussion about the value of insurance and I always have done this as a risk manager, to go into the company and advocate the value of insurance, otherwise insurance may end up with procurement,” continued Mr Köhler.

Leander Metzger, senior vice-president, head of property, northern Europe at BHSI, added that the market needs to use the total cost of risk approach to underline the strategic value of insurance. “If you act more as a purchaser of insurance rather than a strategic risk manager, then you do not add so much value,” he said.

Mr Köhler said it is important for risk managers to be aware that if a company is inadequately insured, leading credit rating agencies will ask how a claim will be paid.

“In the bond rating process, the credit rating agencies assume that insurance is in place and if it is not, it will affect the price of debt. The insurance market as a whole has to have price discussions, but not only that. The value of insurance proposition of our industry has to be [more strongly] explained to the insured,” he concluded.

Düsseldorf, Germany, as well as naming key executives.

“This is the beginning of our exciting journey to provide long-term solutions for customers throughout the region,” said Mr Köhler.

The key appointments were: ■ Jörg Bechert, SVP, head of executive and professional lines, northern Europe, former head of strategy and innovation at AON Germany ■ Ulrich Kütter, SVP, head of marine, northern Europe and most recently head of marine, central and eastern Europe at Allianz Global Corporate & Specialty ■ Leander Metzger, SVP, head of property, northern Europe and former director, AFM at FM Insurance Company Limited’s central European operation ■ Robert Scherf, VP, head of human resources, northern Europe, who joined from Catlin Europe.

So, with the capital backing of the parent group and a team of well known experts raring to make waves from their Düsseldorf base, the next step is generating lots of premium and profits in a highly mature, competitive and stubbornly soft German and wider northern European insurance market.

This is obviously no easy task, so the big question for Mr Köhler was exactly how was this is going to happen.

The answer to this question from Mr Köhler and leading BHSI executives follows.

WHO SHOULD ATTEND? ■ European, US & African insurers & reinsurers ■ West African regulators ■ Western & West African insurance institution representatives ■ Brokers ■ Risk managers ■ Auditors ■ Transaction Advisory Firms ■ Banks & investment funds ■ Western and African government officials ■ African trade development agencies/ organisations ■ Law firms ■ Ratings agencies ■ Insurance industry service providers

For more information please contact event manager Annabel White awhite@commercialriskeurope.com

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9/12/16 15:55:03

14

Gregor Kohler, Berkshire Hathaway Specialty Insurance

HOW TO MAKE PROFIT AND GROW IN TOUGH MARKET: KÖHLER

T

HE CONTINUED PROCESS OF consolidation and mergers and acquisitions [M&A] in the international insurance and reinsurance market is forcing risk managers to take a closer look at where they place their coverage.

The more stable and highly capitalised insurers, which are less likely to be targets of takeovers, are benefiting from this trend, according to Berkshire Hathaway Specialty Insurance [BHSI].

Gregor Köhler is more than aware that, despite the fantastic Berkshire Hathaway reputation and vast capital resources, breaking into the German and wider northern European corporate insurance market will be no walk in the park.

This is a mature, loyal and highly competitive market and any new entrant such as Berkshire Hathaway Specialty Insurance (BHSI) needs to offer something unique to succeed. The European BHSI division is a subsidiary of Berkshire Hathaway International Insurance Ltd, acting under BHSI as a trade name.

Turning up in Germany with a decent amount of capital, a great reputation and a team of experienced underwriters does not mean that quality business will automatically fly through the window.

The start point for Mr Köhler is trust.

If BHSI can win the trust of the German and wider northern European corporate insurance manager community, then his experienced underwriting team will be able to put that huge capital to work effectively and profitably.

And, according to Düsseldorf-based Mr Köhler, the key to winning trust is to truly focus on the main reason why corporations actually buy insurance in the first place: to have claims paid.

This is why the second person he hired was Ulrich Kremer, senior vice-president, claims, northern Europe.

TRUST Mr Kremer is an experienced lawyer and claims manager. He joined BHSI from Chubb, where he was claims department manager for Germany, Austria and Switzerland.

“I want to do certain things differently compared to the competition. To hire a senior claims manager to set up a claims operation so early on is not really the way this industry normally works,” explained Mr Köhler.

This is the BHSI model that was adopted from the start by president Peter Eastwood when he joined the group in 2013 from AIG/Lexington, to launch the corporate insurance operation and diversify Berkshire Hathaway’s massive reinsurance book.

Mr Eastwood’s first hire was David Crowe, senior vicepresident, claims. This was a strong message to the market that BHSI would approach the business in the right way from the start.

“You need to earn the trust and confidence of the market right away and this is a very good way to do this,” Mr Köhler told Commercial Risk Europe.

This focus on claims from the start is, of course, backed up by the group’s massive resources.

The market cap of the entire Berkshire Hathaway group is bigger than $310bn.

“Berkshire Hathaway has enormous capital behind it.

This is not comparable to any other insurance company currently in the market. The group of insurance companies has been in the market for 50 years and had about $41bn in annual premiums in 2015. It was predominantly about reinsurance through Berkshire Hathaway Re and General Re but also [it] is big in the US motor market, with some $18bn of premiums written by GEICO. The next logical step was to step into the corporate insurance business,” explained Mr Köhler.

Berkshire Hathaway’s decision to enter this market was partly driven by recognition of the changing nature of the reinsurance and insurance business over the longer term, he said.

“The volatility of the past in terms of cycles is no longer there. This volatility traditionally provided the reinsurance market with its bread-and-butter business. The German

12-CRE-Y7-10-Hot-Seat.indd 14

market has changed too. In the 1990s, the old tariff market system broke down and the market was opened up.

We are living in a different world now. Berkshire Hathaway recognised that it made great sense to offer its expertise and capital to the ultimate corporate insurance buyer as a means of growing the business,” added Mr Köhler.

WHY NOW? One obvious question for Mr Köhler is: why enter the market now when the market is so competitive, capacity is high and there are few signs of a significant hardening across the board?

The former Bayer risk manager had a simple answer to that question.

“The bottom line is that Berkshire Hathaway is setting up a ‘forever business’, a long-term player. Why now when the market is so soft? Well, it does not really make a difference if you are wearing long-term glasses when you enter the market – either during a soft or hard market situation. And if you take the gold standard approach in underwriting, claims and administration, we are pretty optimistic that this combined with our strong capital basis will lead us to success,” said Mr Köhler.

Another interesting fact is that the market is not actually soft in all parts. The market may be soft for standard risks but once you start talking about nonstandard and high value catastrophe risks, it can become a lot harder – and this is potentially profitable for the insurer that has the resources to play in that space.

Leander Metzger, senior vice-president, head of property at BHSI in Düsseldorf, explained: “Fire capacity is abundant out there but what about contingent business interruption or natural catastrophe cover? Then it becomes tight. If you look at primary or excess first-layer business, it is always triggered by fire capacity of the standard carriers and this does not make sense because it is limited.

This is an opportunity for us to see how we can help clients in any place, even if it is the first layer. The risk manager is not well advised to fix a programme in order to secure the insurer’s fire capacity. A client is best advised if he tries to get the best programme done, inclusive [of] the best coverage for natural perils, and not what fits the insurer’s needs.”

Mr Köhler added: “During many of my initial discussions with risk managers, they asked why we are adding additional capacity to what is a vastly oversubscribed market. I ask them what is their sub-limit on their property natural catastrophe programme – is it adequate? And ‘no’ is the answer. Again, we can jump into the ‘me too’ box if needed, with normal standard P&C business, but even here we see a lot of opportunities to do business because of a lack of capacity for the really important risks. Yes, there may be €3bn available in fire capacity for a client but there may be a €100m or more sub-limit for natural catastrophe for the same exposures.”

GOING LOCAL Another obvious question for Mr Köhler was: why focus on the highly mature and competitive German market? Surely there would be easier and more fluid markets to target?

He responded: “Why not Germany? This is the biggest economy on the continent. We are creating a local business unit here with a local business flavour. You do in Rome what the Romans do. We have seen other insurers try to impose their non-European culture on local markets over the years here and we do not want to do that.”

Claims, again, is an important element of this local approach, he said. He explained that the BHSI philosophy is to avoid the courtroom if at all possible. This fits neatly with the German market approach.

“Clients expect their insurer to help them when a claim arises. To succeed you have to deliver a superior claims service to help the client, and not throw stones,” said Mr Köhler.

His colleague Mr Kremer added: “Our philosophy is to help the customer and avoid interruption for the client’s business as much as possible. We are a claims-paying company. In the first place, we can afford it because our financial strength gives us the needed flexibility. We are the decision makers who have the authority to agree claims directly with the client.”

Mr Köhler added: “We do not throw money out of the window but we will treat customers very fairly. We do not seek exclusions but coverage in a claims scenario and we want to support the client as much as possible. The worst thing for a risk manager is when you have to tell the board you have a reservation of rights or even worse, a declination letter in your pocket,” he said.

HOT SEAT

HIRING TO SUCCEED Local empowerment and the ability to make swift decisions is only made possible if the right people, with the right level of experience, knowledge and skill are in place.

This is why another of the Düsseldorf operation’s first hires was Robert Scherf, vice-president, head of human resources for northern Europe. Mr Scherf, who has 30 years’ experience, joined from XL Catlin where he was head of human resources at Catlin Europe.

“You have to be really selective about who you hire in a business such as this. You need to ensure the individual is able to follow our philosophy, think outside the box and be confident about our structure. They have to absorb our culture,” explained Mr Scherf.

“Berkshire Hathaway encourages local people.

Underwriters should not be shy. Underwriters do their job and a claim will sometimes be the consequence. If that claim is covered, they should not throw fog bombs to delay the claims process and the like,” added Mr Köhler.

Mr Kremer concurred: “We check candidates for their technical skills but really they have to be team players, understand our approach and understand what a truly significant claim can mean to our customer.”

GET WHAT YOU PAY FOR Quality normally comes with a price attached, of course. If you want to hire the best claims people and underwriters, then you have to be prepared to pay a higher price. But are risk and insurance managers, currently under such intense budget pressure, prepared to pay for a ‘gold standard’ of service in such an intensely competitive market?

Mr Köhler is convinced that risk managers are prepared to pay more for a policy that is likely to actually deliver the goods when needed.

“In my previous life as a risk manager, I structured a programme that did cost much more but was worthwhile because some years later a claim scenario has proven that I was pretty much right. Maybe some risk managers are willing to pay a little more to take the quality street,” he said.

Head of property Mr Metzger, a 20-year insurance industry veteran who was previously director, AFM at FM Insurance Company’s central European operation, pointed out that the new operation also has the advantage of a lean cost base to work from.

“Where does price come from? Partly, the cost base.

We have no reinsurance and have advantages from this perspective. Secondly, we have a fantastic IT system, not some huge legacy system that does not work,” he said.

Ulrich Kütter, senior vice-president, head of marine, northern Europe – a 25-year insurance industry veteran who was previously head of marine, central and eastern Europe at Allianz Global Corporate & Specialty – added that, in this sense, it is critical to achieve the right balance between risk-adequate premium against claim exposures and overall costs.

“Getting the right balance is the key. You need a longterm view where the marine market is heading and you have to be fast and efficient at claims settlement based on your capital strength. You need the right mix. We are not entering this market to win business only over price. We will charge the right price for the severe exposures that are out there, while benefiting from our cost competitiveness,” he said.

Mr Köhler added: “It is easy to start lean but hard to keep it. We are working on a delivery basis in order to keep it lean and efficient but that does not mean that we will not be capable of growing or doing business. We want to avoid the complexity. This will be a competitive advantage.”

Mr Köhler said BHSI will work on a “reasonable” cost basis. He is aware that this approach means BHSI will have to turn business away in Germany and elsewhere in northern Europe, because of the current state of the market. But Mr Köhler is more than prepared to do that if the offered market premium is not sufficient.

“We do not want to fund endeavours that clearly do not make sense. We see submissions that are purely based on price. The exposure and retention level has to make sense and be priced properly,” he said.

Mr Metzger supported his boss on the ‘stand firm’ line.

“If you think it’s a good idea to write business at too low a price to win it, then you will suffer, lose good people and it will only get worse. In such a market you have to invest in good people who make smart decisions and are brave enough to say no. If you compete only on price then you will never win the game,” he said.

9/12/16 13:51:09

E-NEWSLETTER

15

» BEST OF THE WEB Commercial Risk Europe reports the leading news stories of relevance to Europe’s risk and insurance managers every week in its electronic newsletter.

Below is a round-up of the most popular articles published last month.

To sign up for the free CRE weekly newsletter please go to http://www.commercialriskeurope.com/ more-information/newsletter/sign-up-here

» ZURICH AFFIRMS COMMITMENT TO LARGE RISK AND MULTINATIONAL BUSINESS DESPITE COST CUTTING [ZURICH]—ZURICH INSURANCE REMAINS fully committed to large risk business and plans to build its multinational programme offering, but will continue to seek cost savings in general insurance, according to CEO Mario Greco.

Announcing its new strategy for the next three years, the Swiss insurer said that ongoing changes at group level should make it more profitable and efficient by 2019.

Mr Greco told a media call that the insurer has no plans to exit geographies or lines of business. Rather, it will continue to build on its existing strengths, he said.

“We have a strong franchise with opportunities to improve profitability in general insurance and the cost base,” said Mr Greco.

“This is a very strong group and it does not need any fundamental restructuring. It has a strong capital base, strong brand and excellent skills, but it needs to focus on profitability and cost management, especially at its general insurance business,” he said.

Mr Greco said that Zurich will build on its Global Corporate business, which generated large losses in 2015, to maintain its role as a “global leader” in large corporate risks.

“Insurance customers will have losses and we do not complain or regret that customers have losses. We just regret if we do not price the business properly or that we do not protect ourselves through reinsurance,” said Mr Greco, when asked about Zurich’s commitment to large corporate risks “It’s a question of price and the coverage we want to have, not about large losses,” he added.

Mr Greco’s assertion that Zurich’s commitment to large corporate risks remains unchanged comes despite an announcement in September that it will no longer maintain a dedicated large commercial risks unit. It is currently merging Global Corporate with the rest of its commercial insurance business under a new Commercial Insurance unit headed

by James Shea, who joined from AIG earlier this year. Under its new strategy Zurich will continue to develop multinational programme capabilities. The insurer is also creating a global specialties team to manage and coordinate its sector- and product-specific specialty insurance offerings.

Zurich said that it will continue to focus on improving underwriting performance at its commercial lines business.

“The group will enhance underwriting performance to improve profitability in

15-CRE-Y7-10-BoW.indd 15

commercial through more disciplined underwriting tools, through initiatives to reduce portfolio volatility by limiting risk exposures and through talent management initiatives, training and career development. At the operating level, Zurich will continue to reduce complexity and improve accountability,” it said.

At group level, Zurich’s strategy will focus on efficiency and customer experience through simplifying its structure and IT systems.

Mr Greco said that Zurich’s “high cost base” can be reduced, while the insurer is already addressing “accountability weaknesses”.

Overall, Zurich aims to cut annual expenses by $1.5bn, reducing annual costs from $10.3bn in 2015 to $8.8bn by 2019. According to Mr Greco, Zurich has “started afresh” with its cost saving targets, which replace its previously announced $1bn planned savings.

Some $500m to $700m will come from IT-related savings in the next three years.

However, under Mr Greco, Zurich appears to be taking a softer approach to reducing headcount. The new strategy does not include job reduction targets and the insurer will no longer pursue the previously announced 8,000 potential redundancies.

—Stuart Collins

In Liechtenstein, the Generali group signed an agreement through its subsidiary Generali Schweiz Holding AG for the sale of 100% of Fortuna Lebens-Versicherungs AG – a life insurance company in run-off since 2015 – to FWU AG, a Munich-based financial services business.

Generali did not specify which markets it is considering leaving next or whether it will divest life or P&C business. But Reuters coverage quoted broker Intermonte as saying that South American or Benelux countries could be among the candidates.

“We have established greater coordination and discipline across business units, with local CEOs empowered to monitor the progress of our strategic levers through targeted KPIs,” said Generali CEO Philippe Donnet. “Our goal is leadership in our chosen markets, not measured by size but by profitability.”

—Garry Booth

» GENERALI TO REVIEW OPERATIONS IN UP TO 15 MARKETS

[LONDON]—Insurance buyers and their risk

[TRIESTE]—GLOBAL INSURER GENERALI is reviewing its presence in up to 15 countries and wants to raise at least €1bn by selling off businesses in unattractive markets.

During its investor day presentation, the firm also said it aims to cut operating costs in mature markets by €200m during the 20162019 period.

Generali intends to maintain a global and diversified geographical presence by focusing on where it is technically strong, efficient and profitable, or where it can create those conditions in the medium- to long-term period, the insurer said in a statement.

At the same time, it will exit from less profitable markets in order to increase operational efficiency, improve capital allocation and mitigate risks.

“Thus, the rationalisation process already started with the disposal of the businesses in Guatemala and Lichtenstein will continue and is expected to generate at least €1bn of cash by 2018,” Generali said.

In Guatemala, Generali signed an agreement to sell its participation – equivalent to 51% of the share capital – in Aseguradora General S.A., a company that is mainly active in the property and casualty (P&C) segment, to its local partners.

» GBUYERS AND SELLERS BEMOAN 2% UK IPT RISE AMID FEARS OF MORE TO COME transfer partners have criticised the UK government’s decision to raise Insurance Premium Tax (IPT) to 12%, which means the rate will have doubled in less than two years.

There is concern among experts that IPT will continue to rise and eventually reach parity with VAT on 20%.

Airmic, the UK buyers’ association, said the latest rise will challenge its members and runs counter to government policy of encouraging business to use insurance to help fight cyber risk.

Other experts noted that the rise was the biggest tax increase announced in the UK government’s Autumn Statement yesterday, and warned of further rises ahead. They called on government to act in a measured fashion.

The UK’s Chancellor of the Exchequer Philip Hammond said his government will increase IPT from 10% to 12%, from next June. The latest rise will mean IPT has doubled from 6% in October 2015.

Airmic said it is disappointed by “yet another rise” in IPT. The Association’s deputy CEO, Julia Graham, said the latest rise adds another increase to the overall cost of insurance and further challenges UK business and its insurance industry.

Ms Graham warned that doubling IPT in a short space of time will start to impact businesses. She called on her government to allow things to settle before thinking about further rises.

“Airmic urges the Chancellor to consider the net impact of the incremental increases in IPT, and allow a period of adjustment and stability before considering any further increases,” said Ms Graham.

She warned that the latest rise in IPT risks insurance becoming a price-driven decision.

This would be bad for UK business, she added.

“Insurance is a strategic purchase and cutting corners in cover to save premium could lead to some customers being disappointed when a claim is made and the cover purchased is not up to the job,” explained Ms Graham.

Airmic also made clear that higher insurance costs run counter to the UK government’s policy of helping UK businesses fight cyber crime, partly through insurance.

“This increase comes at a time when businesses and the insurance industry are grasping cyber insurance covers more effectively, and it would be disappointing to see businesses deterred from taking on additional relevant covers by this increase. This scenario goes against other government policies designed to encourage UK businesses to get cyber-fit,” Ms Graham said.

The UK risk transfer industry also moved to criticise the rise in UK IPT. The Association of British Insurers’ Huw Evans said yet another increase is a “hammer blow”.

“It will hit consumers and businesses alike, hurting those who buy business, motor, property, pet and health insurance. It marks a doubling of Insurance Premium Tax since last year,” he added.

The British Insurance Brokers’ Association (BIBA) said the “aggressive” tax increase is “outrageous”. BIBA said it is a tax on protection and runs counter to HM Revenue and Customs’ stated policy that IPT should make the required contribution to government revenue while “minimising the effect on the take-up of insurance”.

There is also a fear that IPT will continue to rise and potential reach parity with VAT of 20%.

Mike Stalley, CEO of FiscalReps, the international IPT specialists, said: “The increase in IPT follows a continuation of government policy over the last few years, suggesting a longer-term trend towards standard rate parity with VAT, which is the case in a number of other European countries. We may see further incremental increases as the UK raises IPT closer to the standard rate of VAT.” Benjamin Flockton, PwC insurance tax partner, said the unwelcome announcement was not wholly unexpected. The insurance industry has been vocal in lobbying against further IPT rises for some time, he said.

“Nonetheless, insurers have been predicting a trend of IPT ultimately aligning with the UK’s 20% VAT rate,” he added.

—Ben Norris

9/12/16 12:14:24

Continued from Page One

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NEWS

POLITICAL: New world order demands strategic risk response CONTINUED FROM PAGE ONE suggest some fundamental changes may be at play. “[Next year] will certainly be a more uncertain one for political risks than we have seen in decades, in terms of the actions of states and how they treat international trade and investors,” according to Roderick Barnett, political risk underwriter at Lloyd’s insurer Beazley.

“The US election and Brexit both point to more nationalist leanings in the west, but also in some emerging markets that were until recently considered investor friendly,” added Mr Barnett.

Political risk continues to increase, but it is also changing, according to David Lea, senior Europe analyst at Control Risks.

While conflict and terrorism risk are just as prevalent as a year ago, populism and protectionism have grown significantly. “The populist trend continued in 2016 and will be the biggest story in the geopolitical risk town in 2017,” said Mr Lea. Political risk is changing as most developed economies go through a period of political realignment, according to Dr Florian Otto, head of Europe at political risk consultant Verisk Maplecroft. Countries that have been relatively stable have become less so, he added.

“In Europe and North America, political risk is clearly on the rise as their political landscapes have become more fragmented and polarised. A lot of the frameworks and assumptions we’ve relied on to understand the ‘world’ have been called into question,” he said.

This shifting geopolitical landscape goes to the very heart of multinational companies’ operations. It will require companies to adopt a more strategic approach to managing political risks, according to Mr Lea.

This shift may require a different risk management approach for many companies that have traditionally focused on security risks and protecting assets and investments in high risk countries, explained Mr Lea. “Companies will need to look at political risk in a different way, not just from a security perspective. Political risk is becoming more nuanced and strategic, and will require a greater engagement at board level,” he said.

“With the threat of a breakdown in trade and in the historical world order of the last 50 years, companies need to respond in kind to this strategic level threat,” he added.

A key consequence of increased populism will be the potential impact on international trade. “The period favouring global trade has clearly come to an end, at least for now,” believes Mr Lea. The ability of companies to trade cross-border is likely to be directly affected by the result of the US election, Brexit and elections in Europe, he continued.

“Populism does carry a risk for multinational companies. It could affect their ability to carry on their business, as well as potentially on the flow of trade, commodities and manufacturing as the new world order plays out,” said Mr Lea. The outcomes of the UK’s European Union referendum and the US presidential election have undermined confidence in the ability of the status quo to survive, with implications for key elections in Europe next year, explained Mr Otto.

“The result is high uncertainty, which translates into high levels of volatility in the financial markets, particularly for currencies and the financial sector. As Europe is still in the process of coming to terms with the eurozone and migration crisis, any upset in countries like Italy, the Netherlands, France or Germany

could quickly undermine confidence in the eurozone economy, which would hit sovereign bonds of peripheral eurozone economies first,” he said.

According to Mr Lea, companies have enjoyed growth on the back of the trend towards trade liberalisation and increasing ease of cross-border trade. However, the changing political landscape will make such growth harder to come by. It will also become more difficult to access emerging markets and rival trading blocks.

The rise of populism and protectionism also has implications for supply chains, believes Mr Lea. Supply chains could become harder to manage, more complex and bureaucratic. They may also become more exposed to physical disruptions, as well as protectionist trade measures and related regulations.

An increased tendency in Europe for greater protectionism and bureaucracy could affect trade with emerging markets. Similarly, supply chains could also be affected if European countries look to increase border controls, as is also proposed in the US. While it is still too early to predict how Donald Trump’s election promises will translate into risks, the US could become more protectionist and alter international relations, according to Alistair McVeigh, UK political risk and structured credit leader at Marsh.

“The result could be a deterioration in the investment climate and for the outlook of political risk globally, especially for targeted markets such as Mexico and China.

Equally, a thawing in US relations with Russia could also have global repercussions,” he said.

There is little doubt that a more protectionist line will be taken by the US, which does not bode well for investors, according to Mr Barnett.

“There will undoubtedly be a reaction by countries to US

protectionism and this creates heightened uncertainty for foreign investors and multinational companies, which could find corporate assets are targeted by governments negatively affected by US trade embargoes or aggressive trade policies,” he said.

Some believe that the US election and Brexit are an indictment of the perceived negative effects of globalisation, in particular the impact on manufacturing and industrial jobs in the US, UK and Europe.

Mr Trump campaigned on putting ‘America first’ and a promise to bring jobs back to the US. He warned of consequences for US companies shifting operations overseas and has talked of imposing tariffs to protect US industry.

In November, there were signs that President-elect Trump will make good on some of these promises. He reportedly offered US air-conditioning company Carrier Corp a tax break if it curtailed its plans to move 2,300 jobs to Mexico.

“We could potentially see a slowdown in US companies investing and outsourcing overseas. But the extent that rhetoric is turned into reality remains to be seen,” said Rob Deeley, senior vice-president, political risk and structured credit practice at Marsh.

Any significant push back against globalisation and trade liberalisation would have implications for emerging markets, many of which are already dealing with volatility in commodity prices, explained Theo Varenne, a broker at Marsh’s political risk and structured credit practice.

“In the current climate, multinational companies will be thinking carefully about foreign investment and how they can manage political risks,” he said.

An increase in protectionism and a decline in international relations might not play well for emerging markets,

where there may be implications for expropriation and security risks, according to Marsh’s Mr Deeley.

The Trump presidency could also have implications for conflict risks around the world, including relations between Russia and Ukraine, as well as the Baltic states, Turkey and the Middle East.

A study by the Cambridge Centre for Risk Studies found that the risk of a $1tn-plus shock to the world economy from a severe event is increasing, in part due to the growing risk of conflict.

Mr Trump’s rhetoric around Russia and his views on the Nato alliance have heightened security concerns for eastern and central European countries, said Mr Barnett. Insurers have already paid claims for assets lost in Ukraine following its conflict with Russia and Russia-backed separatists. “[The election of Mr] Trump is likely to mean continued uncertainty around Russia and further involvement in eastern Europe. This will be on the political risk radar in 2017,” said Mr Barnett.

In a more volatile world, a solid approach to risk management becomes increasingly important, according to Joe Blenkinsopp, global head of market distribution and development, political risk and trade credit, at XL Catlin.

“Insurers can help businesses understand what could go wrong and identify scenarios where the use of insurance would make sense, in the long run,” he said.

Despite the increase in exposures, the political risk insurance market is open to enquiries from corporates, according to Mr Barnett.

“The market is soft and is more open to innovation. It’s a good time to come to the market for support.

Capacity has doubled in the past ten years and has been tested by claims in Ukraine and Libya,” he said.

RISK FRONTIERS: Multiyear insurance contracts must happen CONTINUED FROM PAGE ONE The risk managers made their comments at Commercial Risk Europe’s Risk Frontiers event in Brussels, sponsored by AIG, Chubb and Aon. The day-long event was held in association with Belgian and Dutch risk management associations Belrim and Narim.

Carl Leeman, president of the International Federation of Risk and Insurance Management Associations (Ifrima) and a Belrim committee member, urged risk transfer partners to scrap the annual renewal and work with clients to deliver longerterm solutions, particularly for more standard risks.

“Long-term wordings are the way forward. It is a waste of time to swap or renew insurance every year,” began Mr Leeman, who is also chief risk officer at Katoen Natie. “Then we can get on with the important things, instead of going through those annual renewals every year, over and over again.”

Ferma president and Belrim committee member Jo Willaert agreed that long-term partnerships are desirable to help foster a deeper, strategic understanding of insureds’ organisations.

“If you have a long-term partnership, it is much easier for the

01-CRE-Y7-10-Front.indd 16

partner – insurer or broker – to know your company and what its long-term strategy is,” he said.

The good news is both men reported that progress is being made on this issue and insurers are more receptive to multiyear deals.

“I see that this situation is changing dramatically and things are improving,” said Mr Willaert, who is corporate risk manager for AgfaGevaert.

Mr Leeman said more and more insurers are open to the idea of longterm insurance contracts.

“It is an evolution that we have seen over the last few years. Ten years ago, it was very difficult to find insurers that would give you that but I think these days, in the industrial market in which we all work, they are more willing to give you those longterm partnerships,” he told conference delegates.

He also told his profession that longer-term agreements are a twoway partnership that requires cast iron commitment from both sides.

“If it is a three-year deal, it has to be for both buyer and insurer. If it’s three years, we as buyers also have to stick to it,” said Mr Leeman.

He argued that multiyear deals are advantageous for insurers because they allow them to properly study the risks they are taking on, develop

a true partnership with clients and rely on premium income for a longer period.

The need for longer-term deals is increasingly important as the risk manager role widens to more strategic risks that are more difficult to transfer and require sophisticated insurance solutions or pure risk management treatment, said the experts.

The call for change is not about relegating the importance of insurance, but allowing time for risk managers to focus more time and energy on the bigger role they are increasingly being asked to fulfil.

This is evidenced by surveys carried out by Commercial Risk Europe, Ferma and its national member associations, which repeatedly show how nontransferable, macro, intangible risks are dominating the risk landscape.

Mr Willaert believes this is a natural evolution of the risk manager role, as management turns to them for help with high level, strategic risk.

“The board comes to the risk manager for solutions to problems that keep them awake at night. The solution is no more the traditional insurance product,” he began.

“It is very good for the risk management profession that we are taking care of exposures rather than buying products. There is a reason

why risk managers are more concerned about so-called macro exposures in surveys. They are bound to be because that is what management is asking for help on and solutions to. I don’t think any board is kept awake by whether their property is covered by insurance; they know it is covered,” explained Mr Willaert.

There is an argument that brokers are barriers to multiyear renewals because they rely on annual commissions to make money.

Mr Leeman simply advised brokers to look for other ways to add value to clients and secure revenue rather than squeezing the market every year and trying to get more commissions.

“They should look for more added value. Exchange of data is one area where brokers can give a lot of added value. We need one unique system where everybody can share data.

Currently, everybody has different IT systems that do not communicate.

We have so much data everywhere at insureds and insurers but we don’t exchange that efficiently. This could be a role that brokers could step into, to develop a uniform system or ways to connect the different systems,” he said. Brokers can also add huge value by helping companies make investment decisions, continued the Ifrima president.

“To get decent country information

on where a company wants to invest would be very useful. It needs a completely different mindset from brokers when it comes to the added value they can give to companies. It is much easer to pay a fee for those things than it is for the 5% discount on cover,” he said.

Mr Willaert said such information and subsequent solutions needs to come from partnership between risk manager, broker and insurer, rather than an off-the-shelf product. “We are partners,” he reminded the audience.

For his part, Belrim president and group risk and insurance manager at CMI, Gäetan Lefèvre, urged fellow risk managers to help their organisations deliver on strategy.

“Strategic decisions, such as entering a new market, are the big issues for companies and where things can go wrong. This is where risk managers need to – and should – help boards,” he said.

“It is important to have the trust and support of the business and management. It is important risk managers have access to management, to open its eyes and say ‘be careful because we know from data that there is a risk lurking in a new project or venture’. It is important that we say something that adds value to the decision-making process,” concluded Mr Lefèvre.

10/12/16 09:16:29

Product recall – Everything is at stake

An ounce of prevention is worth a pound of cure.

Product recall incidents have highlighted that in the worst case scenario it will destroy both your reputation and brand, and will leave you with a product that becomes unsellable. Being prepared for such an event will mean the difference between profit and bankruptcy.

Allianz Global Corporate & Specialty have a dedicated team of underwriters to help our clients protect their business from the impact of a product recall. In conjunction with our crisis consultant partner, red24, we have a solution.

With our contamination, consumer goods and automotive products we will assist with:

Preparing you for a crisis

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Contact AGCS-LIABILITY@allianz.de for more information.

Copyright © 2016 Allianz Global Corporate & Specialty SE. The material contained in this publication is designed to provide general information only. Information relating to policy coverage, terms and conditions is provided for guidance purposes only and is not exhaustive and does not form an offer of coverage. Whilst every effort has been made to ensure that the information provided is accurate, this information is provided without any representation or warranty of any kind about its accuracy.

Allianz Global Corporate & Specialty SE, Commercial Register: Munich, HRB 208312

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Continued from Page One

18

NEWS

CYBER: Reluctance to share data resulting in coverage gaps CONTINUED FROM PAGE ONE not understand the risk. But there is absolutely a trend to more and more clearly define what is covered by traditional policies,” said Mr Pearson.

Many lines of business are already finding cyber risks interacting with traditional risks and coverages.

Professional liability, directors’ and officers’, and crime insurance already see exposures and claims related to cyber events. Property insurers are also waking up to the potential for physical damage and business interruption from cyber attacks.

DRIVING FACTORS Exclusions are most likely to be driven by the need to contain potential systemic cyber losses, according to Mr Allnutt. “Where insurers can clearly identify the potential for a cyber systemic loss – such as a cyber attack on critical infrastructure or industry systemic software – they are most

likely to impose exclusions,” he said.

As insurers look to apply exclusions, it is thought more may seek to develop specific cyber extensions and endorsements, or separate policies to address cyber risks.

“We may begin to see more specific cyber policies sold alongside traditional policies which exclude cyber – in much the same way that terrorism insurance is offered as a separate class due to the adoption of terrorism exclusions,” said Mr Allnutt.

Increasing regulatory intervention will accelerate the insurance industry’s drive to better understand cyber exposures, which is proving difficult in the current competitive market environment.

“This is something that the PRA needed to do. The soft market does not lend itself to insurers taking steps to address cyber exposure, so it needed to come from the regulator,” said Mr Allnutt.

Insurers have not yet figured

out a consistent approach to cyber in property and casualty policies, according to Mr Pearson.

“There is a general belief that insurers are not well prepared when it comes to managing silent cyber risk, and there are questions about whether some have the expertise to understand it and price for it,” said Mr Pearson.

“As a result, the regulator is pushing for a more defined approach to silent cover, to make it more affirmative and work out the aggregation issues. But we are still a long way from that – it will take a few years to get there,” he said.

According to Tom Quy, cyber broker at Miller Insurance, too many markets currently do not exclude cyber, but will also not confirm whether it is covered.

“The PRA is rightly concerned about silent cyber risk and it is in this area I believe we will see the most change. The fact is that a worrying number of insurance contracts have

exposure to cyber and the markets that back these policies have not underwritten this risk, charged the adequate premium or considered the aggregation risks their books are exposed to. This is going to change,” he said.

Where systemic risks are too large or difficult to quantify, cyber cover may have to be backed up by a pooling arrangement, Mr Allnutt continued.

Although regulators are likely to apply more pressure on insurers to better manage cyber exposures, this will not be easily achieved.

“The PRA is right to raise the issue but in reality, it will be a challenge for insurers to identify and quantify cyber risks when much of the exposure is still hypothetical and given the lack of claims data,” according to Mr Allnutt.

Identifying silent cyber risk can be a complex process, according to Helen Bourne, partner at Clyde & Co and head of the lawyer’s UK cyber team.

“It requires understanding the precise breadth of cover offered by a product and the evolving cyber threats faced by insureds,” she said.

“Establishing how a policy treats cyber losses can, and frequently does, entail a broad technical review but, as the PRA has emphasised, this is critical to the quantification of any silent cover,” Mr Bourne said.

INFORMATION SHORTFALL One of the biggest barriers to writing cyber risk at the moment is engaging with insureds to provide an adequate level of underwriting information.

“There is currently a disconnect between the level of information an insured is willing to provide and the level that the underwriter wishes to obtain. This gap needs to be closed before we can have a sensible conversation [about] coverage, certainly in the property damage space,” said Mr Quy.

AWARDS: Recognition seen to foster industry collaboration CONTINUED FROM PAGE ONE

in pooling, captives and cross-border solutions.

Greater central control, a consolidated number of providers, greater assurance on regulatory compliance, the inclusion of corporate social responsibility and cost optimisation were all factors that persuaded the judges to select this winner.

AXA Corporate Solutions won emerging Risk Solution of the Year for its pioneering work in the field of parametric insurance.

Fellow finalists AIG and Swiss Re Corporate Solutions also impressed the judges.

AXA’s work in parametrics also answers many of the concerns and challenges raised by Europe’s risk managers in our annual Risk Frontiers survey and Ferma’s own survey published towards the end of this year.

purchase of Chubb that has been widely recognised as a big success.

Mr Greenberg’s pragmatic approach was exemplified by his decision to name the newly merged group Chubb rather than ACE, because the brand is better known in the US and worldwide.

Dr Von Bomhard, meanwhile, retires from Munich Re next summer after a highly successful decade in charge.

He took over at a difficult time.

The reinsurance sector was recovering from a tricky period dominated by the impact of the 2001 terror attacks on the US, plummeting bond and equity prices, and huge industry-wide reserving problems.

Just as it seemed like the sector had come through the worst, along came the credit crisis, historically low interest rates and the arrival of billions of dollars of fresh competition in the form of the insurance-linked securities market.

STEADY HAND Dr Von Bomhard has steered the European reinsurance giant through this turbulent period with distinction and hands over a company in very good shape.

Munich Re has also recently made impressive strides into the corporate insurance market through its dedicated Corporate Insurance Partner unit.

The third category of awards presented on 6 December was Excellence in Customer Service.

A total of seven awards were presented, focusing primarily on rewarding innovation.

The first category to be awarded was Captive Management Solution of the Year. The finalists were AIG, Willis Towers Watson and Zurich.

AIG took home the prize for a truly innovative solution, produced in partnership with Aon Global Risk Solutions, to solve a potentially disastrous problem for a UK customer.

The finalists for Claims Innovation of the Year were AIG, Chubb and Crawford & Company.

The winner of this category was

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again AIG, and more specifically its major loss team for property and energy in Europe, the Middle East and Africa (EMEA).

This team was rewarded for making a bold promise to improve and speed up its claims process, which makes it easier for clients to get back to business as quickly as possible.

The team was also praised for carrying out a series of major loss workshops with clients around the world. More site visits than ever – 150

in the last year on a global basis – were carried out immediately post-loss.

The winner of the Technology Innovation of the Year award was a joint entry from Munich Re and Beazley, for an impressive €100m cyber solution that ticked a lot of boxes for the risk manager judges.

The other finalists in this category were AXA MATRIX Risk Consultants, RSA and MSM Software Solved, and Zurich.

Zurich was the winner of Global

Programme Innovation of the Year, pipping co-finalists AIG and International SOS. Commercial Risk Europe’s ongoing research with readers shows that there are two key areas of concern for risk managers in Europe and worldwide currently: global programmes and people risks.

Zurich’s nomination for this award neatly combined the two in an innovative life programme that built on the group’s longstanding presence

INNOVATION A combined entry from Swiss Re Corporate Solutions and SBB Insurance AG, the insurance arm of Swiss Railways, took the award for Insurer Innovation of the Year. The co-finalists were AGCS and AIG. Christian Fankhauser, head of insurance management at SBB Insurance, joined Antonio Simone, head of sales EMEA at Swiss Re Corporate Solutions, on stage to collect the award.

The final category of the night was Broker Innovation of the Year. The finalists were Aon, Arthur J Gallagher and Marsh.

The judges decided that Marsh should take the award for its ECHO Excess Solutions, launched earlier this year for the cyber and financial lines markets.

These solutions provide customers with an efficient and more predictable excess coverage in what can be a tricky area.

■ The winners and finalists of this year’s European Risk Manager of the Year Awards will be profiled in detail in a dedicated report to be published and launched at the annual AMRAE conference in Deauville, France in the first week of February.

9/12/16 16:02:29

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