Commercial Risk Europe - February 2015 by Calixa Creative

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FRANCE—AMRAE 2015: CRE takes a look at some of the topics in focus at the French risk management association’s Les Rencontres de l’AMRAE 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12

Volume 6

#01

February 2015

A MATCH MADE IN HEAVEN: XL has formally announced its plan to buy Catlin in a $4.1bn deal in what might be the perfect marriage for customers and shareholders. Logic suggests the bigger, better capitalised group is indeed good news for customers . . . . . . . . . . 8-9

EUROPEAN INSURANCE & RISK MANAGEMENT NEWS

RENEWALS

Softening renewals to spark further M&As 15% in 2015 for property insurance, with primary casualty pricing varying news@commercialriskeurope.com between 10% reductions and 10% increases. NEARLY ALL COMMERCIAL A general oversupply of capacity insurance and reinsurance lines has helped create favourable market continued to soften at the January conditions for European corporate renewals leading many to predict that insurance buyers in January, an consolidation and cost cutting will important renewal period for large become a prominent feature of the commercial risks in Germany and risk transfer market. Switzerland. Such predictions appear on the “In my thirty year career I have not money as last month saw news of seen this level of capital attracted to planned mergers and acquisitions the insurance market before,” Fredrik between XL and Catlin, AXIS Capital Rosencrantz, Chief Executive Officer, and Partner Re and Willis and Miller. EMEA, Zurich Global Corporate told Commercial insurance and Commercial Risk Europe. “It’s making reinsurance buyers have the market extremely benefited from yet another competitive, with brokers round of competitive renewals and insurers under pressure in January. Reinsurance to find a better rate,” he rates came under pressure said. with average reductions of All but a few sections 5-10%. of the market are currently Insurance rates are also subject to intense feeling the pinch. In a recent competition with significant Fredrik Rosencrantz Marketplace Realities report, amounts of quality capacity insurance broker Willis predicted available, according to Brian Kirwan, a year of stability and softening Head of Market Management, Allianz conditions for US buyers. The broker is Global Corporate & Specialty (AGCS) predicting further price cuts of 10% to London. “We expect this situation

Stuart Collins

to continue given that underlying agreements in recent years has afftrends—such as the ease with which ected new business flows, he added. The softening market is generally capital can flow into the market—are considered to be the result of an here for the long term,” he said. oversupply of capital—in Despite the headline part because of the increasing figures, however, the risk appetite for insurance risk transfer market is not yet in free-fall. For example, from pension and hedge diversified global reinsurers funds. This is particularly are likely to report more true for reinsurance where modest reductions of around capital market investors 2% across their portfolios, are competing hard with according to investment David Flandro traditional reinsurance for bank Keefe, Bruyette & US property catastrophe Woods. business. “It has been a tough renewal Although alternative capital has with some difficult discussions with not yet targeted direct insurance lines, brokers and clients,” Zurich’s Mr brokers believe it is only a matter of Rosencrantz said on the primary time before it starts underwriting market. “However we have kept rates specialty and business interruption positive and customer retentions high, insurance. There is now an estimated $320bn despite pressure on pricing following relatively benign years for catastrophe of dedicated reinsurance capital backing a $255bn gross reinsurance losses in 2013 and 2014,” he said. premium market, including life MIXED VIEW coverages, according to David While insurance rates have been Flandro, Global Head of Strategic under pressure, deductibles and Advisory, JLT Re. As a result, the coverage have generally held up, last eight reinsurance renewals have explained Mr Rosencrantz. However, the popularity of long-term RENEWALS: Turn to p16

DEALS

Willis-Miller deal may cause more concern among buyers than XL-Catlin Adrian Ladbury aladbury@commercialriskeurope.com

[ LO N D O N ]—EUROPEAN RISK managers need not press the panic button over recently announced major consolidation deals and their potential impact on competition levels in the international corporate insurance sector. Many experts say that the proposed $4.1bn combination of XL and Catlin would actually add XL’s global distribution capability to Catlin’s specialty expertise to deliver a stronger rival to market Mike McGavick leaders such as Zurich and AIG in the global corporate space. Most agree that the deal makes sense from a large corporate insurance buyers’ perspective and risk managers should hope that shareholders of both companies agree to the deal planned for DEALS: Turn to p18

PARTNER RE / AXIS

AMRAE 2015

AXIS and PartnerRe agree merger to create a $14bn powerhouse

Risk managers making huge strides in France: Canaméras

Adrian Ladbury aladbury@commercialriskeurope.com

[LONDON]—THE LONG AWAITED merger frenzy in the international insurance and reinsurance market kicked off at the end of last month as, shortly after XL announced plans to buy Catlin, AXIS Capital and PartnerRe said that they had signed a ‘definitive amalgamation’ agreement to create one of the world’s leading specialty insurance and reinsurance companies. BIG BEAST The combined group would boast gross premiums written in excess of $10bn, total capital of more than $14bn and cash and invested assets of more than

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$33bn. The boards of both companies action, shareholders of PartnerRe and have unanimously approved the so- AXIS Capital will own approximately called ‘merger of equals’. AXIS said 51.6% and 48.4% of the combined that the deal would bring together company respectively. ‘market-leading’ insurance and PartnerRe chairman, Jean-Paul reinsurance franchises that Montupet, will be nonwill benefit from increased executive chairman of scale and ‘enhanced’ market the combined company. presence. AXIS Capital CEO Albert Under the terms of the Benchimol will serve as deal, PartnerRe shareholders CEO of the combined firm. will receive 2.18 shares of Current AXIS Capital the combined company’s chairman, Michael A Butt, common shares for each share Albert Benchimol will continue to serve on the of PartnerRe common shares board as chairman emeritus. they own. AXIS Capital shareholders Mr Benchimol said: “This will receive one share of the combined transformational combination company’s common shares for each will leverage the complementary share of AXIS Capital common shares strengths of both companies and they own. Upon completion of the transPARTNER RE/AXIS: Turn to p18

in France,” said Mr Canaméras. “In the space of four years, risk managers have ramaral@commercialriskeurope.com gained visibility and acquired new expertise.” [ PARIS ]—RISK MANAGEMENT He continued: “We have achieved has made great progress in France a new level of importance within during the past four years and gained our companies and this process has new relevance within French firms, accelerated even further in the past two according to AMRAE’s president years. We have noticed that companies Gilbert Canaméras. are ever more aware that they need Speaking ahead of to have a risk manager, or a AMRAEs’ annual meeting risk management function, in of French managers in early their organisation.” February, Mr Canaméras said The new-found interest that there remain challenges in risk management is ahead for the profession and reflected in the expansion of outlined his association’s AMRAE over recent years. plans to spread the risk Mr Canaméras said its total gospel throughout France Gilbert Canaméras membership has jumped and further afield. from around 650 four years “We have observed that in the ago to over 1,000 today. Of these over past four years the risk management function has made enormous progress AMRAE: Turn to p16

Rodrigo Amaral

27/1/15 15:55:24

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27/1/15 16:35:58

NEWS WEF Global Risk report 2015

BEN NORRIS takes a look at the key findings and points of discussion from the latest annual WEF report

International conflict biggest threat as geopolitical risks return to the fore: WEF Ben Norris bnorris@commercialriskeurope.com

[LONDON]

NTERNATIONAL CONFLICT IS THE MOST LIKELY

risk to cause global instability over the next 10 years with water crises potentially the most damaging, according to the World Economic Forum’s (WEF) 10th annual Global Risks report. Geopolitical and societal risks dominate the report’s global risk rankings. 2015 continues the trend away from economic risks that were seen as the leading concern between 2007 and 2012. The annual Global Risks report takes a ten-year view on the potential impact of global risks grouped into five categories—economic, environmental, geopolitical, societal and technological. This year nearly 900 experts worldwide from industry, government and academia took part in the Global Risk Perception Survey that asked them to rank 28 risks and their potential impact over a 10-year period. The survey, that informs the report, finds that interstate conflict with regional consequences is the biggest threat to global stability. It is seen as the most likely risk to cause problems and is rated the fourth most serious in terms of impact. The next most likely risks are extreme weather events (2nd), followed by failure of national governance systems (3rd), state collapse or crisis (4th) and high structural unemployment or underemployment (5th). Water crises are perceived as the most damaging risk. In terms of potential impact, rapid and massive spread of infectious diseases ranked second, weapons of mass destruction third, interstate conflict fourth and failure of climate change adaptation fifth. Geopolitical risks account for three of the five most likely threats and two of the most potentially impactful.

The Davos Congress Centre

This category of risk also accounts for the biggest climbers, both in terms of likelihood and impact, with weapons of mass destruction, terrorist attacks and interstate conflict rising furthest. Societal risk also features prominently in 2015 and, in water crises and rapid and massive spread of infectious diseases, account for the top two potentially impactful threats. Speaking at the report’s launch last month, Espen Barth Eide, Managing Director and Member of the Managing Board at the World Economic Forum, said: “One of the major takeaways from the 2015 report is that geopolitical risks are now very high on the agenda.” “For the first time since we started the risk report interstate conflict with regional consequences is on top. That is a significant development and I believe reflects the geopolitical annus horribilis that we had in 2014,” he added. Mr Eide warned that increased interstate conflict could lead to a weakening of global governance institutions as the result of a lack of trust between

Technological change outpacing ability to govern their risks Cyber risk governance underdeveloped Ben Norris bnorris@commercialriskeurope.com

THE PACE OF TECHNOLOGICAL CHANGE IS outpacing our ability to govern and manage the risks, according to this year’s WEF Global Risks report. Speaking at the report’s launch, John Drzik, President of Global Risk and Specialties at Marsh, said: “The pace of technology innovation continues to accelerate. It is exciting but what is underappreciated is emerging technologies are creating new vulnerabilities. The pace of innovation is outpacing our ability to govern some of these risks.” Experts agreed that perhaps the most pressing area of concern is cyber risk. “It is not clear who is regulating the cybersphere,” said John Drzik. “It is an underdeveloped risk governance environment for something that is a very real risk now.” Axel P Lehmann, Chief Risk Officer at Zurich Insurance Group, agreed. “The key element is governance around all the aspects of data privacy and access to information type cyber risks. It is still absolutely open and unsolved.” He said that although the majority of the fortune 500 companies have made significant efforts to protect against and prevent cyber attacks they now need to focus on building resilience. “They need to know not only how to prevent but how to mitigate the effects when they have

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been victim of a cyber attack…companies need to get their act together not only to protect themselves within the walls of their company but across the whole value chain,” he said. Marsh’s Mr Drzik also flagged up other emerging technologies that could pose a threat in the future. He warned that a tremendous surge of interest in synthetic biology is not being properly managed. “This is an area where there is likely to be product development, but there is underdeveloped regulation. This combination produced the financial crisis in the financial sector and no one wants to see the biological equivalent of the financial crisis, so we have work to do,” said Mr Drzik. He also flagged up nanotechnology and artificial intelligence as potential risk hotspots. Mr Drzik stressed that while society needs to encourage innovation it must learn to better govern emerging threats. He called for increased dialogue among stakeholders to tackle this issue. “The recommendations we are making are more energetic dialogue amongst stakeholders around these risks, increased funding for risk governance to parrot the increased research in these areas so the pace of the two stays in line, broadening disclosure standards to enable better assessment, filling gaps in regulatory frameworks and more generally building a culture of responsibility among innovators in this area and more awareness of the potential vulnerabilities,” said Mr Drzik.

governments and populations. This would render society less able to tackle a whole range of risks and highlights the interconnectedness of global threats. “If key players are in competition with each other there is less energy left to deal with the issues that we should be dealing with these days and address common challenges,” said Mr Eide. “We could be less able to deal with collective problems such as health and the environment.” Axel P Lehmann, Chief Risk Officer at Zurich Insurance Group that, alongside Marsh & McLennan Companies, supported the report as strategic partner, noted the shift away from economic risks over the last few years. “There is somewhat of a shift, especially when you look to the longer term,” he said. “When you look back from 2007 to 2012 it was all about economic risks— asset bubble, financial systemic risks, new regulation and income disparity. In today’s environment the risks on the ten-year time horizon are much more about geopolitical, societal and environmental risks.”

WEF calls for more country CROs and risk management investment ■ At the launch of the 2015 WEF Global Risks report, John Drzik, President of Global Risk and Specialties at Marsh, explained that although some progress has been made in appointing country chief risk officers, the role needs to be broadened out and more widely adopted. Along with other experts, Mr Drzik called for increased risk management resource and resilience to help the world mitigate a rising number of interconnected risks. “The general approach that we would like to see business and governments take is put more resources into risk management and put more focus on that area,” he said. He reiterated the WEF’s desire to see chief risk officers in place within national governments. Although some progress has been made in this area more needs to be done, intimated Mr Drzik. “We recommend that governments do have a chief risk officer, or at least someone who has that responsibility to look across the various vulnerabilities that are faced by a country and try to put them in some type of perspective and priority to guide government departments,” said Mr Drzik. “There are governments that have done this. This role exists in half a dozen worldwide. But it is a practice that we would like to see put in place much more broadly.”

The urban world ■ The 2015 WEF report flags up rapid urbanisation as a growing and heavily interconnected risk. It considers how best to build sufficient resilience to mitigate the threat. “Without doubt, urbanisation has increased social wellbeing. But when cities develop too rapidly, their vulnerability increases: pandemics; breakdowns of or attacks on power, water or transport systems; and the effects of climate change are all major threats,” said Axel P Lehmann, Chief Risk Officer at Zurich Insurance Group. Mr Lehman gave the following key figures on urbanisation and related threats: • One third of the global population was living in cities in 1950. Today that percentage stands at 50% and is expected to jump to two thirds by 2050. • 56% of the African population is expected to live in cities by 2050, up from 40% today. 70% of the Asian population is expected to live in cities by 2050 from under 50% today. 80% of the world’s GDP will be produced in cities by 2050. • More than $71tn of investment is needed in the world’s cities by 2030 to meet telecom and water infrastructure needs alone. • More than 700 million people living in cities today lack adequate sanitation, with 40% living in slums. • 15 out of the world’s 20 mega cities are located along coastal areas and have huge ﬂood exposure. “Unprecedented transition from rural society to a truly urbanised society has a lot of benefits, but unplanned and too rapid urbanisation can ultimately touch many risk dimensions such as infrastructure, health, climate and societal issues,” said Mr Lehman. —Ben Norris

27/1/15 15:23:22

Hyogo II

NEWS

UN turns to private sector for disaster resilience help Stuart Collins news@commercialriskeurope.com

[LONDON]—A MAJOR INTERNATIONAL DISASTER risk reduction agreement, known as Hyogo II, is expected to be signed by members of the United Nations (UN) in March. It will likely see the private sector play a bigger role in helping countries become more resilient to natural catastrophes. According to the UN, more than 1.5 billion people were affected by natural disasters over the past decade while an estimated 700,000 lost their lives. The total associated economic loss over the same period was more than $1.3tn. It is widely accepted that natural disasters are increasing in frequency and intensity as a result of global warming, the increasing global population, urbanisation and greater concentrations of economic activity. According to the UN, growth in natural catastrophe exposure worldwide has outpaced efforts to reduce vulnerability. This is reflected in the steady rise in disaster losses. Economic damage from disasters has risen to an annual inflation-adjusted average of $190bn over the past 10 years, from an average of $130bn over the past 30 years. Recent years have seen an upsurge in both national and international action on disaster risk. Many countries have partnered with international agencies like the UN, the World Bank, and regional development banks like the Asia Development Bank to mitigate the threat. They have also joined forces with philanthropic organisations and private sector companies in the battle to build resilience. The most overarching and comprehensive disaster risk reduction initiative to date has been the Hyogo Framework for Action (HFA), a tenyear disaster risk reduction initiative agreed in 2005 following the Indian Ocean tsunami that killed over 230,000 people in 2004. According to the UN, HFA has already resulted in significant progress in reducing disaster risk at local, national and global levels. In particular, the HFA is believed to have contributed to decreasing mortality risk for natural disasters by raising risk awareness and promoting action. “There are a lot of people alive today thanks to growing awareness and understanding of disaster risk over the last ten years as the concepts have entered the public consciousness through campaigns, the media, government and NGO engagement and in the classroom,” according to Margareta Wahlström, Head of the UN Office for Disaster Risk Reduction (UNISDR). A new ten-year international agreement on disaster risk reduction—Hyogo II—is due to be adopted by UN country members and intergovernmental organisations at the third UN World Conference on Disaster Risk Reduction, which takes place in Sendai City, Japan from 14 to 18 March 2015. According to Ms Wahlström, increased stakeholder engagement in the HFA’s three-year revision process is evidence that attitudes towards disaster reduction have progressed for the better. “We know that investing in disaster risk reduction—safe schools and hospitals, resilient cities and towns, flood embankments, mangrove forests etc—is not a cost but an investment in the future which will reduce our losses significantly,” she told Commercial Risk Europe. The updated HFA will set higher targets to reduce the impact of natural disasters when it comes to loss of life and social, economic and environmental damage. It will also look to improve the understanding of disaster risk through better data collection and exchanges of best practices and learning, the UNISDR says.

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The revised HFA is likely to keep the focus on development of health, education, agriculture, water, ecosystem management, housing, cultural heritage, public awareness and financial and risk transfer mechanisms.

PRIVATE SECTOR INVOLVEMENT However, HFA II recognises the need for the public and private sectors to work more closely and for business to integrate disaster risk into their management practices, investments and accounting, the UNISDR says. “The original HFA did not give a lot of consideration to the private sector’s role in disaster risk reduction despite the fact that disasters obviously affect business performance and undermine longer-term competitiveness and sustainability,” said Ms Wahlström. “The private sector is vital to both social and economic resilience of nations and communities and it is responsible for 70% to 85% of overall investment in most economies. Regulators and investors are increasingly demanding that businesses disclose their hidden risks, including disaster risks,” she added. Quoting Mike Wilkins, Managing Director, Standard & Poor’s Rating Services, Ms Wahlström noted that a better understanding of economic losses from disasters ‘can become a normal feature of investment analysis and financial planning’. While the 2005 Hyogo Framework for Action was negotiated by governments without private sector involvement, there is now a move by the UNISDR and others to involve the private sector more actively in building resilience, explained Linda Freiner, Zurich-based Flood Resilience Program Manager at Zurich Insurance Group. This includes the insurance sector, she said. “The insurance industry, and the private sector in general, has been invited to sit at the table and contribute with our skills and expertise in identifying, understanding and reducing risks, helping countries make better decisions and to transfer risk,” said Ms Freiner, who participates in a UNISDR pilot group. As well as realising the importance of resilience, many countries and organisations now understand that large macro risks—including natural catastrophes—are interconnected and complex, requiring a more holistic approach to building resilience, said Ms Freiner. The Rockefeller Foundation 100 Resilient Cities project is another initiative that promotes awareness of resilience and helps to give the world’s major cities the tools needed to cope with disasters. This includes a sponsored chief resilience officer for each city and a network of specialists to exchange knowledge and manage resilience issues. The 100 Resilient Cities project is one of the highest profile resilience initiatives around, according to Reto Schnarwiler, Head of Americas

Kobe, the city devastated by a major earthquake in 1995, is the capital of the Hyogo prefecture in Japan, hosting the UN conference

EMEA at Swiss Re Global Partnerships. The project has already seen 32 cities appoint chief resilience officers and embark on their own resilience strategy processes. A further 35 cities began the process at the end of last year. “The whole programme goes deeper than just managing disaster risks; the idea is to make cities more resilient to social and economic risks,” said Mr Schnarwiler. Another initiative is the UN-backed ‘1-in100’ resilience programme from insurance broker Willis. It aims to integrate natural disaster risk reduction into the financial system, giving recognition to risk mitigation efforts in bank loans, for example. Last year the UNISDR announced an initiative to help regulators, companies, investors, bankers and other key stakeholders systematically evaluate the risk of extreme weather events. “Our goal is to integrate climate and disaster risk into economic decision and the plan is to apply the insurance industry’s one-in-100-year solvency stress test to current assets and current climate conditions,” said Ms Wahlström. Insurance is another major area of cooperation on disaster risk reduction, according to Ms Wahlström. “Insurance pricing often does not reflect risk levels or provide an adequate incentive for risk sensitive business investment,” she said. “We are working with partners in the insurance industry to come up with creative ways of expanding insurance cover such as payments to local governments not based on actual losses but on a pre-agreed amount when a specific trigger is met such as rainfall or wind speed exceeding certain thresholds,” she said. For example, the World Bank-led Caribbean Catastrophe Risk Insurance Facility was established in 2007 and has paid out claims to many of its 16 members for a number of events. A similar scheme—which is due to be expanded from drought to also cover floods and cyclones— has been established in Africa, while a catastrophe scheme is also being developed for the Pacific.

SLOW PROGRESS IN ASIA However, despite a string of natural disasters over the past ten years, natural catastrophe risk is still not high on the agenda of companies in Asia, according to Franck Baron, Group General Manager Risk Management for International SOS (Singapore-based) and Chairman of Parima (the Pan Asian Risk & Insurance Management Association). This is in part a reflection of cultural attitudes towards risk, he said. “Asia is the most impacted region in terms of natural disasters over the last ten years. While there is increasing awareness of natural catastrophe risk and the need to improve resilience and risk management, progress has been slow. There has been very little in the way of concrete action by national governments and business since 2004,” he said. Over the past ten years, supply chain exposures for European and North American companies have grown significantly in Asia as manufacturing has shifted to low cost centres like China, Indonesia and Thailand. However the 2011 floods in Thailand demonstrated a lack of resilience to natural catastrophes and the failure of some companies to understand the complexity of their supply chains, said Mr Baron. According to Richard Waterer of Marsh, the focus on building resilience presents a fantastic opportunity for risk managers to up sell their role and position themselves as trusted board advisers. “The board of directors will have an accountability for this but they will quickly look to the businesses to provide them with the data and financials that support potential investment around this (supply chain risk). The risk manager is probably the best place to go for that,” he said.

27/1/15 15:23:31

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27/1/15 16:34:47

COMMENT

NEWS Association News

The M&A battleground

T IS VERY HARD TO DISAGREE WITH

the justification for the acquisition of Catlin by XL for $4.1bn from a corporate insurance managers perspective and the same goes for the merger of AXIS Capital and PartnerRe. Just as John Charman, CEO and chairman of Bermuda-based Endurance, justified his recently failed bid for Aspen, Mike McGavick convincingly told analysts that the deal between his firm and Catlin makes strategic sense for customers, and consequently shareholders, because of the rapidly changing global risk landscape. Mr McGavick is no stranger to this theme. He is a highly intelligent and strong personality who is not scared of saying it as it is. Thus it comes as no real surprise that the XL CEO has responded to rising customer complaints, voiced increasingly in the pages of Commercial Risk Europe, that the insurance market is dragging its feet on innovation, by going onto the front foot. German risk and insurance managers have undoubtedly been the most vociferous in their attack on the insurance sector’s unwillingness and inability to respond to fast-changing risk transfer needs. It was at the annual DVS meeting of German insurance buyers three years ago that keynote speaker Mr McGavick took the initiative by boldly agreeing that the insurance industry risks becoming irrelevant if it does not react to the changing global economy. He conceded that the sector needed to take a good hard look at itself and the way it does business or find that its increasingly frustrated major customers will seek solutions elsewhere. The key for insurers is to gather more information, work out how to analyse it better and faster and have the right people and systems in place to deliver rapid, flexible solutions. They also need a presence on the ground, not least when writing global programmes, and bigger balance sheets to offer meaningful slabs

of lead capacity to their increasingly demanding customers. The big question and challenge for the risk transfer industry is of course how to make that costly transformation in what remains a highly competitive market without eroding margins. Mr McGavick conceded to analysts that he was previously a fan of organic growth to build shareholder value rather than spending investor’s money on expensive grandstanding acquisitions. But he said that the strategic logic of the deal between XL and Catlin overcomes this bias and, from a customer’s perspective, one surely has to agree. There will be a natural fear among customers that too much consolidation will actually place too much power in the hands of too few underwriters and thereby have the reverse effect on innovation. However, I would suggest that the bigger threat in this regard is actually on the broking side of the business. Miller, for example, always prided itself on its partnership structure and ability to offer customers an independent perspective. The London-based broker strongly came out against contingent commissions. Miller publicly supported calls for reform of the broking market when it seemed that too much premium was being consolidated in the hands of too few brokers that could then call the shots with both customers and carriers, not least on how they funded themselves. While I am not in a position to comment on whether the recent Willis-Miller deal makes good economic sense for those individuals involved, I would suggest that corporate risk and insurance managers should perhaps take a closer look at the implications of this deal rather than XL’s planned acquisition of Catlin. A healthy, independent and customer-focused broking sector is perhaps of more value to the corporate customer in search of innovation at a fair price than a diverse and relatively weakly capitalised insurance company market.

EDITORIAL DIRECTOR Adrian Ladbury aladbury@commercialriskeurope.com

ART DIRECTOR Alan Booth—www.calixa.biz Tel: +44 (0)20 8123 3271[W] +44 (0)7817 671 973[M] abooth@commercialriskeurope.com

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

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Airmic looks for Hopkin replacement and productive year ahead Adrian Ladbury & Ben Norris news@commercialriskeurope.com

[LONDON]

AIRMIC ANNOUNCED LAST MONTH THAT ITS HIGHLY respected technical director, Paul Hopkin, will leave his post after eight years of service. The UK risk management association is now in the process of appointing his successor and is encouraging candidates to apply. Mr Hopkin, who is a qualified teacher and former head of risk management at the BBC and director of risk management at the Rank Group, has, alongside Airmic’s chief executive John Hurrell, helped push the association on to new levels of professionalism over recent years. Mr Hurrell said that his departure is ‘entirely amicable’ and that Mr Hopkin simply feels it is time to seek a new challenge. There is no doubt that Mr Hopkin will not be easy to replace because of his unique combination of high level risk management experience, technical knowledge and capacity for hard work. Mr Hurrell paid tribute to Mr Hopkin’s track record at Airmic. “Paul established Airmic’s groundbreaking technical programme from scratch. He was our first ever technical director and our reputation for delivering excellent guides and research is entirely down to Paul’s personal efforts and his outstanding capability and experience. In addition, over the last couple of years, Paul has been an outstanding guide and coach for our brilliant young team,” he said. “Paul will add huge value wherever his career now takes him. We wish him every success and he leaves with our profound gratitude,” added Mr Hurrell. Mr Hurrell said he is looking for a truly outstanding and experienced professional to fill the gap that will be left by Mr Hopkin. “This is truly a leadership role and the opportunity for someone to make a real difference in our profession,” said Mr Hurrell. He explained that the technical director will drive the association’s strategy behind its member-focused technical programme. The new man or woman will deliver ‘ground-breaking’ research, ‘thought leadership’ and ‘influential lobbying’ with external parties. “We are going to appoint a very senior candidate with an external profile in both the fields of risk and insurance. An important part of the role will be to work with our two excellent R&D managers and to assist them in their professional development,” explained Mr Hurrell. The CEO added, however, that the brief would not be set in stone and there is potential for the new technical director to ‘carve out’ their own role to an extent. “According to their experience, expertise and capabilities, we would want to grow the role to work closely with me in helping to develop Airmic’s profile, influence and membership base,” said Mr Hurrell. Applicants for the technical director role can find further details on the Airmic website—www.airmic.com—or contact Mr Hurrell’s PA Victoria Hicks on victoria.hicks@airmic.com. Mr Hurrell also explained that 2015 will be a ‘critically important’ year for Airmic as it continues to raise the profile of risk management, provide industry leadership and support its members’ needs. He explained that the association’s current technical programme is more demanding than ever with over 20 projects in the pipeline. “These will include further work on our initiative to increase the efficacy of insurance contracts, particularly following the successful passage of the Insurance Bill through parliament; finalising the global compliance database; producing an implementation guide for our flagship report Roads to Resilience, reflecting the new FRC code on risk management; producing guidance on reputational risk; and increasing the boardroom profile for risk and insurance,” said the Airmic CEO. This year will also see Airmic build an entirely new website, set up an advisory board for its most senior members and run its first ever fastTrack conference aimed at emerging risk professionals.

27/1/15 15:24:18

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27/1/15 16:34:14

Catlin / XL

BEHIND THE NEWS

A Match made in

heaven? Catlin and XL agree $4.1bn deal

XL has formally announced its plan to buy Catlin in a $4.1bn deal. In a call to analysts last month XL CEO Mike McGavick and Catlin CEO Stephen Catlin made it sound like a perfect marriage for customers and shareholders. Logic suggests that a bigger, better capitalised group with a broader global platform and range of specialty underwriting capabilities is indeed good news for corporate customers. ADRIAN LADBURY reports

“So whether it is in global specialty complex risk or through Lloyd’s or through our existing global corporate space, having a team of top talent working together with a bigger balance sheet behind us is exactly how we can have the most impact and that is what it is all about,” he continued. Mr McGavick said that there are three specific ways in which a combination of XL and Catlin makes strategic and financial sense. First, he explained that XL has spent considerable time, effort and resource in building its specialty capabilities in order to serve what he described as the ‘rapidly changing risk landscape’. This, Mr McGavick said, has meant that the company, born in Bermuda but formally now based in Dublin, has entered many additional lines of business at a high cost. L CHIEF EXECUTIVE MIKE MCGAVICK TOLD DEALMAKERS: [FROM LEFT] Stephen Catlin of Catlin and Mike McGavick of XL He said that some people have noted that this expansion analysts last month that joining forces with has created a drag on XL’s performance, particularly on its Catlin would better enable the combined group to rise “From a high level, we each believe that specialty and complex expenses. The combination with leading specialty carrier Catlin to the challenge of complex and emerging risks. risk insurance is the space where over time the opportunity exists solves this problem, said Mr McGavick. Mr McGavick has publicly spoken in the past about the for an insurance company to make the greatest impact on the “When blended with Catlin’s businesses…almost all of this need for the insurance industry to rise to the new challenges world,” said Mr McGavick. hard work is suddenly completed,” he said. posed to its commercial customers with innovative solutions and “The simple truth is that risks are changing very fast and Critically the combination will also give the combined group a approaches. companies with specialty lines and [the ability to] adapt to lead, or leading, position in many lines of business. As long as three years ago he told the German risk and complex risks are the companies that will best be able to solve the Mr McGavick said, for example, that he expects the combined insurance community at the annual DVS conference that the clients’ needs going forward,” he continued. group to be among the top three competitors in aerospace, fine art insurance industry is in danger of becoming irrelevant if it does That ability to more rapidly and effectively rise to changing and species. He also believes it will be among the top five players not change the way it does business. customer needs should, in turn, mean that insurers will be able to in political risk and crisis management and will have ‘best in class’ In a joint presentation to analysts with the founder and deliver more profits for shareholders, added Mr McGavick. operations in aviation, energy, and marine. “Catlin is already the largest company of Lloyd’s and CEO of Catlin Group, Stephen Catlin, Mr McGavick explained The XL CEO said that this transformation will only happen, we will add to that leadership position,” he added. the reasons for the proposed takeover. The need to cope better however, if insurers are able to offer tailored products and highly The second big plus is better distribution and the with complex risks on the back of a bigger balance sheet was top capable underwriting. “That is what we are bringing together in of the list. this transaction,” Mr McGavick told analysts. creation of a global platform to service today’s increasingly

08-CRE-Y6-01-Catlin-XL.indd 8

27/1/15 15:24:07

BEHIND THE NEWS XL / Catlin international customer base. Catlin began a ‘journey’ about 10 years ago to create regional hubs in order to make its products available in local markets on a retail basis. XL made its big move into the international market when buying the corporate business of Swiss insurance group Winterthur back in 2001. The combined operation will be even better positioned to serve corporate customers’ cross-border needs, said Mr McGavick. “For both companies, we will now have global platforms that will be more efficient than they are today. Politely put, it has been noted that the build out of Catlin’s platform has been an expense drag for them. This too is cured by bringing our two organisations together,” he said. The third big driver for the deal, according to Mr McGavick, is the need for scale in the reinsurance market. “The reality is that the reinsurance marketplace is going through meaningful structural change, particularly due to the greater importance of alternative capital. It has been widely argued that it would be more difficult for smaller players and we agree,” he explained. “We couldn’t be more excited that we can now take these two very effective, profitable reinsurance organisations, bring them together, and create the eighth largest reinsurer in the world,” continued Mr McGavick. IMPACT BENEFITS The XL CEO said that the combined group will be ‘instantly’ more relevant to customers, brokers and also better equipped to deliver alternative capital market solutions. He added that the combined group will be a top three market share competitor in the broker catastrophe reinsurance market. “This is important, as that is the space that is at once under the most pressure, but second is still a meaningfully profitable line of business,” said Mr McGavick. In conclusion, Mr McGavick said that it is clear that both XL and Catlin could continue to compete as separate entities, pointing out that both have managed to increase margins in recent times despite tough market ‘headwinds’. But he insists that the proposed combination would be ‘stronger’ and better equipped to rise to the opportunities and threats posed by their fast evolving market. “It [the combination] addresses new opportunities. It addresses the macro forces that are changing the P&C marketplace, which we have talked about many times before. It addresses broker consolidation. It addresses the rise of analytics. It addresses the need to be global. It addresses the rise of alternative capital, and it is made purposely for the evolving regulatory environment. Added together, this is a better company,” concluded Mr McGavick. The XL CEO later explained why he was in favour of the Catlin deal despite previously stating a preference for organic growth over mergers and acquisitions. “I have a deep belief in organic growth as the best possible strategy, so you could ask me why now, why this, and I see it pretty simply,” said Mr McGavick. “It is fine to have a bias as to how you would like to do things. But a bias doesn’t mean that you should ignore what is going on in the sector, and these sector forces are a big deal, or that you should be

08-CRE-Y6-01-Catlin-XL.indd 9

blind to a genuine opportunity that is powerful. And this is a transaction that has those kinds of opportunities and the kind of uplift for the firm that overcame my bias and made me excited to go forward in this path.” Mr Catlin, who will be a director in the combined business reporting to Mr McGavick, added some thoughts of his own on the new combination. He said it is clear that consolidation is needed in the market to meet the needs of customers and shareholders. “Both Mike and I independently

came to the conclusion that the talk of consolidation in the marketplace was going to move from talk to action. So if you believe that, why wouldn’t you want to be on the front foot, be proactive rather than being on the back foot, and be reactive? Why wouldn’t you want to choose the partner you want to work with rather than having it chosen for you?” asked Mr Catlin. “As we talked through (that) issue, what became clear to both of us was that we had an amazing amount of compatibility, business ethos is similar, the (desire to pay claims) is similar, and the way you

9.00-9.30 Registration and coffee PART I THE STATE OF THE CORPORATE INSURANCE MARKET: CAPACITY, PRICE, EFFICIENCY AND INNOVATION 9.30-10.00 THE BIG PICTURE: ARE DEMAND AND SUPPLY OF CORPORATE INSURANCE COVERAGE IN EQUILIBRIUM, WHAT IS THE OUTLOOK AND WHAT DO THE CUSTOMERS WANT? Adrian Ladbury reports on the big picture outlook for the corporate insurance market based on meetings with reinsurers and brokers at recent industry events such as AMRAE in France, annual results from the big insurers and reinsurers and expectations from risk managers gathered by Commercial Risk Europe’s ongoing interviews and roundtables. He will also report on what risk managers in Europe and worldwide would like to see their insurers and brokers do to improve the way they deliver products and services to their customers based on CRE’s annual Risk Frontiers survey. Do the wants and needs of customers and suppliers match?

ought to treat people is similar. The more we talked, the more we realised actually that this was potentially a really compelling transaction,” he continued. STRONG SYNERGY “Furthermore, as both companies look further afield to see what other opportunities may be available to them, I think we both again independently came to the conclusion that this is the best transaction that either company could possibly do,” added Mr Catlin. The former Lloyd’s underwriter

10.00-11.00 ROUND TABLE: THE CORPORATE INSURANCE MARKET IN LATIN AMERICA—FOCUS ON BRAZIL, MEXICO AND COLOMBIA Questions tackled during this session include: ■ What is the economic outlook for the region? ■ Is there adequate corporate insurance capacity to meet customer needs in this region, in what areas would risk managers like to see improved coverage? ■ Is corporate insurance fairly priced and are conditions adequate? ■ What are the major trends in the regulation of insurance, particularly cross-border? ■ How have risk management practices evolved in the region and what are the main corporate governance and risk reporting requirements? ■ Is the market happy with the way that claims are managed in this region?

said that for these reasons he and Mr McGavick regard the proposed deal as ‘accelerating the opportunity’ for both Catlin and XL staff and their respective shareholders. “It is our belief, and my belief in particular, that this is going to be a great place to work. This can be a great place to do business and it can be a great place to invest. We will have a balance sheet, which is significantly greater than either individual party, which will benefit (underwriters), allowing them to be innovative and give our clients better service,” said Mr Catlin.

■ How has this market grown in recent times what has driven this growth? ■ How is the business distributed and how could this be made more efficient? ■ Where are the growth opportunities for the hub? 12.00-12.30—COFFEE BREAK 12.30-13.30—CAPTIVE MANAGEMENT HUBS IN EUROPE Moderator: Daniel San Millán Questions tackled during this session include: ■ Are captives as attractive to risk managers as they used to be and what is the outlook for the captive sector? ■ How has recent governmental focus on tax affected captives? ■ How are captives being used, for what lines and types of risks and how is this evolving? ■ As EU regulation is the same for all European captive domiciles, what are the main differences between, for example, hubs in Dublin and Luxembourg? What other attractive domiciles are there for captives after Solvency II in Europe? ■ Which of the hubs will benefit most from Solvency II and how?

11.00-12.00 ROUND TABLE: IBERIA AS A REINSURANCE HUB FOR EMERGING MARKETS—FOCUS ON LATIN AMERICA, AFRICA AND OTHER NEW MARKETS Questions tackled during this session include: ■ Why has Madrid evolved into a 13.30-14.00 reinsurance hub for emerging markets? Q&A followed by closing remarks by ■ What is the benefit for the insurers and Adrian Ladbury customers of using a hub rather than writing the business locally? 14.00—LUNCH

To register please go to www.commercialriskeurope.com/RFMadrid15

27/1/15 16:18:00

Rencontres de l’AMRAE, Cannes 2015

IN FOCUS

New risk new risk managers Rodrigo Amaral

Brigitte Bouquot

ramaral@commercialriskeurope.com

[PARIS] ITH NEW TECHNOLOGIES RAPIDLY complicating the risk

landscape, risk managers must develop their knowledge and skills sets with equal speed to keep on top of IT and cyber threats. The abilities needed to succeed in this new environment are a key focus of the 23rd Rencontres AMRAE. “We are soon moving into a new industrial age, triggered by everything that is related to the digital world, big data, artificial intelligence and so on,” Gilbert Canaméras, President of AMRAE, told Commercial Risk Europe ahead of his association’s gathering in the south of France. As Julia Graham, President of Ferma, explained: “The world is becoming faster and more challenging, and therefore more interconnected and more complicated. As a result, the whole profile of what risk managers are trying to put their arms around has become more difficult.” Understanding the myriad of cyber threats is a tall task for any risk manager. Mastering this new risk area is a daunting challenge. But, as Ms Graham pointed out, this task cannot be avoided and demands a shift in risk management approach. “What risk managers needed to know some years ago was not the same that they need to know today. Risk managers do not have to be experts in everything, but we do need to know what the issues are and where we must head for expertise,” she said. “Today, the role of risk managers in a company is not dissimilar to that of nonexecutive directors on boards. We need to be able to ask the right questions and know where to look for the answers,” she added. The time when technological issues were the exclusive domain of scientists and IT experts has long since passed. When mapping technological risks, many other specialists now need to be called into the process. Risk managers must be able to communicate across the range of stakeholders and act as a bridge between different parties. For Brigitte Bouquot, a member of AMRAE’s board and Head of Insurance and Risk Management at Thales, personal skills are the key to success. “Beyond a minimum mastery of IT systems that everybody needs to have today, risk managers must be close to the teams that introduce innovation in their companies,” she said. “Which means that they need to forge a very good internal network.” A willingness to learn is handy when one needs to juggle a number of different balls at the same time, she continued. “Thanks to their curiosity, and with the help of external sources of information and actual benchmarks found in the market, risk managers can stay ahead of the pack in terms of the analysis of risks,” Ms Bouquot said. According to Sébastien Rimbert, Head of Risk Management Advisory Services at Ernst & Young in France, although risk managers are not responsible for the risks companies face they play a vital role in making sure new risks are properly identified and managed. “Risk managers need to help IT directors, legal directors and others to understand these risks and clarify them at board level,” he said. As Ms Graham made clear: “Technology is not only an IT issue. It has a cultural and human perspective as well, as it involves aspects such

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as how people actually use technology. There is a financial implication that comes into play if something goes wrong. It has a legal perspective because of contracts signed with other parties and the laws and regulations to which businesses need to comply. And, of course, there is the insurance side. We cannot expect heads of IT to be experts on cyber insurance, because that is not what they do.” Risk managers can no longer feel coy about venturing into the realms of IT and technology, while IT experts cannot avoid involvement in an enterprise-wide risk management approach. “Technology is an area that heads of IT have become used to managing by themselves, and where risk managers have not been traditionally very involved,” Ms Graham said. “But those days are finished. It is today an enterprise-level issue.” It is clear that there is still a long way to go for companies to get on top of IT and cyber risks. Ernst & Young’s Mr Rimbert pointed to Ferma’s most recent risk management survey that revealed French and European risk managers rank IT risks as one of the top five that are insufficiently managed. He said convincing boards of the severity of IT risks is one of the main difficulties faced by risk managers. This can lead to the threat being underestimated and can have serious consequences for any firm, he added. It is clear that the pace of technological development will unlikely slow down and its use is changing business models and the risk landscape. “The issues created by new technologies are vertiginous for companies that have to quickly take advantage of them for the sake of competition. This will require changes of business models and mean exposure to new risk scenarios that are still unexplored,” Ms Bouquot eloquently surmised. Going forward new generations of risk managers and employees generally will have the advantage of increased familiarity with many of the new technologies and their inherent risks. But, according to Ms Graham, familiarity with these new technologies also has a downside risk. “On the one hand they will not be afraid of the subject, as they will have been brought up in the world of social media and the paperless book,” she noted. “But it creates a disadvantage in the sense that familiarity sometimes makes it difficult to appreciate some of the risks derived from the use of those technologies. In the old days, you would not even dream of going into a public house and talking about a confidential issue, for fear that someone could overhear you. In social media, people are much less wary when it comes to putting information up on Twitter or Facebook.”

“ Today, the role of risk managers in a company is not dissimilar to that of non-executive directors on boards. We need to be able to ask the right questions and to know where to look for the answers—this is certainly something that requires a proactive rather than a reactive buyer...”

JULIA GRAHAM, PRESIDENT OF FERMA

27/1/15 15:29:27

IN FOCUS Rencontres de l’AMRAE, Cannes 2015

Insurers urged to learn lessons from cyber cover mistakes [PARIS]

EADING EUROPEAN RISK MANAGERS HAVE URGED THE insurance industry to learn lessons from its ill-conceived introduction of cyber risk cover in order to deliver better solutions for future and tricky risks. Ferma and AMRAE big hitters say insurers took the wrong approach when they first started offering cyber risk policies by not paying attention to the needs of clients. They warn that a better and more collaborative approach is needed if insurers are to deliver relevant solutions to emerging corporate risks such as financial loss without physical damage. “We do not want insurers to launch products to cover financial losses without damage before having first consulted us about our needs,” said Anne-Marie Fournier, a vice-president at France’s risk management association AMRAE. “Insurers need to explain to us how the industry plans to apprehend the financial losses incurred when, for example, companies are hit with significant expenses or fines if they behave in a way that was not expected by regulators. In other words, understanding the impact that events may have on a company’s reputation or that unethical behaviour can have on our businesses,” she added. Simply coming up with products wrapped in marketing campaigns is not good enough, she said. For new risk solutions buyers should be consulted about their real needs before underwriters try to sell them new coverages, Ms Fournier added. “We would like the insurance industry to help us cover these risks in a way that is different from what they have done for cyber liability or cybercrimes, where they started not by looking at our needs, but by trying to simply sell new products,” Ms Fournier said. “Insurers tried to convince us that we were exposed to certain risks. That is not the right thing to do. It is up to companies to analyse our exposures and then seek solutions in the insurance market.” One result of the ill-thought-out launch of cyber products is a

lingering suspicion from buyers about what they are being sold, said Ms Fournier, who is also the risk manager at luxury group Kering. “Some products available in the market for cybercrimes are making everybody afraid,” she said. “They may address the needs of one or another particular company, but not of all. Financial losses are also very different from one company to another, from one industry to another, even from one country to another, and coverages need to be more tailor made than traditional insurance products.” The good news, however, is that there are signs that lessons have been learned, at least by some market players. “It seems that companies like AIG are now adopting a more reactive approach in the cyber risk market,” Ms Fournier pointed out. “They are offering a panel of solutions that might meet our needs, and that is progress.” Julia Graham, President of Ferma, has also spotted some progress in the way insurers are delivering innovative solutions for clients. But this follows mistakes from insurers over cyber risk solutions.

“I think the insurance market is getting better,” Ms Graham said. “It jumped too fast into the field of cyber risks originally. Companies saw an opportunity in cyber risks, which was a good thing, as they were responsive. But I am not sure that what many responded with was what businesses needed.” Ms Graham said the insurance market may have ignored some basic risk management principles when cyber risk products were first made available. More attention should have been paid to the risks faced by individual companies and exposures that were covered by other policies, she said. However, the market is now realising that risk managers need more tailored help to understand cyber risks, she continued. “Insurers are certainly looking more at solutions, rather than merely trying to sell insurance products,” added Ms Graham, who is also the director of risk management and insurance at DLA Piper. —Rodrigo Amaral

WHAT ARE THE ODDS

of no surprises

At HCC Global we maintain a sharp focus on ﬁnancial lines insurance, providing our clients the freedom to pursue opportunity with conﬁdence. A process of insurance we call Mind over risk.

HCC Global

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6/4/14 10:22 AM 27/1/15 15:40:56

Rencontres de l’AMRAE, Cannes 2015

IN FOCUS

French firms struggling in

fight against corruption Rodrigo Amaral ramaral@commercialriskeurope.cpm

[PARIS]

VIDENCE SUGGESTS THAT ANTIcorruption efforts among French firms fall below the standards set by many of their global competitors. Experts say this leaves French multinationals exposed to regulatory backlash and at a competitive disadvantage as authorities the world over increasingly target corporate corruption. An apparent lack of political will to tackle corruption in France is a leading reason why French firms have not taken the issue as seriously as some of their global peers, experts add. In December, French group Alstom pled guilty and agreed to pay a $772m fine to settle a bribery case brought by the US Department of Justice. The fine was the second highest applied to a company under the US Foreign Corrupt Practices Act (FCPA) and highlights the potential exposure of French firms operating abroad. According to the leading compliance website FCPA’s blog, French companies have received three of the ten highest fines applied under the US’ foreign anti-corruption rules. No country features more prominently on the list. Many experts believe that such figures reflect the fact that French firms lag behind global competitors in the implementation of anti-corruption measures. “Our efforts in this area have been insufficient considering the international stature of French companies,” said Jean-Paul Philippe, a consultant and former head of France’s anticorruption police. Even among large French groups anticorruption measures and controls can be found wanting, according to Baptiste Pécriaux, Head of Private Sector Affairs at Transparency International France. “French companies that have compliance systems of the highest standards tend to be those that have already been exposed to corruption risks abroad and fined for it,” he said. Others have not made much progress in this area, he added. The problem is increasingly acute as smaller French firms venture abroad in higher numbers. Mr Philippe pointed out that midsized companies expanding overseas are more exposed to corruption risks than their bigger peers because they lack the resource and ability to effectively implement compliance and internal control systems. It seems that an apparent lack of political will to tackle corruption in France has caused apathy among its businesses and hindered the implementation of best practice anti-corruption measures. France has been criticised by organisations such as the OECD for showing little willingness to apply rules prohibiting corrupt acts by international companies. According to the OECD’s latest Foreign Bribery Report, France has only punished five cases of international bribery since 1999, compared to 29 in Germany and 128 in the US. Many other countries that fare badly by this measurement, such as the UK with six cases, have recently bolstered their anti-corruption capabilities. However, previous OECD reports have criticised France for doing little to enhance its anti-corruption powers since the early 2000s. According to Mr Pécriaux, there is a lack of law enforcement. “Laws to fight corruption exist in France,” he said. “The problem is their implementation.” According to Giles Hilary, an anti-corruption

10-CRE-Y6-01-Amrae-2015.indd 12

French company Alstom pled guilty and agreed to pay a $772m fine to settle a bribery case brought under the US Foreign Corrupt Practices Act, by the US Department of Justice

expert at the INSEAD business school: “One advantage of setting up a system of rules like the FCPA or the UK Bribery Act in France would be to encourage French companies to develop structures to deal with corruption at a similarly sophisticated level. Rules that are written with US or British companies in mind tend to naturally give an advantage to them.” “The degree of sophistication that international US companies already have in this area is probably not matched anywhere else,” added Mr Hilary. This is predominantly because laws are more rigid in the US and their implementation more forceful than elsewhere, he suggests. Corruption is causing particular problems for multinational French companies because the issue is becoming a major concern of governments around the world. This is not only the case in developed countries but also emerging markets such as China and Brazil

where anti-corruption drives are in vogue. Mr Hilary noted that anti-corruption plans must be fully embraced by top management to be truly effective. The tone needs to be set at the top so that a coherent message can trickle down an organisation, he said. “It is going to be very hard to convince people not to break the law when corruption is involved if the company is at the same time taking a lot of high level legal risk with, for example, tax minimisation strategies,” he said. Anti-corruption measures must also be replicated throughout the supply chain, added Mr Philippe. “Many large groups already have relatively effective compliance structures, but their suppliers and clients are not necessarily aware of the problem. In foreign markets there is the matter of intermediaries who facilitate the introduction of companies. It is necessary to perform a diligence process before working with them,” he said. For most large multinational firms it is of course extremely difficult to micro manage the behaviour of every employee in every subsidiary. Efficient internal controls that enable firms to spot and react to inappropriate behaviour are the main weapon in the fight against unethical and corrupt behaviour. But they are particularly difficult to achieve given cultural and financial pressures on company units and individuals. “In any given deal, it might be easier to win it by paying bribes,” Mr Hilary said. “But, if your strategy relies on corruption, there is something essentially wrong.” But, even the best control systems cannot guarantee that some employee in some part of the world will not give in to temptation and bribe officials for an easy deal, noted Mr Pécriaux. It seems therefore that internationally active French firms have a long battle ahead in their bid to tackle corruption. But it is a battle that must be joined to avoid regulatory backlash as authorities clamp down on those that break the rules.

“ Our efforts in this area have “ Laws to fight corruption been insufficient considering the international stature of French companies...”

JEAN-PAUL PHILIPPE FORMER HEAD OF FRANCE’S ANTI-CORRUPTION POLICE

exist in France… The problem is their implementation...”

BAPTISTE PÉCRIAUX PRIVATE SECTOR AFFAIRS AT TRANSPARENCY INTERNATIONAL FRANCE

27/1/15 15:29:56

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MALTA INTERNATIONAL RISK CONGRESS 2015

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■ How can captives and innovative self retention strategies such as industry self retention groups be used to help incubate such emerging risks, build a track record and thus make such risks easier and more economic to transfer? ■ What qualities, skills and services will ensure that an insurer and broker will retain and grow their business in the global corporate space in the future? 11.00-11.20—RISK MANAGER SPEAKER 11.20-11.40—INSURER SPEAKER 11.40-12.00—BROKER SPEAKER

HILTON, MALTA 1—2 JUNE Monday 1 June 8.45–9.15 Welcome address from Adrian Ladbury, Editorial Director of Commercial Risk Europe, Joe Bannister, Chairman of the Malta Financial Services Authority. 9.15-9.30 Opening remarks from Maltese Finance Minister Edward Sciculuna on how governments need to tackle the fast-evolving financial, political and social risk environment that face all European nations. 9.30-10.15 Keynote speaker on the ‘black swan’ risks that face the world currently. What are the big risks that we really should be worried about that we can’t even imagine today? 10.15-10.30 Q&A with keynote speaker

12.00-12.30—DEBATE The three speakers will be joined by three Ferma committee members to discuss the big issues and agree on solutions for these three key risk areas. Co-hosted by Adrian Ladbury 12.30-14.00—LUNCH 14.00-16.00—WORKSHOPS WORKSHOP SESSIONS: Experts in the identified risk areas will host sessions with risk managers, brokers and insurers to dig deeper into the nature of the risks, how they are best managed and transferred and how captives can be best used to transfer such risks. The sessions will cover: ■ Cyber risk and big data ■ Supply chain and business interruption ■ Reputational risk ■ Political/terrorism risk 16.00-16.45 Each workshop leader will report back the key findings followed by Q&A. END OF DAY ONE

Tuesday 2 June

10.30-11.00—COFFEE 11.00-12.30 The emerging risk landscape: cyber, supply chain and reputation— time for a new partnership model? The corporate risk management and transfer market has so far struggled to come up with truly innovative and broad-ranging solutions to complex risks such as cyber, supply chain and reputational risk. Three speakers will answer the following questions: ■ Is the risk and insurance market really willing and able to tackle difficult emerging risk areas such as cyber, supply chain and reputational risk in a comprehensive manner or is it only partially insurable? ■ What solutions are currently available in these three key risk areas and are they adequate? ■ Where are the coverage gaps? How do risk managers want to see coverage and service improved and can the risk transfer market deliver solutions at an acceptable price?

8.30-9.00—COFFEE 9.00-10.00 ALTERNATIVE RISK TRANSFER: How to use the capital markets to transfer risk and make more efficient use of regulatory risk capital. 9.00-9.20 Leading broker explains how the capital markets can be accessed to deliver capital efficient risk transfer solutions for corporates and insurance/reinsurance companies in a risk-regulated environment. How can SPVs and PCCs be used to maximise capital allocation and minimise regulatory capital requirements for captives and commercial insurance companies? 9.20-9.40 Leading run-off expert explains what options are available for captives and insurance companies to cut off their tail risk and minimise capital requirements through run-off solutions.

9.40-10.00 Joe Bannister, Chairman of the Malta Financial Services Authority, explains how Malta has developed its regulatory framework to help corporate and insurance/reinsurance companies maximise their capital efficiency in a risk-regulated world followed by Q&A with speakers. 10.00-10.30—COFFEE 10.30-12.00 THE FUTURE OF FINANCIAL RISK IN EUROPE Leading risk management experts in the main financial sectors explain the evolution and future of risk management in Europe. Each speaker will ask: ■ What are the main expected risk-related rules to emanate from the EC and international regulators in coming years? ■ How could and should companies that operate in the sector prepare and respond? ■ What impact will the rules have upon the nature and pricing of products and services offered to customers? ■ Will the rules make Europe a safer place in which to do business? ■ Will the rules drive business out of Europe to less strongly regulated centres? 10.30-11.00 Asset/investment management firms 11.00-11.30 HEDGE FUNDS 11.30-12.00 INSURANCE COMPANIES 12.00-13.15—LUNCH 13.15-14.00—KEYNOTE SPEAKER A senior representative of the European Commission explains the future of risk regulation for the European and international financial markets and how the system will prevent a recurrence of the credit crisis and subsequent economic and financial turmoil. How will the European system work with other leading international economies and regulatory systems to avoid future crises? 14.00-14.30 Panel debate and Q&A: What is driving all this risk-based legislation? Will it make Europe a safer and more competitive place in which to do business? The expert speakers from the previous session will join the keynote speaker to tackle big questions including: ■ What are the risk management and reporting requirements expected to emanate from the EC and other international bodies and regulators in the next five years? ■ What exactly should a fund manager/investor/custodian do in response? ■ How could and should fund managers/investors/custodians use the new rules to their advantage? ■ Is Malta the right place to manage this risk? 14.30-15.00 Q&A with pre-submitted questions from delegates 15.00—CONFERENCE ENDS

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E-NEWSLETTER

» THE 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

» CYBER AND POLITICAL RISKS CLIMB ALLIANZ BAROMETER [LONDON]—CYBER AND POLITICAL THREATS are the big climbers in the Allianz Risk Barometer 2015. The survey of over 500 risk managers and corporate insurance experts from global businesses and within Allianz finds that both risks have moved up the corporate agenda over the last year. They now hold top 10 spots both globally and within the Europe, Middle East and Africa (EMEA) region. However, more traditional industrial threats are clearly still the biggest concern for risk experts. Business interruption and supply chain risk, natural catastrophes and fire and explosion head the Barometer’s global and EMEA rankings for the fourth year running. Market stagnation and the impact of technological innovation are the key fallers in the 2015 Barometer. The Allianz Barometer is based on responses from experts in 47 countries who were asked to name up to three risks they believe to be of most importance in their area of expertise. Globally, 46% of respondents cited business interruption and supply chain risk, 30% natural catastrophes and 27% fire and explosion. They, along with changes in legislation and regulation, which received 18% of votes this year, have been the top four perceived global risks since the barometer began four years ago. They also continue to be the top four risks in the EMEA region. This year cybercrime and IT failures rank 5th on 17%, both globally and in EMEA. The threat, ranked 8th in 2014 on 12% and 15th in 2013 on 6%, continues its rapid rise up the Allianz Risk Barometer. In EMEA the risk has risen from 9th position in 2014 when it received 11% of votes. According to the Barometer, cyber threats are now among the top three corporate risks in Germany (2nd top risk), the UK (3rd top risk) and the US (3rd). It has also entered the

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top ten risks in markets such as France (10th) and Spain (8th). Loss of reputation (61%) is cited as the main cause of economic loss from cyber risks, followed by business interruption (49%) and damages paid due to loss of customer data (45%). Meanwhile, data theft and data manipulation (64%), reputational loss (48%) and increased threat of persistent hacking (44%) are the cyber-related scenarios businesses most fear. The Barometer also finds that businesses are less prepared to tackle cyber risk than any other threat. 29% of respondents said businesses are least prepared for cyber risks, followed by business interruption and supply chain (18%) and natural catastrophes (16%). 73% of respondents believe that underestimating cyber risk is preventing companies from being better prepared for cyber risks, followed by budget constraints (59%) and failure to fully analyse potential threats (54%). The other big mover is political risk/social upheaval that has risen nine positions to 9th in the Barometer’s global risk chart. It is rated as a leading risk by 11% of respondents this year, up from 4% in 2014. The risk has also burst into the top 10 risks facing business in the EMEA region, ranking 8th. It has become one of the top three risks in Russia and Switzerland and is ranked the top business concern in Ukraine. Furthermore, it is the second top cause of supply chain disruption (53%) after natural catastrophes. Going in the other direction, market stagnation or decline fell from 5th to 7th in the overall Barometer risk ranking. It scored 15% in 2015, compared to 19% last year. It also fell from 4th to 6th in EMEA, scoring 17% compared to 22% in 2014. The threat of austerity measures has also fallen sharply this year in the global ranking, down to 17th, or 5%, from 12th, or 7%, in 2014. The impact of technological innovation is also regarded as less threatening in 2015, according to the Barometer. The risk has fallen five places to 19th and by 4%. —Ben Norris

» TRIA RENEWAL WELCOMED BY ALL AS STABILISING INFLUENCE [WASHINGTON]—BUYERS AND INSURERS alike welcomed the reauthorisation of the Terrorism Risk Insurance Act (TRIA) in mid-January. The US federal terrorism insurance backstop was finally renewed via the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2015 (H.R. 26), which President Obama

signed into law on 12 January. TRIA will now be extended for six years and will be in place until 2020. Following a turbulent renewal process, the news was welcomed by US risk managers’ association RIMS and its risk transfer partners. TRIA was allowed to expire on 1 January, 2015 to the consternation of insurers and their customers because the US Senate failed to reach agreement on its reauthorisation before Congress adjourned for the year. However, when Congress reconvened the House of Representatives passed an identical reauthorisation bill that the Senate voted through on 8 January. RIMS said the extension of TRIA is poised to stabilise the global terrorism insurance market. Its immediate past president Carolyn Snow, who was heavily involved in the renewal of TRIA, said the news brings to an end weeks of confusion and worry for companies with terrorism exposures in the US. “For about three weeks following the programme’s expiration, brokers, underwriters and commercial insurance consumers were faced with the stark reality

of the challenge to protect their businesses and clients from potentially catastrophic and unpredictable losses incurred by an act of terror. RIMS commends our leaders in Washington DC for addressing this uncertainty immediately upon their 2015 return and authorising a fair extension,” she said. Newly elected RIMS president Rick Roberts said he is thrilled that Congress and President Barack Obama ‘finally realised that this Federal backstop is more than just an insurance issue’. The chair of RIMS’ external affairs committee Janice Ochenkowski also welcomed the new-look TRIA. But she noted it doesn’t contain everything that RIMS was after. This included cover for nuclear, biological, chemical and radiological events and a clearly defined certification process. “RIMS advocated for a TRIA solution that addressed the long-term availability and affordability of insurance coverage for nuclear, biological, chemical and radiological events caused by terrorism, as well as a clearly defined certification process,” she said. “While the 2015 extension doesn’t include these components, overall, RIMS is thrilled that our government leaders authorised a bill that alleviates so much uncertainty and that adequately protects businesses in the US from the potentially catastrophic impact of terrorism.” The latest incarnation of TRIA includes the following changes. It increases the industry aggregate loss trigger from $100m to $200m. This will be phased in from 2016 by annual increments of $20m for five years. It increases insurer co-participation in losses from 15% to 20%, which will be phased in from 2016 in 1% increments. Under the latest version of TRIA, the US Treasury’s recoupment rate will rise from 133% to 140%. The insurance market aggregate retention will increase from $27.5bn to $37.5bn through $2bn annual increases over the life of the bill. It maintains the liability cap at

$100bn and the deductible at 20%. Insurers also moved to praise the newlook TRIA and Congress and President Obama for reauthorising the backstop quickly in 2015. Nat Wienecke, Senior Vice President, Federal Government Relations for the Property Casualty Insurers Association of America (PCI), said his body applauds President Obama for quickly enacting the TRIPRA of 2015 into law. It represents ‘a momentous occasion for consumers, taxpayers and our members’, said Mr Wienecke. The American Insurance Association (AIA) said a well-functioning private terrorism insurance marketplace ‘has been preserved because Congress and the Administration made TRIA’s reauthorisation an immediate priority’. Marsh said that TRIA’s short-lived expiration raised significant pricing and capacity concerns for organisations that purchase terrorism insurance. This was particularly the case for risks located in central business districts in major cities for which terrorism insurance is typically more expensive due to risk aggregation issues. However, pricing and terms and conditions that changed upon TRIA’s expiration are likely to return to preexpiration levels, said Marsh. Insurers may achieve this on a blanket or account-byaccount basis, it added. It noted that the most significant changes to the newly reauthorised TRIA—including to the programme trigger and co-insurance— do not take effect until January 2016. For that reason, organisations can generally expect negligible impacts on pricing at this time, said the broker. —Ben Norris

» PARIS ATTACKS COULD HINDER DEVELOPING INSURANCE COVERAGES WARNS AMRAE [PARIS]—THE JANUARY TERRORIST ATTACKS

in Paris could hold back innovative and new insurance solutions to protect against terrorism risks, Gilbert Canaméras, President of AMRAE, warned last month. Speaking to Commercial Risk Europe, Mr Canaméras added that the attacks by three French-born Islamic radicals show that terrorism is a real concern for French companies at home. Mid-sized firms are less prepared to combat the threat than larger companies, he said. He also noted that although security measures are predominantly the responsibility of security chiefs, risk managers must evaluate mitigation plans in place. But crucially for Mr Canaméras, the attacks, which killed 17 people, could halt recent progress towards new and innovative terrorism insurance covers from insurance and reinsurance companies. “Before last week’s attacks, we observed that the market was moving in the field of terrorism risks,” Mr Canaméras said. “There was a tendency for companies to study and propose new solutions for this kind of risk. Now I do not know what will happen.” —Rodrigo Amaral

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NEWS

AMRAE: Renewed risk management interest reflects AMRAE expansion CONTINUED FROM PAGE ONE

364 are full members—companies represented by risk managers or other risk professionals. Mr Canaméras said that AMRAE’S 23rd Rencontres in Cannes is a time for the association and its members to look back at what they have achieved and make plans for the future. This year’s conference focuses on the challenges and opportunities faced by French companies as a result of new technologies and other economic and social developments. It also provides AMRAE with a further opportunity to carry out its mission to spread risk management knowledge throughout France and to other parts of the world. According to Mr Canaméras, a recent satisfying development at AMRAE is the growing participation of small and medium companies in its activities and events. About one third of the companies represented by AMRAE today are SMEs. The involvement of SMEs has been boosted by the creation of AMRAE regional branches that can more easily work and communicate with firms located outside the Paris region. The latest branch opened in the Provence-Alpes-Côte d’Azur, or PACA, in the south of the country. This region includes Cannes and other

economically important cities such as Marseille and Nice. The other regional branches encompass the Rhône Alpes region, centred in Lyon, and Grand Ouest, with Nantes and Niort as its main locations. AMRAE is also targeting risk managers outside of France, predominantly in French-speaking Africa. Its Club de la Francophonie project, which aims to spread risk management concepts to Frenchspeaking countries with a particular

focus on Africa, is a key part of current plans. In Cannes, AMRAE hosts the club’s second meeting following its launch in Deauville last year. In November 2014 AMRAE organised its first event in Africa. Around 160 people attended the conference in Casablanca, Morocco. Attendance was not restricted to risk managers and included company directors and other high level participants. This broad interest was a

pleasant surprise to AMRAE, said Marc De Pommereau, AMRAE’s secretarygeneral. “We have received consultations from organisations in French-speaking countries on the possibility of taking our ERM training initiatives there,” Mr Canaméras said. “We have the duty to spread the culture of risk management beyond our frontiers, and that is why we have launched the Club de la Francophonie.” He said that AMRAE can act on

behalf of risk managers in Frenchspeaking African countries in discussions with the insurance industry. “It is of interest for risk managers in French-speaking countries in Africa to develop an organisation that could enter into a dialogue with the likes of the Federation of African National Insurance Companies…Just like we at AMRAE are a channel to talk to the FFSA (France’s association of insurance companies) in France,” said Mr Canaméras.

RENEWALS: “It has been a tough renewal season with

some difficult discussions with brokers and clients...” CONTINUED FROM PAGE ONE

seen reductions in rates and more recently a relaxation of terms and conditions, he said. A trend for large insurers to buy less reinsurance in recent years means that soft reinsurance market conditions have so far been of only limited benefit to the commercial insurance market. According to Mr Flandro, reinsurance now typically accounts for less than 10% of primary insurance premium. “The trend towards higher retentions by insurers and large corporates means that the benefits of lower reinsurance costs have not come through to the buyers of primary insurance as much as they once would have,” he said. However, a ‘spill over’ of excess reinsurance capacity is leading to increased competition in most speciality insurance lines as reinsurers look to diversify, explained Mr Flandro. For example, although aviation rates increased at recent renewals in response to recent claims the uptick was lower than expected because of excess capacity, he said. M&A ACTIVITY Given underlying conditions the softening market is not expected to abate anytime soon. As insurers feel the pinch of ever-reducing rates, low investment income and increased regulation, many suggest that fundamental change is afoot in the risk transfer market in the form of mergers and acquisitions.

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In a bid to boost returns for investors, insurers are looking to cut costs and seek consolidation and diversification to improve their capital position, according to Bryan Joseph, Global Actuarial Leader at PwC. “Mergers and acquisition (M&A) are a natural consequence of increasing capital costs because it can give greater diversification and opportunities for savings from cost synergies,” he said. TOO MANY SMALL PLAYERS “Over the years there has been a lot of discussion in the industry around consolidation and the need for bigger and stronger insurers. There are too many small specialty and commercial lines insurers and reinsurers, evidenced by the excess capacity in the market,” according to Mr Joseph. A shakeup is now almost inevitable, especially in specialty insurance and reinsurance markets like London and Bermuda where there are a number of mid-sized insurers that add little to market expertise, capacity or security, he explained. “There is plenty of scope for the numbers of insurers in these markets to fall considerably— there is too much capacity and it is inefficient to have too many players,” he said. Mid-sized brokers and insurers are among those most likely to seek mergers and acquisitions, according to Andrew Holderness of Clyde & Co. Mid-sized firms face an increased burden of regulation, shrinking profit margins in a soft

market and clients demanding more from their service providers, he said. London brokers, in particular, are feeling the pinch. There was notable M&A activity between mid-sized players in the London broking market last year and this seems set to accelerate. For example, Hyperion Insurance Group Limited and R K Harrison are in merger talks while Miller Insurance just agreed a deal with Willis. Recent years have seen a number of acquisitions, but these have tended to be opportunistic, small, bolt-on deals involving speciality units and emerging market insurers. “Now we are seeing more structured plays,” said Mr Flandro. With lower margins and fewer opportunities to grow organically, many insurers will now be considering their strategic options, according to Clyde & Co’s Mr Holderness. He noted that the recently agreed acquisition of Catlin by XL Group—which is widely thought to be driven by the need to gain scale—could prompt other Bermudian groups to consider M&As. At the end of January, Bermuda-based AXIS Capital and PartnerRe became the latest groups to announce merger plans in an $11bn deal driven by the need to achieve scale in today’s market. “Organisations have reached a point of inflection, reflecting internally and externally, asking if their strategy and structure is right

John Hurrell and whether capital is being put to the best use,” said Mr Holderness. Customer-led trends may also favour larger insurers in the future, as well as niche players, potentially putting mid-sized insurers under pressure, explained Zurich’s Mr Rosencrantz. Corporate clients are getting larger, risks more complex, global and interconnected, while values are becoming more concentrated. New exposures, like cyber, reputation and supply chain disruption, as well as a trend towards more costly natural catastrophes, will need investment, knowledge and service, he said. “Price and capital are no longer unique selling points—service and knowledge is now more important for global carriers. New capital entering the market is just money, and money can’t handle claims in Indonesia or provide engineering services in New Zealand,” said Mr Rosencrantz. “If you need to be big to service

commercial customers, it may happen that we see consolidation among general capacity providers. We could see more mergers of equals,” said Mr Rosencrantz. As corporates have grown larger and grown internationally they have sought bigger global insurance partners, noted Mr Joseph. As a result smaller and mid-sized carriers have come under pressure as they lose premiums to the handful of large multinational insurance groups, he noted. While a tough market to enter, Mr Joseph believes that there is room for more multinational insurers. “The next wave of big global players is likely to come from national insurers, in particular those in Asia, Latin America and the Middle East,” he said. Soft markets can also see insurers look to cut costs. However, cutting costs is not easy, according to Mr Joseph. Insurers can look to reduce headcount, drive down distribution costs or use technology to gain efficiencies. Yet commercial insurance buyers want to see insurers investing in better service delivery, talent and innovation in order to meet their changing risk and coverage needs, he noted. As the market conditions begin to feed through to underwriting profits, some insurers may be tempted to take a tougher stance on claims. However, insurers are already taking a strict interpretation of policy coverage, and have been for the past few years, said John Hurrell, chief executive of Airmic.

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PARTNER RE/AXIS: Both boards approved so-called ‘merger of equals’ CONTINUED FROM PAGE ONE create an organisation with the size and breadth to enhance product and service offerings, maximise growth opportunities, optimise portfolios and deliver both economies of scale and capital efficiencies.” The CEO of the new company said that it would have three strongly positioned businesses: a top-five global reinsurer, a $2.5bn specialty insurance underwriting business and a highly successful and growing life, accident and health franchise that would all enjoy increased strategic flexibility.

“As a top five global reinsurer with leading positions in a number of specialty lines, we will be strongly positioned to turn the challenges presented by the structural changes in the reinsurance market into opportunities,” said Mr Benchimol. ‘FINANCIAL STRENGTH’ He added: “For our clients and brokers, this transaction brings together two companies with outstanding underwriting talent and service to deliver more comprehensive solutions backed by the financial strength they have come to rely on from both companies. I look forward to working

closely together to make this vision a reality, while achieving diversified and consistent earnings growth for our shareholders.” Costas Miranthis stepped down as CEO of PartnerRe and as a member of the PartnerRe board as the deal was announced. PartnerRe Director David Zwiener took the position of interim CEO of PartnerRe until completion of the transaction. Mr Miranthis commented: “This merger with AXIS Capital offers a unique opportunity to enhance PartnerRe’s scale in the reinsurance sector and to enter the primary insurance market with a high quality

partner with a global franchise. This is the right step for PartnerRe at the right time—squarely addressing the strategic imperatives that today’s markets are demanding.” BERMUDA HQ The new company’s headquarters will be located in Bermuda. The combined company will have a top five market position in the reinsurance market with combined gross premiums written of $7bn. It will be the leading broker-based reinsurer. The reinsurance operation will be complemented by a global specialty insurance business with $2.5bn in

gross premiums and the creation of a meaningful player in the life, accident and health markets, with total gross premiums written of $1.5bn and particular strength in the US A&H reinsurance market. AXIS said that the merger is expected to achieve at least $200m in annual pre-tax cost synergies in the first 18 months of operation and will be accretive to earnings per share and returns on equity for the shareholders of both companies. The transaction is expected to close in the second half of 2015, subject to approval by the shareholders of both companies and regulatory clearance.

DEALS: Deal set to deliver strong rival to the current market leaders CONTINUED FROM PAGE ONE completion mid-year. The merger of AXIS Capital and PartnerRe (see story on page one) is more of a reinsurance-focused deal but still creates a serious player in the global specialty market. This again looks like good news for customers overall. Risk managers may, however, be justifiably more concerned about the wider implications of the news that Willis has agreed a deal with Miller to take its corporate and reinsurance business in-house and create a combined new wholesale broker under the Miller brand, in which Willis now holds an 85% stake. Risk managers have expressed rising concern in recent years during Commercial Risk Europe’s annual European and Global Risk Frontiers surveys about the dwindling choice of brokers able to help manage and transfer their increasingly complex and international exposures. Experts agree that Willis’ move could foreshadow a period of consolidation in the broking market that could be good news for shareholders but not so good for customers. The ultimate winners could be networks of independent brokers such as World Broker Network (WBN) and Brokerslink as risk managers seek the alternative and independent view. John Hurrell, CEO of the UK risk and insurance management association Airmic and himself an ex-senior broker, summed up market feeling neatly by stating that as a corporate insurance buyer he would be more concerned about the wider implications of the Willis deal than the XL acquisition. “There is no shortage of choice in the insurance market overall but the shortlist of truly global players is fairly small. This [XL Catlin deal] potentially adds a new player into the premier league of larger, better resourced entities,” Mr Hurrell told CRE. “Miller and Willis looks to be a wholesale and specialty player but removes a player from the board of retail brokers. Whether this creates a space for other consolidations to fill this space remains to be seen. But I would not expect this to be the final deal in the broker market for 2015,” he continued. Mr Hurrell added, however, that he sees no reason for Airmic members and the wider European risk management community to press the panic button just yet.

01-CRE-Y6-01-News.indd 18

“Nevertheless, big buyers are not currently constrained by lack of choice [among the brokers] and the Miller deal, on its own, does not dramatically change this situation,” he said. The Willis deal with Miller is complicated by the fact that Miller is a partnership. A straightforward takeover is therefore not possible even if that is what Willis had wanted. BRAND TRANSFER Under the deal agreed, the two brokers will therefore create a new wholesale and specialty broking firm under the Miller brand and transfer the retail UK corporate, financial institutions and reinsurance business to Willis. The Willis Group will become a corporate member of Miller Insurance Services LLP by taking a majority (85%) interest in the partnership. Partners of Miller will retain the remaining interest ‘in perpetuity’ that Miller said would be transferred across ‘generations of new partners’. The statement announcing the deal said the move would bring additional expertise and ‘enhanced value’ to the new firm’s combined UK retail and global specialty business and its treaty reinsurance team. Graham Clarke, CEO of Miller, said: “This agreement will accelerate our growth strategy and enhance our offering to our clients. It is a unique opportunity to combine the strengths of two firms for whom client service is paramount. Miller’s independent platform and partnership will continue to operate under the Miller brand with

the same ethos and continuity of leadership, complemented by Willis’ international experience, scale and industry and product knowledge.” Dominic Casserley, CEO of Willis Group, said: “Miller, a pre-eminent independent specialist broker in the London wholesale market, is highly regarded by clients and insurance carriers alike, with a culture and professional approach that aligns closely with Willis’ own values-based client service and heritage. “This transaction positions Miller as a leading London specialist wholesaler, allowing Willis and Miller to draw on each other’s professional strengths, and underlines the deep commitment of both parties to the London insurance market.” The transaction is expected to close in the second quarter of 2015. The terms of the transaction were not disclosed. (The strategic reasons for the XL acquisition of Catlin are explained by XL CEO Mike McGavick and Catlin CEO Stephen Catlin in our analysis on pages 8 and 9). As Mr Hurrell noted, most corporate customers with international exposures should welcome the combination. But both Mr McGavick and Mr Catlin still need to convince analysts and shareholders that it makes sense for them. Equity analysts appear to agree that it makes sense for Catlin shareholders but XL’s may need a little more convincing. The proposed acquisition of Catlin by XL is a cash and stock transaction under which XL will acquire all outstanding shares of Catlin for approximately $4.1bn in equity value. Catlin also intends to

pay a final dividend of approximately $100m to shareholders. The transaction will be financed through a $2.3bn aggregate cash consideration, $1.3bn in cash on hand at XL, $1bn in issued fixed income securities and XL shares issued to Catlin shareholders. Peter Porrino, XL CFO, explained that the group’s strategy when considering any transaction is to maintain its credit ratings, a robust balance sheet and a conservative financial profile. “That was what we will continue to expect here,” he said. Mr Porrino pointed out as an analyst’s conference call began last month that Standard & Poor’s had affirmed XL’s ratings with a stable outlook. S&P said in its press release that XL’s proposed $4.1bn acquisition of Catlin would create a stronger global franchise in both insurance and reinsurance. Mr Porrino said the transaction is expected to finalise in mid2015 subject to normal regulatory approvals and Catlin shareholder approval. ALL AROUND SENSE Mr McGavick said that the financial arguments for the deal are as compelling as its strategic elements. The XL CEO said that analysts would inevitably ask why the deal represents a better use of the insurer’s money than share buybacks—an increasingly popular trend among insurers and reinsurers as they struggle to put capital to work in the stubbornly competitive market. “We understand very clearly the economic value of share buybacks. In fact over the past handful of years, we’ve used $3.1bn to buy back about

123 million shares. We get it, but the fact is that when we ran the math, the economics of this transaction are in many instances better than, and in other instances comparable, to stock buybacks…but of course, stock buybacks cannot create the greater strategic upsize that the creation of XL Catlin can gain in growth in earnings and business opportunities,” said Mr McGavick. The XL CEO conceded that there is ‘clearly’ one negative factor of the deal—the dilution of tangible book value to share for XL shareholders. He said that the XL board was ‘fully mindful’ of this matter but after careful consideration still believes the move makes sense. “There is no simple decision for an insurance company in most situations. Growing tangible book value per share is the mission. But in this case, we collectively concluded that the overwhelming benefits financially and strategically of this transaction make this dilution tolerable. We believe firmly that we are making the right decision,” said Mr McGavick. So what are the main financial metrics that justify this deal? Critically, XL expects to achieve double-digit earnings per share (EPS) and ‘meaningful’ returns on equity (ROE) accretion in line with the ‘phase in of synergies’. The XL CEO added that the transaction is also expected to yield an estimated internal rate of return well in excess of XL’s cost of capital. And how much does XL expect to save from this deal? The answer is at least $200m. This figure had to be certified by a third party under the UK takeover code, said Mr McGavick. The XL CEO said that savings of this scale should come as no surprise given that the combined group would operate on a capital base of $17bn and a net earned premium base of $10bn. This means that the savings would be roughly 10% of the expenses of the combined company. During the same analysts’ conference call, Mr Catlin added that collectively the two companies currently spend about $2.8bn on ceded reinsurance. “Clearly, there is the opportunity to save money there. There are going to be opportunities in terms of increasing shared services for the group. Economies of scale, in terms of the use of internal modelling and the like. There is plenty of scope for us to do better and we, you can rest assured, are determined so to do,” Mr Catlin said.

27/1/15 15:56:56

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