Commercial Risk Europe - May 2014

www.commercialriskeurope.com VOLUME 5/ ISSUE 04/ MAY 2014

Commercial Risk Europe EUROPEAN INSURANCE & RISK MANAGEMENT NEWS

INSURANCE MARKET M&A: Suppliers keep saying that the industry is overcapitalised...while risk managers complain it is barely scratching the surface of their risk transfer needs. Is consolidation the key? ................ p8-12

RISK FRONTIERS—MALTA: The Malta Association of Risk Management is one of the newest members of Ferma. CRE met with leading figures in the island’s market to discuss the shifting risk landscape .......... p13-16

CAPITAL.

Corporate buyers derive larger benefits from alternative capital Stuart Collins news@commercialriskeurope.com

ERM.

Survey reveals risk management progression but work to be done Ben Norris bnorris@commercialriskeurope.com

[DENVER, COLORADO]—A NEW survey and report from RIMS and Marsh has delivered mixed news on the progression of the risk management profession. While it finds that a majority of risk managers and C-suite executives believe companies are not using risk management to its full potential it reveals that the function is generally involved in setting business strategy.

Two further reports launched prior and during the annual RIMS conference at the end of April conclude that mature risk management delivers tangible value and lay out five key steps towards successful Enterprise Risk Management (ERM) implementation.

According to the Excellence In Risk Management XI report by RIMS and Marsh, based on a survey of 600 risk managers, C-suite executives and others involved in risk-related functions, only 20% of the C-suite and 25% of risk professionals believe that their organisations are using the risk management function to its fullest capabilities.

BY THE NUMBERS Furthermore, 51% of the C-suite and 43% of risk professionals said that the risk management function is under used. The survey also reveals that 69% of C-suite executives believe their organisation manages risk effectively, compared to 75% of risk managers.

While these figures suggest that risk management has a way to go to achieve its full potential other findings from the survey paint a more positive picture.

Some 93% of C-suite executives ERM: Turn to P22

01_CRE_Y5_04_News.indd 1

[ L O N D O N ] — N E W C A P I TA L flowing into the reinsurance market is beginning to result in cheaper cover and higher limits for corporate buyers as well as creating new opportunities for risk transfer, according to brokers and insurers.

The past two years have seen increasing interest from capital market investors in the reinsurance market, triggering a softening of reinsurance prices. According to reinsurance brokers, the trend is accelerating with the price declines seen in US property catastrophe last year having now spread to nearly all classes and geographies at the April renewal.

Reinsurance prices for US property casualty risks have decreased over the past five major renewals, as hedge and pension fund capital flows into the

market through catastrophe bonds, sidecars and collateralised vehicles, explained David Flandro, Head of Global Business Intelligence at reinsurance broker Guy Carpenter.

However, the alternative capital is now influencing other lines of business and territories, said Mr Flandro.

Until recent months, the soft reinsurance market had been slow to filter down to corporate insurance, but that situation is now changing, especially in property lines.

SOFT CONDITIONS The oversupply of reinsurance capacity is helping to create a soft pricing environment for large corporate property and casualty risks, said Matthew Grimwade, Head of Placement, JLT Specialty Risk Practice. “There is a lot of capital out there looking for a home. And if this trend continues it will help in continuing to provide a very

David Flandro competitive market for risk managers,” he said.

All but a few select sectors—such as waste recycling or certain types of food processing firms—are being well catered for by the insurance and reinsurance markets, he said. In particular, treaty reinsurance costs for

natural catastrophe perils have come down substantially, which has allowed insurers to pass on some, or all, of the savings to primary insurance buyers, and offer higher limits, said Mr Grimwade.

For example, AIG recently launched per-risk capacity of up to $1.5bn for well-protected and managed risks, either for a single, large location or multinational commercial property assets. The insurer also recently increased limits for its Side A Directors and Officers insurance to $100m. Such moves are possible through the insurer’s ability to increase its reinsurance purchasing in the soft market, a spokesperson for the company said.

Several insurers have been able to materially lower their cost of underwriting capital by incorporating alternative capital flows into their CAPITAL: Turn to P20

CYBER.

AIG LAUNCHES GROUND-BREAKING CYBER COVER Stuart Collins news@commercialriskeurope.com

AMERICAN INTERNATIONAL Group (AIG) has launched a new cyber insurance policy that covers property damage and bodily injury exposures, a risk that most insurers are reticent to underwrite.

Insurance for property or bodily injury resulting from a cyber-security breach is typically excluded by property casualty, cyber and specialty insurers, leaving the risk of damage to property and people from a cyber-attack largely uninsured.

PHYSICAL IMPACT However, a security breach—for example affecting a network controlling an oil pipeline—could result in a fire or explosion, causing potentially massive damage and loss of life.

Cyber criminals are already targeting industrial facilities.

According to Reuters, hackers recently shut down a floating oil rig, while another rig was so affected by computer malware that it took 19

days to make it seaworthy again.

The general lack of property and bodily injury insurance for cyber security exposures has been a particular concern for energy firms, manufacturing companies and critical infrastructure since the Stuxnet worm, which disabled

Iran’s nuclear centrifuges, was discovered in 2010. The incident highlighted the potential threat of a security breach to industrial systems controlled by networks and automated systems.

Insurers at Lloyd’s responded with cyber insurance aimed at

ENDURANCE.

Aspen ‘vehement’ in opposition to $3.2bn Endurance takeover Adrian Ladbury aladbury@commercialriskeurope.com

JOHN CHARMAN’S EFFORTS to create a new Bermuda-based international insurance powerhouse through the takeover of Aspen by his company Endurance will not happen if the Aspen board has its way.

Mr Charman wants to combine the two groups through a $3.2bn bid to create a company with over $5bn of annual net written premiums, making it the Bermudian market’s fourth

biggest risk transfer company based on 2013 net premiums written.

Mr Charman, Chairman and CEO of Endurance, is convinced that most international insurance and reinsurance companies are simply not big enough to meet the fast-evolving global needs of their corporate customers.

He claims that the industry is hampered by outdated structures and bloated expenses that may meet the needs of management but not necessarily the interests of customers ENDURANCE: Turn to P22

these types of risks. For example, Kiln launched a product last year to cover physical damage caused by an attack on so-called SCADA systems—the automated control systems used in critical infrastructure and manufacturing.

Property insurers, especially in the energy sector, exclude physical damage triggered by cyber attacks, while standalone cyber policies do not cover physical property damage, explained Laila Khudairi, a cyber underwriter from Lloyd’s insurer Kiln. “We are providing tailored solutions and offering cover that plugs this gap,” she told CRE in October.

‘FAR REACHING’ AIG’s new umbrella policy also should help plug this gap, although this solution is more far reaching than that offered by Lloyd’s, explained Raheila Nazir, who heads AIG’s cyber, media and technology team in the UK. She believes that AIG’s umbrella policy, which sits above global insurance arrangements, CYBER: Turn to P20

2/5/14 15:13:50

02_CRE_Y5_04_FAP.indd 2

2/5/14 11:05:41

NEWS Aviation

3

Improved safety and capacity pushes airline insurance rates down again Stuart Collins news@commercialriskeurope.com

[ LONDON ]—UNPRECEDENTED improvements in safety and overcapacity are likely to see aviation insurance rates fall further this year, despite the tragic loss of Malaysia Airlines flight 370 (MAS 370).

Total airline premium volume fell 10% in 2013 to $1.4bn, outweighing total market losses of $1.5bn, according to Aon. However, airline insurance rates were down by 17% to 18% for the year, it said.

Total airline premiums are now lower than they were just over a decade ago, despite a massive increase in exposure from increasing fleet values and a rise in passenger numbers, explained Paul Mitchell, Head Analyst for Aviation at Aon. Exposures have increased from $576bn in 2000 to $896bn, yet premium volume in 2013 was lower than the $1.6bn recorded in 2000, and substantially lower than the high of $3.62bn in 2001, he said.

A number of trends are combining to soften the aviation market, most notably over capacity and fewer major claims, said Garrett Hanrahan, Head of Aviation in the US for Marsh. There have been unprecedented improvements in airline safety in the past three years, he added.

According to FlightGlobal’s Airline Safety and Losses Review, 2013 was another good year for airline safety with a fatal accident rate of one per 1.9 million flights, the second safest year on record after 2012. Airline operations are now almost three times safer than they were twenty years ago, explained Paul Hays, an aviation industry analyst and author of the report.

Airline safety has improved steadily since the 1950s, although safety improvements in recent years have accelerated and even outstripped the rapid growth in air travel, said Mr Hays. The replacement of older fleets with safer, more efficient aircraft and improvements in safety management systems have helped improve this record, as well as the spread of best practices between airlines, regulators and countries, he said.

FEWER ACCIDENTS Twenty years ago the industry would have expected one or two major losses involving a US or European airline each year, now the likelihood is more like one major loss every five to ten years, according to Mr Hays.

The last major loss involving a US carrier was the American Airlines Flight 587 crash in Queens, a borough of New York City, in 2001. The most recent major global loss prior to MAS 370 was the Air France Flight 447 in 2009, which disappeared over the Atlantic with 228 people on board.

While insurance prices have undoubtedly dropped in response to improved safety, the market is also responding to abundant capacity which stands at 155% to 160% for US airlines and 180% to 200% for non-US airlines, according to Marsh.

With the exception of one quarter in 2009, prices have been in free fall

03_CRE_Y5_04_News.indd 3

since 2004, said Mr Hanrahan. “Prices continue to be under pressure and premium levels are likely to fall for the foreseeable future,” he said.

Even the loss of MAS 370 is unlikely to have much impact on the market, according to Mr Hanrahan. “It’s not an inflection point for the market to harden, and recent renewals suggest a continued soft market,” he said.

Despite recent events, in terms of fatal accidents involving passenger flights the aviation sector is at its safest level since the beginning of the jet age in 1952, according to Henning Haagen, London-based Global Head of Aviation for Allianz Global Corporate and Speciality for EMEA and Asia.

“This trend, combined with the level of capital in the market, suggests the old cyclical pattern of the past has changed for classic hull and liability aviation risks,” he said.

‘THE NEW NORMAL’ “Despite speculation around recent losses, I wouldn’t expect any significant alteration in the foreseeable future, in the absence of any fundamental changes in the wider market. In fact, the current market may be the ‘new normal’ for aviation insurance,” he added.

Reductions have brought rates close to, or just under, levels of 2001, the bottom of the last soft market, explained James Dowlen, Head of

Airline Underwriting at AIG Europe in London. “With capacity in the aviation insurance market at an alltime high, there are likely to be further reductions,” he said.

Although the market hardened between 2001 and 2004, rates have since come down too far, argued the insurer. “There is now a question over whether the market can continue to sustain itself as it gets softer and as hull values and liability limits increase, despite the introduction of new technology,” he said.

For example, new aircraft like Boeing’s Dreamliner uses composite manufacturing processes that are more costly to repair. At the same

INSURERS TAKE MAS 370 LOSS IN THEIR STRIDE THE DISAPPEARANCE OF MALAYSIA AIRLINES Flight 370 (MAS 370) was a huge news story but the tragic loss is unlikely to have much impact on the airline insurance market, according to experts.

“MAS will not turn the market, that would require many more losses,” said Olivier Marre, Senior Vice President, Aviation Insurance at Allied World. He believes the airline insurance market is unlikely to harden without a large industry loss, such as a costly hurricane, that would see capacity moved from aviation to support other lines.

The MAS 370 loss could cost insurers between $250m and $450m, depending on potential court settlements, according to Standard & Poors. The airline’s insurance was led by Allianz, although a number of Malaysian and other Asian insurers confirmed that they have also underwritten the airline.

The market has already settled the hull claim with Malaysia Airline at just over $100m. The hull and war market used a standard 50:50 clause that enables the claim to be paid without the cause of the crash being known, leaving insurers to settle or subrogate at a later date.

“It’s early days and until the wreck is found we can’t draw any conclusions,” said James Weigall, Head of General Aviation, Products and Airports at AIG Europe.

If a problem with the aircraft is found to be behind the crash it would cause concern among underwriters because there are many of the same Boeing 777s in use, explained Mr Weigall. Similarly, if the cause were an act of terror, or

if the crash was the result of pilot error, there would also be implications for the insurance market, he said.

While the loss has not yet moved the airline market, it could have implications for the aviation hull war market, according to Garrett Hanrahan, Head of Aviation in the US for Marsh. “We will monitor the hull war market to see if underwriters look to move rates up, although the reaction of the war market is not yet clear at this point,” he said.

S&P said that if the event is classified as a war loss it would be one of the largest losses in this class of business since the terrorist attacks on the World Trade Center in 2001. Such a loss would most likely lead to rate increases in aviation war policies in coming months, it said.

The unusual circumstances behind the plane’s disappearance—such as why the transponder was switched off and how it was able to fly off course for many hours—have yet to illicit a response from underwriters.

However, the loss, much like that of the Air France crash in 2009, illustrates the growing cost of search and rescue and recovery costs, according to Paul Mitchell, Head Business Analyst for Aviation at Aon. “There is at present coverage available for search and rescue up to the maximum liability limit included within most standard aviation policies and airlines will no doubt be keen for this to last, however it remains to be seen how insurers will react,” said Mr Mitchell.

—Stuart Collins

time, liability claims are increasing as litigation becomes more widespread and as passengers from emerging markets grow more wealthy and receive higher compensation, explained James Weigall, Head of General Aviation, Products and Airports at AIG Europe.

“There may be fewer crashes, but claims are costing more,” he said.

The cost of attritional claims is one of the biggest challenges facing aviation underwriters, according to Mr Weigall.

“There are fewer catastrophic claims and passenger safety is improving, but the costs of everyday claims are going up significantly. The market may soon be at a point where there will not be enough money to pay for catastrophe losses because premiums will go towards paying for bumps and scrapes,” he said.

The soft market is an opportunity for airline insurance buyers to get more for their money, according to Mr Mitchell. For example, it is possible to obtain greater coverage levels, like third party war cover, as part of the original policy and at a reduced rate to that offered in the specialist war market.

‘COVERAGE SLIPPAGE’ While it may be a buyer’s market, the prolonged soft market could make it harder for airlines to budget for insurance purchasing in the long run, explained Mr Mitchell. With less premium in the market there is little margin to absorb a catastrophic loss. “Premiums could double or triple in a worse-case scenario on some of the peripheral coverages,” said Mr Mitchell.

Broader coverage terms for nonaccident events may also pose a real risk for underwriters, according to Olivier Marre, Senior Vice President, Aviation Insurance at Allied World.

“Rate reductions are annoying and can erode profitability but coverage slippage can be more problematic,” said Mr Marre.

On average, the global airline insurance market covers 1,500 large commercial airline take offs every 30 minutes, with each take off exposing insurers to more than $350m in case of a crash. This represents in excess of $5tn theoretical aggregate exposure, explained Mr Marre. Yet premiums earned by the market during that 30minute period do not exceed $70,000, he added.

“The market is able to provide cover to the airline sector at these rates because airlines’ safety records are excellent and because aircraft accidents are, for the most part, statistically uncorrelated,” explained Mr Marre.

However, competitive pressures mean that this fundamental point is sometimes forgotten, he argued.

Coverage has been broadened at times to include systemic risks such as delays, he said.

“Non-accident cover is being offered that is detached from the occurrence basis of underwriting, and may run the risk of creating an imbalance. The everincreasing exposure of aircraft to cyber risks or other black swan events that could lead to the loss of a large number of aircraft in a single event, should be enough to keep us awake at night,” he said.

2/5/14 12:30:16

Intellectual property risk

4

NEWS

Multinationals face growing intellectual property risks Rodrigo Amaral ramaral@commercialriskeurope.com

RISK MANAGERS NEED TO HELP THEIR organisations to better protect intellectual property (IP) that is increasingly exposed in a globalised world where extended supply chains and an increased number of business partners are creating more threats.

According to experts the risk of stolen IP is growing and cannot be ignored, a point illustrated by the International Chamber of Commerce’s estimate that the annual impact of counterfeiting and piracy will reach $1.7tn next year.

Although many companies are on the case, there is concern that current laws alone do not offer full protection.

A recent survey by law firm Taylor Wessing suggests the time organisations spend dealing with IP issues has increased over the last three years. However, those responsible for this effort told Taylor Wessing that although laws around the world to protect IP rights have improved they do not go far enough.

The task of properly assessing IP risks is far from simple. It is particularly difficult for multinational companies that have to defend their position in different countries where enforcement of IP rights vary widely.

It does not help that breaches are most likely to take place in some of the most important markets in which companies are targeting for growth or production.

“The main culprits are the Bric economies, but also countries like Thailand and Turkey,” said Lara Quelch, a senior IP consultant at KPMG in London.

IP can be stolen from a wide range of sources, but more often than not the culprits, or weak points, are business partners.

Unreliable suppliers can steal production technology and set up a new operation.

03_CRE_Y5_04_News.indd 4

They can also take a loose approach to IP security, allowing trade secrets to be stolen.

Products can simply be counterfeited and sold for lower prices. There is also the risk of insufficient or incorrect trademark and patent registration.

When arriving in a new market, companies can find that their brands have been previously registered in the territory by opportunistic individuals or firms.

Organisations can also fail to register their brands or products in local writing systems.

Or, they can belatedly find out that their products inadvertently infringe the rights of a rival already operating in the market.

This is a particular risk in emerging markets where bureaucratic processes tend to be slow and cumbersome.

According to John Wilks, an IP expert at law office DLA Piper: “Companies must not leave it open for a business partner in a foreign market to register IP rights on their behalf.”

LONG APPLICATION PROCESS Roland Mallison, an IP expert at Londonbased law office Taylor Wessing, said that in some Middle Eastern countries the process of applying for a patent or a trademark can require numerous physical visits.

“The whole process may take up to three years, and the patent or trademark may not actually feature on the registry for five years. Sometimes companies want to launch a product in one of these countries, but they cannot be sure that it does not conflict with a registered patent because the registry is out of date,” he said.

All this presents a challenge for risk managers, but the threat must be properly managed.

“As a risk manager, you have to understand whether there are intellectual property issues in your risk profile,” said Julia Graham, President of Ferma. “Like

with any other risks, a risk assessment must be done to help understand all the different angles.”

Once a breach is identified, risk departments should be ready to act quickly, she continued. “You need to be very sensitive as to what you have to do and who you need to inform,” Ms Graham pointed out. “It impacts also very heavily on your approach to business continuity and, depending on the nature of the breach, could be part of your crisis management response.”

Monitoring and reacting to breaches is complicated by the fact that many companies now have to keep an eye on many jurisdictions around the world as they expand.

Collaborating with the local IP authorities is a must, experts say. It is also important to establish priorities and pick the right fights.

“The most successful IP programmes have a degree of flexibility that enables companies to shift resources from one place to another as situations change,” said Michael Hart, head of the IP department at law firm Baker & McKenzie in London. “Companies need to employ a whole combination of measures to consolidate their reputation as someone that counterfeiters do not want to mess around with.”

Measures include a contractual binding clause ensuring companies have the right to make unannounced visits to suppliers in order to check how IP is protected. A production chain dispersed over several countries reduces the risk of a whole item or production process being copied. Corporations that have suffered counterfeiting can also target the offending firm’s distribution channels, such as websites, to cut sales access.

Very often, the fight against IP infringements results in long-running, costly legal battles that can drag on for

years. That is why corporate buyers have increasingly looked towards the nascent field of intellectual property insurance to transfer some of the risks to which they are exposed.

According to Ian Lewis, Director at Samian Underwriting Agency, a unit of Lloyd’s brokers Safeonline LLP, demand for IP insurance is on the rise. Carriers are beginning to allocate more capacity to the sector. Mr Lewis estimates that €100m of cover can be placed for large risks.

‘NICE TO HAVE MORE CAPACITY’ “It is a good level of capacity, although it would be nice to have a bit more, especially for large risks,” he said. Most of the carriers are Lloyd’s syndicates or large insurance and reinsurance groups.

Standalone IP insurance policies can be written with a worldwide remit, or to cover only a particular set of jurisdictions where companies feel they are more at risk, Mr Lewis said. The market also provides complementary coverages to D&O policies that often include exclusions of IP-related claims.

Companies can transfer the risks of someone else infringing their patents or trademarks, including defence costs. Firms can also buy protection against challenges to their ownership of a particular patent or trademark. The range of threats that can be covered is growing.

“It is a special risk class and it has rates today that are higher than typical professional liability or product liability insurance,” said Mr Lewis. “Part of that is because it is still a young field. At the beginning, professional indemnity, D&O and product liability were very expensive and had very narrow wordings. Today they seem to be not that expensive and have broad wordings, and the take-up is much greater. IP is going through a similar process.”

2/5/14 12:30:05

05_CRE_Y5_04_FAP.indd 5

2/5/14 09:25:24

COMMENT

6

NEWS Association News

Consolidate to innovate

F

AILURE TO INNOVATE IS ONE OF THE biggest risks faced by all companies in the modern global economy and this applies to the insurance market as much as the corporate sector that it serves.

This has been a consistent theme in our discussions with risk managers all over Europe and more recently worldwide during our annual Risk Frontiers survey and events. It clearly will not go away as the world becomes more transparent, faster, more complex and globally interdependent by the day.

The need for innovation presents risk managers with particular challenges because one of their key goals is to point out where potential problems may lie as their organisations seek to grow. This is why risk managers are often regarded as harbingers of doom or naysayers.

But, as broker Willis stressed at the end of last month, the goal to minimise risk is often one of the most dangerous paths in management and can result in a failure to innovate.

Gerard Tellis, director of the Center for Global Innovation and Neely Chair of American Enterprise at the University of Southern California, wrote in the fourth edition of Resilience, Willis’ risk management publication, that firms often fail when they are at the peak of success.

“Success leads to complacency, arrogance and lack of change.

Market leaders often think that the future is secure and assume a false sense of security and assurance against risk,” stated Mr Tellis in a description of what he calls the ‘incumbent’s curse’.

He pointed out that market-leading firms often shun risky innovations because of their high failure rate, while entrepreneurs embrace them because they have little to lose.

This thinking applies to the insurance industry as much as the corporations that it serves, and if anything more so.

When innovation crops up during our roundtable discussions with risk managers it is almost always in reference to the insurance sector and its apparent inability to innovate on their behalf, particularly with so-called emerging and fast-changing risks.

The traditional structure of insurers along increasingly outdated lines of business, the need for indemnity triggers and desire for mountains of historic data before coming up with a probability of loss and therefore realistic price are all named as huge obstacles to the creation of innovative solutions.

Then there is the simple problem of scale and the ability of the market to come up with significant slabs of risk transfer capacity that would really make a difference. Talk to any risk manager in the oil or pharmaceutical industry and you will find frustration over this problem.

And finally there is the cross-border problem that keeps on cropping up in our market discussions.

Risk and insurance managers at leading European and international corporations need coverage for operations and

risks across the world, in challenging legal, regulatory and fiscal environments that keep changing.

They want and need partners in the risk transfer market that can keep up with this demand and offer top notch service— before and after the contract is signed—both on the ground and at head office level.

The insurance market is of course aware of this need to innovate in many different ways. We are not just talking about new product design here.

Innovation is badly needed in the way products and services are packaged and sold, the way that contracts work, the way that insurers actually organise their business and in the manner in which claims are agreed and settled.

To some this change is not happening fast enough and, as Mike McGavick, CEO of XL, said three years ago at the DVS conference, the insurance industry is in danger of becoming irrelevant.

Enter John Charman, the famously combative former ‘King of Lloyd’s’, founder of Axis Capital in Bermuda and now chairman and part owner of Endurance Specialty.

Mr Charman is not known for mincing his words and seeking complex, subtle solutions to problems and challenges. He likes to pile in and sort things out.

He agrees with the many risk managers that we have talked to over the last four years that insurers need to dramatically sharpen up their act internally and consolidate to offer bigger slabs of capacity to start eating into that uninsured gap.

This is one of the key justifications for his proposed takeover of rival Bermuda insurers Aspen in a $3.2bn deal that would add Aspen’s $2.65bn of annual net written premiums to Endurance’s $2.66bn to create a global insurance and reinsurance group with some $5.3bn of premiums.

This combination would of course lead to significant job cuts, particularly at management and back office level, and there is no guarantee that the combined operation would retain all the business.

But surely it would make sense for such a deal to go ahead from a large corporate customer’s perspective if it increased risk appetite, extended global reach and cut the cost of transactions at the same time?

This proposed deal is clearly riddled with complications and personal issues that will mask its fundamental rights and wrongs as the battle ensues.

But the bottom line is surely that such deals need to happen across the global risk transfer sector if it is to truly step up and meet the needs of its increasingly frustrated large customers.

I guess the key will be whether such deals can also work for investors. If they can work for both parties then perhaps we are about to enter an era of consolidation, as predicted by Mr Charman and others.

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

PUBLISHING DIRECTOR Hugo Foster Tel: +44 (0)1580 785 176 [W] +44 (0)7894 718 724 [M]

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

hfoster@commercialriskeurope.com

REPORTERS:

news@commercialriskeurope.com

UK/IRELAND: Garry Booth, Stuart Collins, Tony Dowding, Nicholas Pratt FRANCE/SPAIN: Rodrigo Amaral GERMANY: Anne-Christin Groeger, Friederike Krieger, Herbert Fromme EDITORIAL ENQUIRIES: enquiries@commercialriskeurope.com

PRINTING

For commercial opportunities email hfoster@commercialriskeurope.com

MAILING AGENT

To subscribe email subs@commercialriskeurope.com

Warners (Midlands) plc A1 Mailings Services Ltd. RUBICON MEDIA LTD. © 2014 All rights reserved. Reproduction or transmission of any content is prohibited without prior written agreement from the publisher

Commercial Risk Europe is published monthly, except August and December,

by Rubicon Media Ltd.—Registered office 7 Granard Business Centre, Bunns Lane, Mill Hill, London NW7 2DQ

Whilst every care has been taken in publishing Commercial Risk Europe, neither the publisher nor any of the contributors accept responsibility for any errors it may contain or for any losses howsoever arising from or in reliance upon its contents. Editeur Responsable: Adrian Ladbury.

06_CRE_Y5_04_Leader.indd 6

Ferma launches 2014 benchmark survey Ben Norris

bnorris@commercialriskeurope.com



[BRUSSELS]—FERMA LAUNCHED ITS 2014 RISK AND Insurance Management Benchmarking Survey late last month in partnership with its national association members in 20 European countries.

The survey opened to risk and insurance managers across Europe on 22 April.

Ferma is encouraging its members to take part in order to enable it to deliver the most in depth look at key issues facing the risk industry today.

The latest biennial survey aims to be more quantitative and practical than previous editions and allow European risk managers to benchmark their activities against peers from across the continent.

The survey will ask risk and insurance managers for their views on: n The most significant risks facing businesses today n The cost of risk, including insurance, risk consulting costs and broker remuneration n The relationships between risk management and other internal functions of the organisation n Risk management and corporate performance n The identification and insurability of emerging risks such as cyber risks, environmental liabilities and supply chain exposures n EU hot topics and their impacts for company governance and insurance markets.

The results will form the basis of the first Ferma European Risk and Insurance Report to be published at the federation’s seminar in Brussels on 20 October, 2014.

An independent research company, Toluna, will collect the responses and compile the results.

Cristina Martinez, Ferma board member and head of the survey project group, said on this year’s benchmarking survey: “Our intention is to create a reference work for risk and insurance managers throughout Europe that will also provide a tangible basis for reporting to senior management on risk management. This seventh edition of the Ferma Benchmarking Survey will be more quantitative and practical than previous versions of the survey and provide more benchmarks for comparison, including with the results of surveys conducted by national associations.”

Ferma president Julia Graham added: “Our members have activities in a number of European countries, so being able to benchmark themselves at European level will be invaluable.”

She encouraged participation by Ferma members to ensure that the results are truly representative of the views of risk and insurance managers across Europe.

Airmic chairman, Chris McGloin, said Ferma has worked with his and other member associations to ensure that the survey results will be a valuable tool for risk managers.

“I have urged Airmic members to take part. The more responses we gather, the more useful the survey will be for us,” said Mr McGloin.

According to Ferma vice president and Anra board member, Alessando De Felice, making the survey more quantitative will add to its practical uses.

“This way, we will be able to produce results that will have a lasting value for individual risk managers as well as national associations that are part of Ferma. The evidence that the report will highlight will be a starting point for further analysis and will form a solid basis for future reports, to analyse how the situation evolves over time and in the different countries where risk managers operate,” he said.

Ferma association members will receive an invitation to participate in the survey with a link to the questionnaire.

Anyone that would like to take part but does not receive an invitation can contact Christel Jaumoulle at christel.jaumoulle@ferma.eu giving their first and last name, business title, company, country and email address.

As well as its member associations, Ferma has worked extensively with five commercial partners to deliver the survey. These are AXA Corporate Solutions, EY, Marsh, XL Group and Zurich.

The survey’s webpage can found at http://www.ferma.eu/about/publications/ benchmarking-surveys/benchmarking-survey-2014/

“T

HE LATEST biennial survey aims to be more quantitative and practical than previous editions and allow European risk managers to benchmark their activities against peers from across the continent....”

2/5/14 12:30:38

Allianz Cyber Protect Your No. 1 choice when all else fails.

Digital business & data protection insurance.

Allianz Cyber Protect offers a broad range of coverage.

Cyber attacks are on the rise and are becoming highly sophisticated.

Securing your network with firewalls, filters, malware prevention software, etc. are all vital parts of a well designed security policy.

However, the threat from cyber criminals continues to grow and the potential business impact is enormous.

Third-party liability such as:

Allianz Cyber Protect is our answer to your evolved IT risks. It is a comprehensive cover that ranges from protection which can be issued at short notice, to a completely tailor-made solution based on your individual requirements.

First -party liability such as:

• Loss of personal or corporate data including claims from e-payment service providers • Network breaches and media liability • Regulatory proceedings

• Business interruption • Notification costs • Incorrect transfer of funds due to a cyber attack And of course, we provide a full range of IT and communication services in case of a claim. Are you interested?

Please call us for more information: +44 (0)203 451 3259 or +49 (0) 89 3800 2236 www.agcs.allianz.com

With you from A - Z

The material contained in this publication is designed to provide general information only. Please be aware that information relating to policy coverage, terms and conditions is provided for guidance purposes only and is not exhaustive and does not form an offer of coverage. Whilst every effort has been made to ensure that the information provided is accurate, this information is provided without any representation or warranty of any kind about its accuracy.

07_CRE_Y5_04_FAP.indd 7

2/5/14 08:52:48

8

Insurance market M&A

BEHIND THE NEWS

Man with a mission

Sessions House, Hamilton, Bermuda

Brokers, analysts and the insurers and reinsurers themselves keep telling everyone that will listen that the international insurance and reinsurance industry is currently over-capitalised. But at the same time corporate risk and insurance managers complain that the industry is barely scratching the surface of its risk transfer needs and that its cost-laden, traditional line of business approach prevents it from meeting their real demands.

John Charman, Chairman and CEO of Bermuda-based Endurance Specialty, believes that consolidation is the answer. He is literally prepared to put his money where his mouth is and bought a $30m stake in Endurance when he took the helm last May. He has reorganised and refocused Endurance for further growth and has now made an audacious and contested bid for rival Bermuda insurer Aspen to fast track the process. Commercial Risk Europe Editor ADRIAN LADBURY investigates what lies behind the proposed deal and what potential implications it has for the wider market

J

OHN CHARMAN, Chairman and CEO of Bermuda-based insurance and reinsurance group Endurance Specialty, believes that the insurance and reinsurance industry is simply too small to meet the ever-rising needs of customers in an increasingly complex world riddled with expanding exposures.

The outspoken former deputy chairman of Lloyd’s, who invested some $30m of his own money into Endurance when he joined last year, told Bermuda newspaper The Royal Gazette in November 2012 that the risk transfer industry is ‘not even the size of an apple’ compared with the complex modern global economy and its risk transfer needs.

Mr Charman is currently using this argument to partly justify the proposed and contested takeover of rival Bermuda-based insurance and reinsurance group Aspen Holdings by Endurance.

In Mr Charman’s view the industry needs to go through a dramatic process of consolidation. The combination of two of Bermuda’s leading insurance and reinsurance groups would be a good example of his wishes.

The industry veteran, once famously dubbed ‘the King of Lloyd’s’, believes that the sector needs to significantly raise the risk-bearing capacity of individual players, thus enabling them to take on wider and emerging corporate risks at both primary and reinsurance level. Such a process would also help the sector reduce its allegedly bloated expense ratio, not least at management level.

Such highly public claims may not endear Mr Charman to many of his peers in the sector who spend most of their time trying to convince existing and potential investors of the attractiveness of their stocks and the industry as a whole.

But frankly Mr Charman, who has the skin of a rhino, will not give a hoot about what his peers think

08_CRE_Y5_04_BTN-M&A.indd 8

and, perhaps more importantly, many of the corporate insurance sector’s leading customers will actually agree with him.

Since the launch of Commercial Risk Europe in February 2010 we have carried out our annual Risk Frontiers survey of European and global risk managers and found that the sector’s customers do share some of Mr Charman’s concerns.

We have found that many large corporate insurance buyers are increasingly frustrated by the insurance industry’s apparent inability to react quickly to their fast-changing risk transfer needs with significant levels of capacity.

There is also definitely a concern among risk and insurance managers that the industry is simply not big enough and that its structure inhibits innovative thinking and rapid decision-making on where and how to apply its risk capital.

So Mr Charman’s views will garner support among the people that matter the most at the end of the day: the customers.

This is not a new theme for Mr Charman. He publicly stated in November 2012 that he intended to use his own capital, experience and contacts within the investment community to kick start a process of consolidation via a start up company or through the takeover of an existing firm.

CAPITAL PLAN

People in the industry will have listened with interest at the time because Mr Charman was out of a job and sitting on a lot of capital that he had accumulated in a highly successful 40-year career in the London and international insurance business.

He was out of work at the time having, in June of 2012, been ousted by fellow board members as chairman and CEO of Axis Capital, the Bermuda company he founded in 2001.

Mr Charman was replaced by Michael Butt, the chairman he had replaced the year before and worked with since 2002 to build the company.

In a carefully-worded press release issued to explain the move, Axis stated that: “The change in board leadership came after the board endeavoured to resolve differences with Mr Charman over his understanding of the role and responsibilities of the chairman position.”

2/5/14 13:25:29

BEHIND THE NEWS Insurance market M&A Mr Charman was clearly not happy about the manner of his exit from the company he had founded.

He is a journalist’s dream (or nightmare if he does not like you) because he actually says what he really thinks and does not mince his words, a rare thing indeed in today’s media-obsessed industry.

No surprise then that in an interview with The Royal Gazette he described the manner of his departure from Axis as ‘a monumental betrayal’ by former colleagues.

“I feel so deeply upset about the circumstances of what happened with Axis and I don’t want to retire from the industry in that way,” Mr Charman told the newspaper.

Of course Mr Charman did not disappear quietly to enjoy his fortune. He was soon back and ready to pursue his consolidation plans in the Bermuda market that had become his home.

In late May of last year, Endurance Specialty announced that its board of directors had elected Mr Charman as the company’s chairman and chief executive officer, replacing David Cash as CEO and William H Bolinder as chairman.

This came after Mr Charman, together with members of his family, had become some of the company’s largest shareholders with the purchase of $30m of its ordinary shares and indicated their intent to reinvest the dividends received on their investment.

Endurance was launched alongside Axis and other Bermuda companies in 2001 to take advantage of the capacity crunch and rocketing insurance and reinsurance prices following the terror attacks on New York and Washington in September of that year.

By the time Mr Charman took over the group last May it had grown to become one of the island’s leading players with annual primary and reinsurance business in the US and worldwide of about $2.5bn.

The first set of results with Mr Charman on board were the second quarter and first half 2013 figures.

The group reported net premiums written of $1.3bn, an increase of 3.5% over the first half of 2012, on the back of a combined ratio of 90.2%, though this did include 11.8 percentage points of favourable prior year loss reserve development. Operating income was $137.1m and the operating return on average common equity for the first six months of the year was 6%, or 12.0% on an annualised basis.

This was a fair set of results that came on the back of a decent reputation in the US and international insurance and reinsurance markets that Mr Charman’s predecessors had worked hard to build up over the previous 12 years.

But the new chairman had bigger ideas and had already initiated the ‘Endurance revolution’.

This basically comprised the exit of staff and arrival of new blood, an attack on costs and exposures and diversification of the book to become more global, notably in Asia, a region that Mr Charman believes is critical for the long-term success of any international insurance group.

“We have immediately refocused our global underwriting and are now adopting a very controlled, coordinated, disciplined and profit-driven approach. As rates

08_CRE_Y5_04_BTN-M&A.indd 9

have declined we have deliberately reduced our exposures. I am absolutely committed to Endurance becoming a leading low expense, medium volatility but very high performance insurance and reinsurance international carrier,” Mr Charman explained as he announced the first half figures last August.

STREAMLINED

“During the past month, I have streamlined our executive leadership team as well as completely restructured and reduced the overly inflated size of our organisation.

The substantial savings arising will be used to fund the very necessary build out of our global underwriting operations. To protect our shareholders’ earnings, we have had to cut hard and deeply from our own resources in order to finance our future growth.

Importantly, we already have a great pipeline of very high quality market-leading underwriters who will join us over the next twelve months. Market conditions on both sides of the balance sheet [underwriting and investment] will remain challenging over the next few years and with that scenario in mind, I will continue to relentlessly

9 drive substantial improvements, effectiveness and cost efficiency throughout our organisation. As well as planning a pan-Asia joint venture strategy, our new, revitalised specialty insurance operations in the US, Bermuda and London will lead the oncoming Endurance revolution,” continued Mr Charman.

The ‘revolution’ continued throughout the second half of last year and into the first quarter of this as the company announced the arrival of several new senior underwriting staff, many from Axis.

The company announced the arrival of Fred Cooper from Aspen as executive vice president and head of

US financial institutions insurance.

Based in New York his remit was to launch a book of management liability coverage for financial institutions including hedge funds, private equity firms, banks and insurance companies, alongside Endurance’s existing US professional lines insurance business.

The same month, Stuart Pattison joined Endurance from CNA Insurance to lead the company’s new US law firm practice, operating within the EndurancePro business unit.

In September Endurance CONTINUED ON PAGE 10

Risk Frontiers LONDON LATIN AMERICA: / iÊiÛ Û }ÊÀ Ã Ê > `ÃV>«i > `ÊV ÃÌ ivviVÌ ÛiÊÌÀ> ÃviÀÊ vÊVÀ ÃÃ L À`iÀÊÀ Ã Ã

Grange Tower Bridge Hotel London 29 May 2014

Mh ob^p ma^ ikh`kZff^ bg ]^mZbe% hk mh k^`blm^k _hk ma^ ^o^gm% ie^Zl^ `h mh3

PPP'<HFF>K<B:EKBLD>NKHI>'<HF(>O>GML(<:E>G=:K( >fZbe hnk >o^gm FZgZ`^k :ggZ[^e Pabm^¿Zpabm^9\hff^k\bZekbld^nkhi^'\hf

2/5/14 15:19:39

Insurance market M&A

10

BEHIND THE NEWS

ENDURANCE RESULTS REVEAL EXTENT OF ‘REVOLUTION’ Adrian Ladbury aladbury@commercialriskeurope.com

[ H A M I LT O N ] — J O H N C H A R M A N ’ S ‘Endurance revolution’ really began to show through in the company’s fourth quarter and full year results for 2013.

At the start of February this year Mr Charman revealed solid full year 2013 results, again helped by favourable reserve releases.

The annual increase in gross premiums by 4.6% up to $2.7bn was nothing special and did not appear to reflect a ‘revolution’.

But the fourth quarter increase in both gross and net written premiums and developments in the expense and combined ratio was possibly more telling.

Gross premiums written in the fourth quarter reached $370.8m, an increase of 41.5% from the same period in 2012. Net premiums written reached $280.1m, an even higher increase of 49% compared to the last quarter of 2012.

Where did this come from? Well, mainly from the reinsurance side of the business.

However, gross insurance premiums written were $200.7m, a still excellent increase of 13.3% from the fourth quarter of 2012. Fourth quarter net insurance segment premiums written were $112m, an increase of 5% from the fourth quarter of 2012. The combined ratio was a horrible 123%, 3.9 percentage points higher than the fourth quarter of 2012 that was hammered by Superstorm Sandy in the US. The favourable prior year loss reserve development in the fourth quarter was two percentage points compared with three percentage points in the fourth quarter of 2012.

On an annual basis gross premiums written were $1.48bn, an increase of 3.2% over 2012.

On an annual basis the net insurance premiums written were $932.5m, a decrease of 1% from

2012. The combined ratio was a nasty 105.3% but still an improvement of 5.3 percentage points on 2012.

This was boosted by favourable prior year loss reserve development of 3.6 percentage points in 2013 compared with 4.8 percentage points in 2012.

Endurance’s explanation of the fourth quarter development in premiums and combined ratio supports the impact of Mr Charman’s ‘revolution’, the re-underwriting of the Endurance book and the slew of senior underwriting appointments.

The company said that the fourth quarter 13.3% increase in gross premiums written in its insurance segment was driven by ‘improved positioning and expanded underwriting talent’ in its professional, casualty and other specialty lines of business.

‘EXPANSION EFFORTS’ It added that the full year gross premiums written increase in agriculture, casualty and other specialty lines came from ‘successful expansion efforts’ that were partially offset by the termination of a large professional lines programme in late 2012 and from the impact of ‘non-renewals and re-underwriting actions’ taken earlier in 2013.

Endurance said that the increase in the insurance segment combined ratio for the fourth quarter of 2013 compared to the same period in 2012 was driven by a higher general and administrative expense ratio that was partially offset by a lower net loss ratio. The cost of hiring and firing staff is high in the modern global insurance business.

“The general and administrative expense ratio was higher in the current quarter due to higher incentive compensation accruals reflecting the improved overall company profitability in the current year. In addition, the general and administrative expense ratio was higher in the current quarter due to greater levels of corporate expense, severance costs,

and expenses associated with the hiring of new underwriting teams,” admitted Endurance.

The reinsurance business led the premium growth as gross premiums written in the fourth quarter reached $170.1m, a rise of 100.3% from the fourth quarter of 2012. Net premiums written rose to $168.1m, an increase of 106.8% over the fourth quarter of 2012.

The fourth quarter combined ratio was an excellent 66.1%, an improvement of 53.1 percentage points on the final quarter of 2012 that was clearly hit by Sandy. More favourable prior year loss reserve development of 21.3 percentage points compared to 7.2 percentage points in the fourth quarter of 2012 further boosted the reinsurance result. Gross premiums written of $1.19bn represented an increase of 6.3% from 2012.

The company explained that the increase in gross premiums written within the reinsurance segment during the final quarter of 2013 was mainly caused by growth in casualty and professional lines of business, partially offset by reductions within catastrophe and property.

New hires in the US, plus previous hires towards the end of 2012 and the first half of last year clearly had an immediate impact on the business.

“The increase within the casualty and professional lines was generated by our recently expanded underwriting teams in our US reinsurance operation, which underwrote several new large quota share contracts…

For full year 2013, gross premiums written increased in casualty, professional and other specialty lines from business written by new underwriting teams that joined Endurance since late 2012,” explained the company.

This new business was offset by what the company described as ‘significant’ non-renewals and reduced participation on contracts in the property and catastrophe sphere. Gross premiums written in the catastrophe line of business were hit by lower reinstatement premiums and reduced

limits and lower rates on renewals.

The full year combined ratio was 90.2%, which included 11 percentage points of favourable prior year loss reserve development and 3.7 percentage points of current year catastrophe losses.

Net investment income was $166.2m, which represented a decrease of $7.1m from 2012. Operating income, which excludes after-tax realised investment gains and foreign exchange gains and losses, was $281m and $6.41 per diluted common share.

The operating return on average common equity was 11.9% and the net profit was $312m compared with $163m in 2012.

STRATEGIC IMPROVEMENT As the results were announced, Mr Charman said: “Our results benefited from lower levels of catastrophe losses and strong favourable reserve development, and we are just beginning to see the positive impact of the significant underwriting investments we have made over the last year. Strategically, we have made great progress in the transformation of Endurance into a leading diversified global specialty insurer and reinsurer and I am very pleased with the positive impact of the high quality, market-leading underwriting teams that we have quickly and effectively integrated into Endurance.”

The former underwriter continued, attributing the excellent result to the big changes made by himself and his team since he arrived. He stated: “Last autumn, our strategic forward planning envisaged our underwriting activity taking place in a soft market environment for the next couple of years; critically, we now have the leadership, underwriting experience and expertise to profitably align and direct Endurance through these exceptionally challenging times. My colleagues and I are excited about our prospects for 2014 and are determined to reward our shareholders accordingly.”

MAN WITH A MISSION CONTINUED FROM PAGE 9 announced that it would expand the capabilities of its Asia Pacific reinsurance operations headquartered in Singapore to include a locally-based global catastrophe reinsurance team focused on the Asia Pacific markets.

In October Endurance announced that Scott Galiardo, Senior Vice President, would assume the newly-created New York-based role of group actuary with oversight responsibility for Endurance’s corporate actuarial, reserving and ceded reinsurance activities on a global basis.

He reports to Joan deLemps, Chief Risk Officer, who was herself only promoted to the role from chief underwriting officer in July of last year.

As Ms deLemps stressed, this move was another reflection of the group’s expansion plans: “Scott’s breadth of experience in both specialty insurance and reinsurance lines will serve us well as we continue to expand our specialty product capabilities and strengthen our market position.”

Also in October, and further evidence of Mr Charman’s desire to convert Endurance into a truly global operation, the company announced that Graham Evans would join the following month as executive vice president and head of international insurance to build a new international insurance platform to offer multi-line capabilities.

Jack Kuhn, Chief Executive Officer of Global Insurance, commented: “Graham has an excellent reputation for building start-up operations and a significant network of relationships, both of which will be critical as we develop Endurance’s presence in the London market. This marks a significant milestone as we establish Endurance as a recognised global leader in the specialty insurance market.

Going forward, we will further expand our international presence from this new London base, complementing significant planned growth in our US and Bermuda teams.”

Mr Evans was another hire from Mr Charman’s former company Axis, a theme that would intensify

08_CRE_Y5_04_BTN-M&A.indd 10

over the following months. Only 10 days later Endurance announced that Christopher Donelan would join the company from Axis Re as president and chief underwriting officer for Endurance Re, along with Michael Fokken and Tracy Thomson, who became executive vice presidents in Endurance Re’s North America underwriting operation.

Nicholas Leccese and Mark Strona also took on roles as reinsurance pricing actuaries to supporting the business unit in New York.

In November Endurance revealed that Douglas Workman would join the company from another Bermudabased rival Alterra Capital as executive vice resident and chief executive officer of US Insurance.

The pace did not slow in the New Year. The company announced on 6 January that Ian Bowler had joined its London office (from Axis Insurance) as senior vice-president to launch a new Professional Indemnity (PI) practice as part of recently appointed International Insurance CEO Graham Evans’ plan to rapidly expand the group’s London-based global operation.

‘DEPTH OF EXPERTISE’

Mr Evans said at the time: “Ian and his team are recognised for their depth of expertise in the PI classes and have an exceptional reputation within the London market. They are the first of a number of new London market insurance teams in the pipeline for 2014 as we build out Endurance Insurance’s multi-line capabilities and international presence.”

The following month the group announced that Rennie Muzii had joined the company from Marsh & McLennan to lead its professional lines initiatives in the US Western Region focused on errors and omissions (E&O), information security and privacy, commercial management liability and financial institutions products.

A day later the group announced a further senior hire

as it revealed that Brian Goshen, another industry veteran with 30 years’ experience and formerly chief administrative officer at Axis, would join later that month as chief human resources officer.

On 3 April the exodus of staff from Axis to Endurance’s international platform continued as Mr Evans in London announced that Richard Allen would join the company’s London office as executive vice president and head of international professional lines.

Mr Evans’s comments further underlined the commitment of the group to deepen its global base. “With Richard’s extensive network of broker contacts in the London, European, Australian and South African markets and his track record building new books of business, we look forward to quickly establishing Endurance as a recognised global professional lines market. In addition, as we expand our international operation to include additional specialty lines, Richard will be a valued member of our insurance leadership team in London,” he said.

And last but not least, at the end of April Endurance announced another hire from Axis as Clifford Easton joined the party as executive vice president and global head of energy insurance. Another veteran with 30 years’ market experience, Mr Easton is responsible for launching a new specialty insurance line covering both onshore and offshore energy. The theme was crystal clear. Mr Charman was living up to his promise that he would not go quietly from the industry after his painful departure from Axis and would not waste any time in rebuilding Endurance into a more globally diverse operation staffed by fewer but more experienced and well-known professional underwriters and managers.

It really should not have come as a surprise to anyone in the market that the industry veteran made the bid for Aspen because it is the next logical step in Mr Charman’s dream to consolidate the market and become more relevant for customers.

2/5/14 13:25:42

Your

insights

Our

strengths and expertise

Top-class

protection around the world

You know your business inside out. You know your markets, your customers, your competitors. Above all, you know the risks facing your business. At Swiss Re Corporate Solutions, we have the capabilities and the financial strength to meet the risk transfer needs of businesses worldwide. But that’s only half the story.

Whether your risk is basic or complex, whether the solution is off-the-shelf or highly customised, we believe that there’s only one way to arrive at the right solution. And that’s to work together and combine your experience with our expertise and your strengths with our skills. Long-term relationships bring long-term benefits. We’re smarter together. swissre.com/cs

11_CRE_Y5_04_FAP.indd 11

2/5/14 11:05:23

12

Insurance market M&A

BEHIND THE NEWS

Endurance-Aspen deal could be tip of the iceberg claim experts A rash of reports from leading consulting firms in the insurance market around year-end predicted that conditions are ripe for a significant uptick in global M&A activity of the type sought by Endurance. ADRIAN LADBURY reports

A

NUMBER OF LEADING CONSULTING FIRMS BELIEVE that the time is ripe for a round of serious mergers and acquisitions in the international insurance and reinsurance market.

KPMG recently published a report edited by Sam Evans, Global Insurance Transactions and Restructuring Lead, that said it expects to see a ‘dynamic deal environment’ with continuing appetite for expansion into core markets and M&A in 2014 and beyond.

The consulting firm said that it sees a number of trends that will shape the future M&A landscape.

First, KPMG believes ‘serious opportunities’ will be created through dramatic shifts in technology use.

The firm believes that high growth markets not constrained by legacy products and infrastructure could lead the charge, particularly by leveraging mobile technology and expanding upon the success of telematics in motor to property.

“Investment opportunities will be created through partnerships, joint ventures and acquisition of innovators by traditional players,” stated KPMG. A second trend is the increased activity and competition from private equity and non-corporate acquirers, according to KPMG. The firm believes that market incumbents can expect increasing competition from private equity funds, and, in some instances, pension funds.

The consulting firm believes that Asia will remain a competitive and heavily penetrated market but with opportunities for M&A. It suggests that deals will be selective, but argues that underlying fundamentals will continue to attract interest in China, India and Indonesia, particularly as the developing regulatory environment opens up the market.

HOT TARGET MARKETS

KPMG also expects continued activity in Latin America, another favoured region among insurers and reinsurers currently as they seek growth outside of mature European and US markets.

And of course the next hot target markets will be Africa, Turkey and the Middle East on the back of high expected growth rates in these relatively untapped insurance markets, said KPMG. Regulatory change will continue to act as a deal catalyst according to KPMG, a view that Endurance’s chairman John Charman echoed as he explained the need for market consolidation before making the recent contested bid for rival Bermuda insurance group Aspen.

“As in recent years, the continuing implementation of risk-based capital and consumer protection initiatives will serve as a catalyst for change, creating investment opportunities. Specific initiatives like the Asset Quality Review for the banking sector will result in a more rigorous assessment of whether insurance businesses are considered core or could be sold,” stated KPMG. The consulting firm also sees rising ‘inbound’ M&A interest into mature markets. “In a reversal of recent deal flow, we expect more inbound investment to mature markets. For example, as Chinese and other investors look to capitalise on opportunities created by current economic conditions,” it said.

It also believes that traditional insurers will exit legacy segments and sell non-core books to focus on growth and capital redeployment, just as Mr Charman has re-engineered the Endurance portfolio since taking over last year.

“Although the challenges are significant, opportunity exists to create a pan-European platform to consolidate legacy and closed book portfolios,” said KPMG. The consulting firm also sees opportunities to create core infrastructure such as central clearing houses in high growth markets.

KPMG believes that access to data will result in new partnerships and business models. “Another step change for the industry occurs as partnerships are established to capitalise on data-driven business models (eg Google, Amazon, Apple, retailers) resulting in a fundamental change in the way insurance is bought and sold.

Traditional incumbents must react,” concluded the firm.

Towards the end of last year consulting firm Towers Watson published a report along with global intelligence provider Mergermarket based on a survey of 250 market executives. It concluded that international insurers are regaining their appetite for M&A.

08_CRE_Y5_04_BTN-M&A.indd 12

As many as seven out of 10 executives from life, P&C and composite insurers around the world surveyed said that their companies planned an M&A transaction over the next three years. This compares to 39% that had completed a transaction over the last three years. Some 77% of respondents said they foresee an increase in insurance M&A in the next one to three years.

Towers Watson said that the outlook is borne out by recent trends, which have already seen an uptick in insurance M&A activity. The value of global insurance M&A deals in 2012 was the second highest seen in the last eight years. In the first half of 2013, the value of deals completed was up 44% on the same period in 2012, said the consulting firm.

But valuation gaps remain a ‘significant challenge’ to the market, concluded the report. Acquirers are seeking a global average of 15.2% return on capital, ranging from 13.8% for deals in western Europe up to 17.2% in Africa and the Middle East, the survey found.

Fergal O’Shea, EMEA Life Insurance M&A Leader at Towers Watson, said: “These rates may be an obstacle to deals as only a limited number of targets will likely generate such high returns. Especially when looking at consolidation in developed markets, returns of this level generally require large expense savings or other synergies to be delivered—which carry risk in themselves.”

VALUATION PRESSURE

Further pressure on valuations may come from the fact that only a fifth of respondents said they are planning to divest operations in the next three years, compared to 34% that have completed one or more in the past three, concluded Towers Watson.

“If you combine that with the increased appetite for acquisitions, the possibility of a re-emergence of a seller’s market is likely to result in competition for assets and elevated valuations,” commented Andy Staudt, EMEA P&C Insurance M&A Leader at Towers Watson.

Towers Watson agreed with KPMG that Asia-Pacific will be a hotbed of insurance market M&A activity.

The firm stated that many companies display a regional ‘home bias’ for where they are likely to target their M&A activity, but added that there is ‘universal agreement’ that the Asia Pacific region provides the most attractive opportunities over the next three years.

But don’t rule out activity closer to home. Western Europe was rated bottom of the regional attractiveness league compiled by the report authors, but some 55% of respondents still said they believe Solvency II will promote acquisitions as insurers seek to restructure and capture diversification benefits.

“There should be cautious optimism surrounding the insurance sector and related M&A across Europe, with a number of telling factors set to influence a larger volume of deals,” said Paul FrancisGrey, Assistant Editor and Head of Financial Sector Coverage at Mergermarket.

2/5/14 13:25:52

RISK FRONTIERS Malta

13

The Malta Association of Risk Management [Marm] is one of the newest members of the Federation of European Risk Management Associations [Ferma]. The association is keen to raise the profile and levels of professionalism in the local risk management market, so given Marm’s progression and ahead of our flagship conference the Malta International Risk & Insurance Congress in Malta on 12 and 13 June we decided to include the association in this year’s European Risk Frontiers survey. The development of risk management as a profession and the shifting risk landscape were just two of the issues discussed at the roundtable hosted

by TONY DOWDING, Editor of CRE’s sister title International Programme News [IPN]

The changing of risk management TONY DOWDING: How is the risk landscape changing for

organisations? Is there a shift towards intangible risks, such as cyber, and towards uninsurable and emerging risks?

IAN-EDWARD STAFRACE [IES]: Here in Malta, risk

management has not been an offshoot of insurance procurement because most companies do not have a person dedicated to insurance purchase. Where risk management is being implemented as a discipline, it’s more about holistic risk management. The focus here has therefore never really been about insurable risks.

Many times the issues risk managers deal with are not traditionally insurable, such as reputational risk. There’s also a growing appreciation that risk management contributes to strategic risks, to innovation and to preparing for and reacting to market forces. I think all that is leading away from what you would call the traditional risks.

ANDRE FARRUGIA [AF]: I think it is a matter of experience.

13_CRE_Y5_04_RF_XXX.indd 13

Insurers are tending towards providing a product to cover these emerging intangible risks that they wouldn’t have insured two, five or ten years ago. I believe, even in Malta, insurers are tending towards trying to secure what they did not secure earlier. So they are shifting towards uninsurable risks, but they are still very cautious.

I think one of the emerging risks that we are experiencing in the financial market is the availability of expertise. What the industry in Malta has had to do in the interim is to import expertise and that comes at a cost. It takes time to train people in the respective competences and there are so many new operations.

Malta has been attracting new ventures such as reinsurance companies, protected cell companies and affiliated insurance companies. All are new types of operations that bring with them the need for people with new technical skills. That is an emerging risk that organisations are having to cope with and they are

doing so at a price.

DIANE BUGEJA [DB]: I think a shift in risk focus is

stemming from greater interest being shown by committees, like the audit committee and the risk management committee. They’re demanding more information on cyber risks and these intangible risks because of what they are hearing and because they want to know more. And also we are moving towards a world of data analytics.

MARK L ZAMMIT [MLZ]: From an operational point of view, cyber risk, especially in the Maltese context right now, is gaining a lot of ground. Malta is attracting a lot of online gaming and FX brokerage firms that manage their business entirely online. So there is going to be an increase in intangible risks. Cyber risk is obviously one of them but there is also reputational risk and business continuity and disaster recovery issues. From an industry point of view, we are also seeing a change in professional indemnity type of insurance. So yes, the

2/5/14 13:26:50

Malta

14

risk landscape is changing towards intangible risks.

ROBERT M CACHIA [RMC]: If we knew the complete answer to the question of how the risk landscape is changing for organisations, it would not be a risk and risk managers would be out of a job. In terms of cyber risk, it’s not a risk it’s a certainty. There will be a small or massive hack. You don’t know whether it will be in the next minute, the next month or the next year. But the hack can come from a loner next door, hackers hunting in packs, a rogue state or a failed state.

TD: How is risk management developing as a discipline? How

is it responding to this changing risk landscape?

DB: It’s becoming more holistic in its response, so I think risk managers and even institutions as a whole are realising that you can’t deal with risk management in silos. The more the risk landscape changes, the more interconnectedness we are seeing between risks, both tangibles and the intangibles and the insurable and the uninsurable.

So when dealing with a particular risk you need to consider all the interconnections and when quantifying your risks you need to see the clusters of risks more than the risk in isolation. I think that is the way we are responding and that is the way it is developing, so more and more models on the interconnectedness and on the clusters and how one risk affects the next.

MLZ: From a financial perspective, it seems that risk management is trying to take a proactive view.

However, it ends up taking a reactive stance because the financial industry is coming up with so many new risks and so quickly that they end up being something new that you have to react to.

TD: Where should the risk manager sit to be the most

effective? Traditionally it has been in the finance department, but is this the most appropriate place?

IES: The risk manager should not sit within the finance

department or any other department other than its own. Sitting within finance would restrict the scope and focus primarily to financial risks such as market, liquidity and credit, without the independence that would assist the risk manager in being critical about the management of financial risks. It is also therefore not conducive to wider enterprise risk management.

Whether on the board or reporting to the board, as a minimum the risk manager needs to be reporting to the chief executive officer on a day-to-day basis. In such cases the CEO often uses the risk manager as a sounding board to consider risks and uncertainties in important decisions and to ensure these are managed effectively and efficiently.

13_CRE_Y5_04_RF_XXX.indd 14

In Malta risk management has come more from the top down rather than the bottom up. Besides regulators, more than ever, shareholders and all other stakeholders expect boards to effectively manage the risks the organisation is taking. Where boards recognise this and the potential reputational damage alone from failure to properly manage its risks, they want to have a professional risk manager within the organisation.

DB: It is changing. With the companies I’ve worked with, at least, it is changing. The most important thing is that risk managers are given authority in the organisation. Unless they are given authority and people within the organisation know that they have a certain power to change and report on things, then risk management won’t be a success.

AF: Although it should be the case, it’s so dependent on the size and structure of the organisation. I do agree that the position of the risk manager should be an executive one, at least reporting to the chairman or the CEO. But invariably, since a lot of companies are medium or small-sized, you usually don’t find risk managers at a very senior level.

DB: With small companies, what you would typically expect is that at least a director would have responsibility for risk management. So at least the function is given its due importance and there’s a voice at board level.

PAUL MAGRO [PM]: The risk management function is most effective when it is independent. This independence is achieved through its functional and hierarchical separation from the main operating units within a firm. Due to this independence the risk manager is required to

PARTICIPANTS ■ Ian-Edward Stafrace— ■ ■ ■

■ ■

Chief Risk Officer at Atlas Insurance PCC and Vice President of Marm Diane Bugeja— Senior Manager, Risk Advisory, KPMG Malta Mark Lawrence Zammit— Managing Director, ATCS Consultancy Ltd Dr Robert M Cachia— IT Governance Manager for Malta Government and Visiting Senior Lecturer, Department of Management, Faculty of Economics, Management and Accountancy, University of Malta Dr Paul Magro— Managing Director and Head of Risk Management, RiskCap International Ltd Andre Farrugia— Board Secretary of Marm and President of the Malta Insurance Institute

■ CRE would like to thank the members of Marm who participated in the roundtable, Marm itself and the Malta International Training Centre for hosting the event

RISK FRONTIERS

report directly to the board of directors.

TD: Is there a place for risk management at board level? Will

the concept of the chief risk officer grow?

PM: Everyone within a firm, whatever sector, has some

responsibility for managing risk. But it needs to start from the top. At the board level there is a place for risk management just as there is a place for legal and operations etc. As firms grow and become even more complex, the concept of introducing the chief risk officer will develop. It is ideal to have someone at board level with an eye for risk management who can relate to the issues of the firm being discussed at board level.

DB: This is especially true for regulated entities. We licence a lot of financial services entities and the MFSA, the Malta Financial Services Authority, expects a business plan to nominate a director at board level who will be interested in managing risks. So even if they nominate the accounting and compliance officer as being responsible for risk management, the MFSA will expect that at board level there is an independent nonexecutive board member responsible for risk.

RMC: If there is no risk thinking at board level, where would it be? Boards are for commercial success and that embraces risk, innovation, process and people. Chief risk officers and a risk-aware culture at all levels and in all processes are necessary, and will give businesses sustainable agility.

TD: Do you see risk management as a profession? Is the role of

the risk manager a coordinator or facilitator?

DB: I think it has to be a profession, otherwise risk management can potentially fall between the cracks and risks won’t get managed. As awareness increases, risk management has to be a profession, to my mind.

We have professional courses—professional diplomas in risk management—so people can prepare to be risk managers.

AF: The role needs to be complemented by a certain amount of skills and tools. I wouldn’t expect everybody to be skilful at managing risk in an organisation so it most definitely needs to be a standalone profession.

IES: A concept that is very much applied throughout businesses as far as the implementation of enterprise risk management is concerned is three lines of defence, where you have practically everyone in the organisation involved in some way, or form, in risk management.

The professional risk manager will have risk owners with their own specialised area of expertise. In their own specialised area they might have more expertise than the risk manager and the risk manager needs to recognise his limitations and where he needs to bring in

2/5/14 13:26:58

JUNE 12-13 2014, WESTIN DRAGONARA RESORT, ST. JULIAN’S, MALTA

EVER EXPANDING RISK HORIZONS presenting the results from the

2014 GLOBAL RISK FRONTIERS SURVEY

DAY 1—THURSDAY 12 JUNE 12.00—12.30: Registration 12.30—14.00: Welcome buffet lunch and networking 14.00—14.10: Opening remarks & Welcome address— Finance Minister, Malta

DAY 2—FRIDAY 13 JUNE Day two will focus on the regulatory parameters that risk and insurance managers have to work within and how well equipped is the insurance industry to cope with the risk transfer demands of modern global corporations.

SESSION 1—GLOBAL PROGRAMMES: THE ENDLESS SEARCH FOR NIRVANA—CONSISTENCY, CONTINUITY, COMPLIANCE AND CAPACITY The first session of this year’s congress will identify how risk and insurance managers with European and international corporations can most effectively manage and transfer their international exposures.

14.10—14.30: CRE Editorial Director Adrian Ladbury will report the findings of research carried out by Commercial Risk Europe, Commercial Risk Africa and International Programme News among leading European and international risk managers on the subject of global programmes during the first half of the year.

14.30—15.00: KEYNOTE SPEECH—Nuno Antunes, Head of Global Risk Solutions, EMEA, AIG 15.00—15.30: PANEL DEBATE—The findings of the survey will then be discussed with: Andy Tromans, Partner, Clyde & Co; Praveen Sharma, Global Leader of the Insurance Regulatory & Tax Consulting Practice, Marsh; Marcus Reichel, Head of Group Insurance, Adidas Group (invited); Risk Manager—TBC 15.30—16.00: Coffee and networking break 16.00—17.40:

SESSION 1—CAPTIVES AND THE EFFECTIVE MANAGEMENT OF GLOBAL RISK 09.00—09.30: Fabrice Frere, Managing Director, Aon Global Risk Consulting (Luxembourg) will address, among other key issues: ■ Why are captives still the most effective way of managing corporate risk?

■ How can captives help risk managers maximise their insurance spend and improve coverage?

■ Where should European firms set up captives and why?

■ What are the latest captive tools and methodologies such as Insurance Linked Securities available for risk managers?

09.30—09.50: Angele Grech, MFSA Regulatory Development Unit, will tackle the following questions: ■ What does Malta have to offer as a captive centre, why set up a captive in Malta?

■ Why did Malta introduce its new reinsurance SPV rules?

■ What are the latest developments in captive cell structures in Malta and what do they offer?

■ What is the potential for Malta to become the home of a new ILS centre in Europe?

09.50—10.10 FUTURE DEVELOPMENTS OF CAPTIVES— STRUCTURES AND OPTIONS David Mifsud, Chief Underwriting Officer, Atlas Insurance PCC Ltd and Mark Camilleri, Chief Financial Officer, Atlas Insurance PCC Ltd ■ Protected cells—why, where, when and how to make best use of them in risk financing strategies ■ Update on how protected cells are being treated under Solvency II and the benefits these can offer over standalone insurance company/captives.

10.10—10.45: Malta panel debate—Adrian Ladbury, Editorial Director, Commercial Risk Europe, will host a discussion with a group of local captive managers, investment managers and risk managers who have captives in Malta. Previous speakers are joined by William Thomas-Ferrand, Senior VP, Captive Solutions, Marsh Management Services Malta and David Mifsud, Chief Underwriting Officer, Atlas Insurance PCC Ltd

STRUCTURING A GLOBAL PROGRAMME MASTERCLASS This masterclass will identify the practical process that risk managers should consider when they structure their global programmes.

The masterclass panel, chaired by Praveen Sharma of Marsh, will include Andy Tromans, Partner, Clyde & Co; Clive Hassett, Director, Multinational Services, ACE European Group and Patrick Thiels, Regional CEO Mediterranean, France and Benelux, Allianz Global Corporate & Specialty.

The masterclass will discuss two hypothetical case studies for Public/Product Liability and Directors & Officers classes and explore the major issues that risk managers should consider such as implementation of local policies, premium allocation and recharge and premium taxes.

16.00—16.50: CASE STUDY 1: Public/Product Liability 16.50—17.40: CASE STUDY 2: Directors & Officers 17.40—18.00: Summary of afternoon’s discussions 18.00—20.00: Cocktails

SESSION 2— GLOBAL RISK MANAGEMENT AND TRANSFER 11.00—11.30: What the buyer wants CRE Editorial Director Adrian Ladbury will reveal the

findings of this year’s Global Risk Frontiers Survey and initial findings of the European Risk Frontiers Survey.

The survey’s specific questions include: ■ What could insurers and brokers do to ensure that the value of insurance is more easily explained to the board?

■ How could insurers and brokers better manage claims?

■ What single initiative would improve the process of innovation and development of new covers for emerging risks in the international marketplace?

11.30—12.30 THE GLOBAL RISK FRONTIERS INDUSTRY DEBATE Leading senior, international, insurance industry executives will explain how they plan to respond to changing customer demands. This discussion will also cover the potential offered by capital markets to introduce innovation.

SESSION 3—RISK REGULATION This session will focus on risk regulation, the ever-changing landscape and what it means for risk managers and the wider risk and insurance industry focused on solvency and the regulation of global programmes.

14.00—14.30: How does risk regulation make the world a safer place in which to do business?

KEYNOTE ADDRESS—Karel Van Hulle, Professor at Leuven University and former head of pensions and insurance at the European Commission responsible for the creation of Solvency II 14.30—15.00: Regulation of cross-border insurance A senior representative of the International Association of Insurance Supervisors (IAIS) will be invited to explain its thinking and strategy on the supervision of cross-border insurance business and programmes.

15.00—15.30: Panel Debate—Adrian Ladbury and CRE Deputy Editor Ben Norris will host a debate with Mr Van Hulle and the representative of the IAIS. They will be joined

by Marisa Attard, Director of the Malta Financial Services Authority and two risk managers with significant captives SESSION 4—THE RISE OF THE CRO & RISK EDUCATION 16.00—16.15: CRE Editorial Director Adrian Ladbury will reveal the specific risk education findings of its annual Global Risk Frontiers survey of 120 international CROs and risk managers.

16.15—16.45: Delivering true ERM A CRO with a leading international corporation will identify what they believe is needed to really make ERM work in a modern global corporation and how education and training can help achieve this goal.

16.45—17.15: Risk Manager Panel Debate The findings of the Global Risk Frontiers Survey will be discussed with a panel of leading international risk managers

To view the programme in detail, or to register for the event, please go to:

WWW.COMMERCIALRISKEUROPE.COM/MALTACONGRESS2014 Email our Event Manager Annabel White—awhite@commercialriskeurope.com

15_CRE_Y5_04_FAP.indd 15

2/5/14 15:37:25

Malta

16 expertise. But the risk manager also needs to facilitate and ensure that risk management is being applied consistently throughout the organisation. Then you have all the staff that are responsible for identifying risks and implementing the controls within their own area. They don’t need to be professional risk managers but you’ll always need a professional risk manager to assist in the coordination and facilitation. Ferma’s Risk Manager Certification Project, which Marm is supporting, is giving due importance to recognising the need for professional risk managers to have the required knowledge, experience and continued professional development.

PM: Even though risk management has been around for some time, it is the financial crisis that has pushed firms to place more importance on the management of risk. I do see it as a profession because you require an individual with specific skills to be able to work in risk management. Small organisations may require just one person who is responsible for risk management, whereas much larger and complex firms may employ personnel dedicated to one risk—e.g. market, liquidity or credit.

RMC: Perhaps risk management is not a subject— perhaps it’s still developing—but it is becoming a subject. I think it contains fragments of psychology, fragments of individual psychology. It is about social psychology and group dynamics and also situational awareness. It is also about balancing probabilities in economics and management. When all of this is done, the residual risk is the domain of actuarial statisticians and insurance professionals. For risk managers there is no ‘one size fits all’. Cultures vary from region to region, and so will risk management approaches.

TD: Is it important that the risk manager remains separate and

therefore able to be involved in all the different areas of the organisation?

MLZ: This helps make identification of risks much easier because if the risk manager is independent and has an independent role, rather than being the risk owner, they rely on the first line of defence, the middle management and the front-liners, to not only own risks but identify them as well. When we teach risk management at university we say that everyone is a risk manager. Why? Because everyone knows their line of business and the risks that are involved.

IES: From my experience it does sit alone and I can’t imagine it any other way. The risk officer needs to be independent to be able to comment on and contribute to the management of varying risks. The risk officer will rely on the front-liners and he’ll rely on risk owners. As a risk officer, I don’t own any of the risks.

Each risk is owned by a separate person—ideally, the person closest to the risk who has the most expertise.

TD: When looking to integrate risk management into all levels

“R

ISK REGULATION CAN MAKE THE WORLD a safer place because it drives firms to think about their risk management needs but too much regulation turns RM into a tickbox issue...”

—DR. PAUL MAGRO through education that procedures can be put into place for employees to follow when an event occurs.

Education should be a continuous process—i.e. on a yearly review because new risk management techniques and procedures may become available, and risks may increase in importance.

TD: Do you think that enterprise risk management is a realistic

goal for organisations?

IES: The alternative silo approach towards risk

management has failed time and time again so I think it is a realistic goal and it is what every organisation should be striving to achieve. Putting risk management into a silo just won’t cut it. The challenge is in the implementation of ERM and ensuring that you have board buy-in for that strategy. You need support from the directors, and you need support from management to cascade this across the organisation.

RMC: I wouldn’t call it realistic, optimistic or pessimistic. I think it is just plain necessary because uncertainty is everywhere. Uncertainty can be an opportunity to be captured, or an evil to be managed.

MLZ: Enterprise risk management always needs to be top-down. You have to have a board that actually instigates the risk management, and then you have the risk manager. You need communication, you need education and you need the three lines of defence. Is enterprise risk management—a top-down approach with board buy-in and the mission strategy of the company being communicated down through the levels of the organisation—realistic? It is something that is already being done in various companies right now.

You might find Chinese walls between various functions and certain stereotypes as well. So the risk manager needs to be a very good leader in order to rope them all in and break down any walls that exist and be able to get all the information they need from each and every partner.

PM: Yes, I do think that ERM is a realistic goal. Yet it may be a tedious one because implementation of ERM requires coordination between all departments of a firm. ERM aligns the risk appetite and strategy of the firm, enhances risk response decisions, reduces

RISK FRONTIERS operational surprises and losses, identifies crossenterprise risks and provides an integrated response to related risks across the firm. Thus, ERM can assist a firm to drive continuous improvement of its risk management capabilities in a changing operating environment.

TD: Does risk regulation make the world a safer place in which

to do business or does it simply turn risk management into a tickbox compliance issue?

PM: Risk regulation can make the world a safer place

because it drives firms to think about their risk management needs. However, too much regulation does turn risk management into a simple tickbox compliance issue that goes against the concept of risk management and the benefits it brings to firms.

IES: There are positive and negative aspects to this.

It’s thanks to regulation that the importance of risk management has really been pushed, which in turn has increased stakeholder expectations and put more pressure on organisations to really manage their risks better.

Regulation, however, can be a double-edged sword. When it’s overly prescriptive, or focused on risk avoidance, or when it’s changing all the time, it pushes risk management, unfortunately, into the compliance sphere. Rather than focusing on enterprising risk management within the organisation, the risk manager’s role in the regulated industries can be taken up by having to react to the ever changing regulatory requirements and that is one danger we all want to avoid.

Again on the positive side, regulation has pushed organisations to increase the resources of their risk management functions and encouraged people to study risk management. However, if those increased risk resources are distracted by trying to meet the ever changing regulatory requirements they move away from effective risk management to compliance.

To meet these challenges, while being generally aware of regulatory requirements, my recommendation is to focus efforts on getting risk governance right and risk management embedded in the organisation first and foremost. Risk management that is visible, repeatable and consistently applied to support decision making, increases the probability of success and reduces the probability of failure and the uncertainty of achieving overall objectives.

The risk management function should ensure that all significant risks to the organisation are consistently and effectively identified, assessed, prioritised, treated and monitored. Unless you have missed out on some obvious risks or controls, you will then be in a good position to adhere to any risk regulatory requirements and be able to readily demonstrate this to the regulator or any other stakeholder.

and areas of an organisation, is it largely about education and communication?

MLZ: I firmly believe that risk management needs to be continuously communicated throughout the organisation. Not only internally but also externally to the stakeholders. Why? Let’s take, for example, a business continuity plan. What is the use of making a continuity plan when you don’t communicate with your stakeholders and they don’t know what your business continuity is? So communication is very, very important, and education internally as well, because risks are continuously evolving, they are continuously changing.

AF: We know how dynamic risk and its management is—in a few days or months it will need to be updated.

So really and truly I believe in continuous application and communication. It doesn’t necessarily mean that everybody has to risk manage but everybody should risk identify. It is everybody’s responsibility to risk identify but then it is the job of the risk manager to coordinate this primary identification process into something that is meaningful.

IES: Every person at Atlas has risk management within their job description and, depending on their role, the scope will be different. At the most basic level, if you see a risk you need to report it. If you see a failed control you need to report it. There are a number of mechanisms that can be used to keep the involvement of risk management continuous. However, continued education is paramount, you need to have people who know what tools are available. It’s one of the reasons why you try to identify risk owners that have expertise.

If they don’t, you need to get them trained and provide them with the tools they need.

PM: The core to integrating risk management in an organisation is education and communication. It is

13_CRE_Y5_04_RF_XXX.indd 16

2/5/14 13:27:07

INTERNATIONAL PROGRAMME NEWS

» THE BEST OF IPN Commercial Risk Europe’s International Programme News (IPN) is a monthly web-based service that delivers news and analysis on risk transfer and financing developments at international level. It examines initiatives from insurers, brokers and captive managers to help risk and insurance managers improve the way they manage and transfer their cross-border risks. Below is a selection of leading stories from this month’s issue.

You can access the full IPN newsletter at http://www. commercialriskeurope.com/ipn-home/ipn and sign up to receive the monthly email alert at http://www. commercialriskeurope.com/ipn-signup.

» ZURICH CEO SENN STRESSES IMPORTANCE OF GLOBAL PROGRAMMES Zurich’s CEO Martin Senn told the insurance group’s AGM that providing global insurance programmes is one of the group’s core strengths.

“Globalisation remains the most significant driving force of growth in our time. Global trade will continue to grow—and with it demand for international and interconnected insurance solutions,” Mr Senn said.

“Such cross-border solutions are especially needed by large corporate and mid-sized companies. Providing these solutions is one of our strengths as a global composite insurance provider.”

He went on: “At the same time, we have seen a counter-trend to globalisation in some countries since the beginning of the financial crisis: there has been an increase in protectionism and local regulation.

This is making it increasingly difficult for us to carry out cross-border activities for our private customers in some jurisdictions.”

He told the AGM that Zurich was working from the assumption that the global economic situation will slowly improve. “The time has come to take our foot off the brakes a little. We will take a more aggressive stance in the coming years,” he said.

He noted that major corporate customers are increasingly demanding integrated solutions. They also increasingly want to obtain coverage for all of their risks from one place and wish to be looked after by one service provider, he added.

“These trends have motivated us to set new priorities and to act in a more growth-oriented way than in previous years,” he said. “We want to invest in select markets and customer segments: where we have a competitive advantage; where we are big enough to play to our strengths; and, of course, where we see potential. These growth markets include large corporate businesses that are active worldwide, such as multinational companies searching for a consistent solution for their insurance needs across all countries.”

—Tony Dowding

17_CRE_Y5_04_IPN.indd 17

» ASIA: ‘A REGION OF CONTRADICTIONS’ Asia continues to be a region of contradictions and opposing dynamics, with markets that are extremely developed, markets that are truly emerging and natural catastrophes among the most devastating anywhere on earth. Yet the insurance industry seems to be in a perpetual soft market, driven by new capital, new capacity and fierce competition, according to a report from Marsh.

The report revealed that Typhoon Haiyan/Yolanda in November 2013 broke records as the strongest ever to make landfall. Economic losses are expected to be more than $10bn, but insured losses will total only $700m, according to Munich Re. Insurance penetration rates across Asia—especially in countries like the Philippines and India—are well below those of developed markets.

“This creates a contradictory landscape, where the headlines and video footage of devastation does not match in terms of insurance pay-outs and contribution to rebuilding. In addition, the insurance industry’s commitment to helping companies in times of need will be tested, following a claim in the semi-conductor industry that is likely to be one of Asia’s largest losses on record. This is a landmark opportunity for the industry to delight or disappoint, and will set a precedent going forward,” said Marsh.

Marsh’s Asia Insurance Market Report 2014 explained that in Asia’s developed markets, such as Japan, Korea, Singapore and Hong Kong, the industry continues to advance and evolve in terms of their approach to risk management and insurance.

It pointed to Singapore, which has further established itself as the principal insurance and reinsurance hub for the region, with more and more players starting operations. Insurers are making Singapore their regional headquarters not just for Asia, but increasingly for Asia-Pacific.

According to the report, the flow of capital and capacity into the Asian markets is set to continue, as governments across the region implement strategies to create a global

insurance market based in key hubs such as Singapore. It said Asia will continue to be the most dynamic region for the insurance industry, and presents growth opportunities for industry players across the board.

“It also remains an extremely attractive region for insurance buyers,” said Marsh. “We expect insurance rates to continue to be soft in general, as capital, capacity and competition continue to be the primary theme for 2014 and beyond. Price remains king in Asia; however, there is a growing awareness of the long-term sustainability and price benefits of good risk management.”

It added that Asia is a buyer’s market, with rates generally at historic lows.

For non-cat property, an abundance of capacity across the region is keeping rates down. Marsh said that in some markets that do not have natural catastrophe exposures, such as Singapore, rates are known to reach 0.007% per million.

The report added that local insurers continue to offer very attractive rates, in many cases more so than international insurers, creating intense competition in many markets.

For cat-exposed property, Marsh said that rates in Japan have come back down to pre-Tohoku earthquake and tsunami levels, as insurers have recouped losses. In Thailand, rates have also come back to levels seen before the disastrous floods in 2011, but limits have not risen significantly.

In other catastrophe-exposed markets, such as Indonesia, which is prone to floods and earthquakes, rates continue to be stable given the lack of large-scale events in 2013.

The Philippines, which suffered more than 20 typhoons this season, has seen increases in property rates with catastrophe exposures, but this has been limited.

The influx of new insurers, combined with a benign litigation culture in general across the region, is keeping rates extremely competitive for financial lines insurance, such as directors and officers (D&O) and professional liability, said the report.

It added that new types of

17 insurance, such as cyber liability insurance, are also creating interest among buyers and competition among underwriters, keeping rates in check.

—Tony Dowding

» CAPTIVES TUNE IN TO EMPLOYEE BENEFITS Zurich has published a white paper entitled Better Control Through Captives—Efficient Management Of Corporate Risks And Customised Employee Benefits. It points out that captives are increasingly used to manage not only property and casualty risks, but also human capital risks.

It quoted Mark Cook, Director of International Consulting at Towers Watson: “The number of companies combining non-life and life risks in a captive has almost doubled in the last five years, and will likely double again in the next three to five years.”

Zurich said the financial benefits of using captives for employee benefits include improved cash-flow management, investment returns and overall premium cost savings.

In addition, said the paper: “For multinationals, captives help build a comprehensive global knowledge bank of benefit programmes that is invaluable in customising benefits to meet specific goals by country or region.

Many multinationals also find that the biggest advantage of having employee benefits in a captive is the compliance and governance knowledge available through a fronting insurer with global reach.”

The paper concluded: “A captive combining non-life and life risks provides the flexible risk management and financial efficiency that gives an organisation the freedom to more easily customise its coverages and employee benefits. The result is not only a more financially resilient organisation, but also one that can continue to respond effectively to changing coverage needs and employee programmes. In today’s ever-changing business environment, the resiliency of a captive can help companies effectively address the challenges of today, tomorrow and long into the future.”

—Tony Dowding Martin Senn

2/5/14 12:30:32

E-NEWSLETTER

18

» 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

» AIG ANNOUNCES NEW EMEA STRUCTURE AND KEY PERSONNEL CHANGES [LONDON]—AIG HAS ANNOUNCED A

new structure to its Europe Middle East and Africa (EMEA) operations and made senior appointments to implement the new regime.

The insurer’s EMEA management structure will change from 47 countries to 8 zones with its headquarters consolidated in London.

Under the new regime two new strategic leadership roles have been created.

Nicolas Aubert, previously Managing Director of the UK and Israel, has been named Chief Operating Officer of EMEA, reporting to Seraina Maag, President of AIG’s EMEA region. In this capacity Mr Aubert will focus on all aspects of the region’s client service delivery and transformation.

Anthony Baldwin, previously Managing Director, Country Operations Europe and Distribution at AIG, has been appointed Managing Director and Head of Distribution, EMEA, again reporting to Ms Maag. He will be responsible for market execution of the region’s eight zones.

As part of the shake up AIG has also named Emmanuel Brulé as Chief Risk Officer, EMEA. Mr Brulé will be responsible for enterprise risk management functions across the eight zones. His previous role as Commercial Lines Leader for the EMEA Region has been eliminated.

AIG has also created eight new managing director positions within the EMEA region to service each of the new zones.

The eight managing directors will lead market-facing activities and strategic execution. They will report to Mr Baldwin.

The eight managing director appointments and their zones of responsibility are as follows: n Africa Zone, led by Wayne Abraham (countries consist of: Kenya, South Africa, Uganda) n Central Zone, led by George Williams

18_CRE_Y5_04_BoW.indd 18

(countries consist of: Austria, Germany, Switzerland) n East Zone, led by Christos Adamantiadis (countries consist of: Bulgaria, Czech Republic, Hungary, Kazakhstan, Poland, Romania, Russia, Slovakia, Turkey, Ukraine) n South Zone, led by Marco Dalle Vacche (countries consist of: Cyprus, Greece, Ireland, Israel, Italy, Malta, Portugal, Spain) n Middle East North Africa (MENA) Zone, led by Michael Jensen (countries consist of: Bahrain, Egypt, Kuwait, Lebanon, Oman, Pakistan, Qatar, Sri Lanka, UAE) n North Zone, led by Juhani Talvia (countries consist of: Denmark, Finland, Norway, Sweden) n UK Zone, led by Nicolas Aubert, interim Managing Director (UK only) n West Zone, led by Fabrice Domange (countries consist of: Belgium, France, Luxembourg, Netherlands).

Ms Maag said on the changes at AIG: “Many companies talk about putting the customer first. I am excited by our new organisation that will truly allow us to focus on understanding our customers’ needs, be their risk expert and innovate solutions together.”

—Ben Norris

with the railways. One of his tasks at DVA was chairman of DVA-Reinsurance in Dublin, the reinsurance captive of the group.

DVA is a joint venture between Deutsche Bahn (65%), DEVK (20%) and broker Marsh (5%). For many years three managers—Mr Allerdissen, Peter Hoechst and Christian Heidersdorf—have headed the company.

Mr Allerdissen’s departure appears to be part of a bigger reshuffle at the higher reaches of the DVA. Peter Hoechst retired rather suddenly in February 2014.

Gilbert Van den Eynde joined DVA from Marsh as a replacement for Mr Hoechst.

Before working for Marsh, Mr Van den Eynde spent 20 years with Gerling. From 1996 to 2002 he worked for Pallas, the captive broker and insurer of the pharmaceutical company Bayer.

Insurance sources said that Mr Allerdissen and DVA’s supervisory board had differing views about the roles of top management.

It is not clear whether this was a reason for the split. Neither the company nor Mr Allerdissen were prepared to comment on the matter.

Mr Allerdissen has given sustained support to risk management matters in Germany through his work at the risk managers’ association Deutscher Versicherungs-Schutzverband (DVS) and many speeches and newspaper columns.

At present Mr Allerdissen is chairman of DVS and will remain in this position until the association’s annual general meeting on 9 May. At the same time as his departure, the association will have to replace another highpowered board member, Klaus Greimel.

Mr Greimel is still a member of the DVS committee but will leave the energy giant Eon and move to HDI-Gerling Industrie as branch manager of its Munich office.

Another DVS committee member, Hanns Martin Schindewolf, till now head of risk management and insurance at carmaker Daimler, will move to Axa. —Herbert Fromme

» ZURICH IDENTIFIES SEVEN CYBER RISKS THAT THREATEN SYSTEMIC SHOCK Hans-Jürgen Allerdissen

» DVS CHAIR HANS-JÜRGEN ALLERDISSEN LEAVES DEUTSCHE BAHN [COLOGNE]—IN A SURPRISE MOVE DVS chairman Hans-Jürgen Allerdissen has left German Railway’s captive Deutsche Verkehrs-Assekuranz-GmbH (DVA).

Mr Allerdissen was director of DVA and has worked for the German Railways (Deutsche Bahn) since 1992. He was one of the founders of the company’s captive, primary and reinsurance broker.

Before joining Deutsche Bahn Mr Allerdissen worked at Gerling and the Deutsche Eisenbahn-Versicherungskasse (DEVK), which has historically close links

THOSE CHARGED WITH CYBER RISK management must bolster their organisation’s defences to avoid a potential global systemic shock on a par with the 2008 financial crisis, Zurich has warned in a new report.

Cyber risk management professionals need to look beyond internal information technology (IT) safeguards to interconnected external risks that threaten the fundamental stability of information systems and the internet, finds the research by the insurer and international think tank Atlantic Council.

The build-up of seven key interconnected cyber risks, including those related to counterparties, outsourced suppliers, supply chains, disruptive technologies, upstream infrastructure and external shocks, could create a systemic ‘failure on a similar scale to the 2008 financial crisis’, says the report.

It lays out key recommendations for governments and organisations with systemic cyber responsibilities, as well as those for individual organisations, to enhance

mitigation and reduce the likelihood and effects of cyber risk.

Axel Lehmann, Group Chief Risk Officer and Regional Chairman Europe at Zurich Insurance Group, said: “The internet is the most complex system humanity has ever devised. Although it has been incredibly resilient for the past few decades, the risk is that the complexity which has made cyberspace relatively risk-free can—and likely will—backfire.”

“Organisations are unknowingly exposed to risks outside their organisation, having outsourced, interconnected or exposed themselves to an increasingly complex and unknowable web of networks. Few people truly understand their own computers or the internet, or the cloud to which they connect, just as few truly understood the financial system as a whole or the parts to which they are most directly exposed,” he continued.

According to the report, there are a number of reasons to believe the internet of tomorrow will be less resilient, available and robust and will more likely initiate and cascade global shocks.

It says that society’s track record for successfully managing complex IT systems is ‘far from perfect’. Because the internet is highly interconnected and tightly coupled with society, a small failure or series of failures in one place can cascade, producing an outsized impact elsewhere, it adds.

“Just imagine if a major cloud service provider had a ‘Lehman moment’, with everyone’s data there on Friday, and gone on Monday. If that failure cascaded to a major logistics provider or company running critical infrastructure, it could magnify a catastrophic ripple running throughout the real economy in ways difficult to understand, model or predict beforehand. Especially if this incident coincided with another, the interaction could cause a crash or collapse of much larger scope, duration and intensity than would seem possible,” the report warns.

It identifies seven key interconnected cyber risks that could cause such a meltdown.

They begin with internal corporate network and security practices and expand outward.

The seven aggregations of risks are: n INTERNAL IT ENTERPRISE: Risk associated with the cumulative set of an organisation’s (mostly internal) IT including hardware, software, servers and related people and processes. n COUNTERPARTIES & PARTNERS: Risk from dependence on or direct interconnection (usually non-contractual) with an outside organisation such as university research partnerships, relationship between competing/ cooperating banks, corporate joint ventures and industry associations. n OUTSOURCED & CONTRACT: Risk usually from a contractual relationship with external suppliers of services such as HR, legal or IT and cloud providers. n SUPPLY CHAIN: Both risks to supply chains for the IT sector and cyber risks to traditional supply chains and logistics including exposure to a single country, counterfeit or tampered products and risks of disrupted supply chain. n DISRUPTIVE TECHNOLOGIES: Risks from the unseen effects of, or disruptions either to or from, new technologies, either those already existing but poorly understood or those due soon, such as embedded medical devices, driverless cars and the largely automatic digital economy. n UPSTREAM INFRASTRUCTURE: Risks from disruptions to infrastructure relied on by economies and societies, especially electricity, financial systems and telecommunications. n EXTERNAL SHOCKS: Risks from incidents outside the system, outside of the control of most organisations and likely to cascade, such as major international conflicts and a malware pandemic.

—Ben Norris

2/5/14 12:30:26

Cyber Sphere Protecting businesses against Cyber risks

19_CRE_Y5_04_FAP.indd 19

2/5/14 08:54:19

Continued from Page One

20

NEWS

CAPITAL: Investor interest has triggered softening conditions CONTINUED FROM PAGE ONE

capital structures, said Bryon Ehrhart, CEO of Aon Benfield Americas and Chairman of Aon Benfield Securities.

“These insurers have used the new capacity to remain in businesses that were previously challenged and grow their business in areas that would otherwise not have been targeted for growth. We believe this trend will continue,” he said.

“There is also a good chance that the new capital flows will help corporate insurers offer more relevant limits to large corporate insureds,” added Mr Ehrhart.

The effects of alternative capital are already being felt in the direct energy insurance market, according to Andrew Herring, who heads Marsh’s energy practice in Europe, Middle East and Africa. “While new capital has had most impact on the reinsurance market, it is influencing the behaviour of primary insurers. Cheaper reinsurance is driving more competitive behaviour among energy insurers with improved terms for buyers,” he said.

In its recent Energy Market Monitor report, Marsh said that the emergence of alternative capital was one of the factors driving down rates (by double digits in the first quarter 2014), a trend that is accelerating in the run up to renewals in June and July.

New capital is also likely to limit underwriters’ ability to respond to major losses with market-wide rate increases.

“There is a huge amount of capital waiting in the wings that can be switched on overnight.

This is likely to lead to an extended soft market with any potential hardening in the market likely to be short-lived,” said Mr Herring.

CAPTIVE BENEFITS The influx of alternative capital has also helped drive increased competition among reinsurers for captive business, according to Adrian Richardson of Aon Risk Solutions.

“While the floodgates have not opened, we do see more appetite for captive risk,” he said.

All captives are benefiting from the general softening reinsurance market and increased competition between fronting insurers, said Mr Richardson. While alternative capital providers—such as collateralised reinsurers—are already reinsuring captives, he said.

“As more capacity has flowed into the market it has driven players to up their game, and we have seen fronting insurers look to step up client service levels,” said Mr Robertson. “With increased competition, insurers and reinsurers have

Bryon Ehrhart had to become more inventive and be prepared to push boundaries,” he said.

For example, reinsurers are more willing to offer captives multi-year deals and stop loss covers, said Mr Richardson. It has also become more cost effective for captives to transfer long tail liabilities, such as environmental or workers’ compensation exposures, he said.

Large captives that take on huge amounts of risk—such as those owned by energy and technology companies—could use the supply of alternative capital to help drive down the cost of risk, explained Mr Richardson. For example, through buying catastrophe covers.

“For the enlightened captive owner, the arrival of alternative capital opens up a raft of opportunities, but they will need to have the right level of financing and risk appetite to utilise it,” he said.

These changes in the reinsurance market are more than just the cyclical nature of insurance pricing, according to Mr Ehrhart.

“We believe the transformation that is occurring now is different because the source of the funds is not simply excess capital built through a profitable operating environment,” said Mr Ehrhart.

“This time, in addition to the high capital levels, we have significant new sources of risk capital that take a different view of risk adjusted returns. The difference in expected returns is material and it challenges the traditional notions of equity returns for reinsurers and insurers,” he said.

To date, capital market players have not entered the corporate primary insurance market directly, concentrating instead on reinsurance where they can find high volumes of uncorrelated risks that are rich in data.

Capital markets typically prefer portfolios of risk and do not have much appetite for individual risks, explained Mr Grimwade.

Together with relatively high barriers to entry, capital market investors are therefore unlikely to play in primary markets directly any time soon, he predicted.

However, if capital markets can’t access enough business through reinsurance, they may look for ways to directly access primary markets, potentially through partnerships with brokers, said Mr Grimwade.

According to Marsh’s Mr Herring, the influx of new capital is linked to such a market trend. Some brokers have established facilities to provide automatic capacity alongside open market insurers, potentially boosting available capacity and efficiency, he explained.

For example, Marsh agreed a quota share arrangement with Berkshire Hathaway in 2010, which saw the reinsurer underwrite 10% of the broker’s London market energy book, although that deal recently expired.

Separately, Berkshire signed a sidecar-like deal in 2012 to offer its capacity to Aon’s clients placing their business at Lloyd’s.

Facilities like these ‘drive competitive behaviour’ as well as create efficiencies for large risks that require insurers to participate on a subscription basis, according to Mr Herring.

While alternative capital may at first appear a threat, some corporate insurers see benefits for buyers from such funds.

For example, efficient forms of capital may compliment insurers’ technical know-how and service capabilities to deliver more of what risk managers want.

“In the market where we are focusing, we haven’t seen direct competition in the corporate space from cat bonds and side cars,” said Brian Kirwan, UK Head of Market Management at Allianz Global Corporate & Specialty. “Yes, there has been an injection of capital into the market, but this isn’t competing directly with us, where we are focusing more on lead positions

on technical corporate risks,” he said.

“But I can see the advantage to customers of more innovative forms of capacity, especially if it reduces long-term pricing through greater efficiency,” he added.

New forms of capital are also likely to result in new risk transfer and hedging solutions for risk managers, explained Rick Miller and Michael Popkin, who are both Managing Directors and Co-Heads of Insurance-Linked Securities at Jardine Lloyd Thompson Capital Markets, part of JLT Towers Re. “Alternative capital will increase the supply of reinsurance capacity, which will filter down to a greater supply of insurance.

But alternative capital will not be limited to insurance risk transfer solutions. There are other methods to hedge risk,” said Mr Popkin.

For example, risk managers could use derivative products or contracts with parametric triggers to hedge against business interruption and contingent business interruption risks, he explained.

A risk manager could purchase a hedge to pick up financial losses should a storm or earthquake of a certain magnitude strike within a certain radius of key facilities, he continued.

‘CAPITAL MARKET THINKING’ Such products are already available, but they could become more commonplace as capital market thinking becomes more ingrained at traditional reinsurers, according to Mr Miller. “We are now seeing the rise of the reinsurance manager. The distinction between the insurance-linked securities manager and pure reinsurance underwriter is blurring,” he said.

As a result, traditional reinsurers will increasingly offer both traditional reinsurance and capital market products, he said. Many reinsurers already manage thirdparty reinsurance capital on behalf of capital market investors, he added.

“It is not about alternative capital versus traditional reinsurance. We will see the two morph, with reinsurance managers running both their own balance sheets and those of third party investors,” said Mr Miller.

Some have doubts about the commitment of alternative capital investors, suggesting that higher interest rates or a large catastrophe loss might cause some to withdraw. However, convergence looks like it is here to stay, said Mr Flandro.

In the long term, convergence capital will be needed to fund rising catastrophe exposures as insurance penetration and wealth increases in emerging markets, and to meet the increasing cost of natural catastrophes, he said.

CYBER: Product bridges gap between virtual & physical coverages CONTINUED FROM PAGE ONE is a significant development in the evolution of cyber coverage.

The ‘wrap-around’ policy uses a difference-in-conditions clause to drop down and provide cover where gaps in a wide range of underlying insurance policies exist, Ms Nazir said.

AIG has launched the product in the US and expects to roll it out in Europe in June. Capacity is ‘meaningful’ at between $50m and $100m, Ms Nazir told CRE. Commenting on the AIG

01_CRE_Y5_04_News.indd 20

product, Daljitt Barn, PwC cyber security director and former chairman of the Cyber Risk & Insurance Forum, said that the ‘cyber injury’ cover is the first of its kind.

“This is a great step towards a better understanding of cyber exposure across a business at large and the tailoring of an insurance service to meet business growth plans. Think of it as cyber insurance meets casualty and D&O head on,” he said.

To date, the specialist cyber insurance market has been

dominated by cover for data breaches. But Mr Barn believes that cyber insurance is now beginning to fall into two camps—cover that is solely focused on data breaches and the hybrid approach where reputational harm, cyber extortion and all other aspects of intangible cyber risks are covered.

‘VHS vs BETAMAX’ “It’s too early to say whether the cyber insurance market is moving into a VHS vs Betamax scenario, but introduction of new policies such as AIG’s around cyber

injury and the well-established Beazley Breach Response product demonstrate buying patterns and security breaches are more prevalent than ever,” he said.

More generally, cyber insurance claims have been increasing, said Ms Nazir. Last year, cyber claims at AIG were greater than previous years combined, she said.

Cyber claims are also becoming more expensive, according to a UK Department of Business Innovation & Skills report published this week.

The 2014 Information Security Breaches Survey, conducted by PwC,

found that the number of security breaches affecting UK business has decreased over the last year (81% of large organisations suffered a security breach, down from 86% a year ago) but that the scale and cost of individual breaches has almost doubled.

“The key point about the survey is that data breaches are not going away, so it’s safe to say that the cyber insurance market across the EU will see accelerated growth once the EU Data Protection Regulation comes into effect,” predicted Mr Barn.

2/5/14 15:13:59

cre_full_page.indd 1 21_CRE_Y5_04_FAP.indd 21

29/01/2014 2/5/14 10:34:09 11:04:42

Continued from Page One

22

NEWS

ERM: Reports at RIMS conclude mature RM adds value CONTINUED FROM PAGE ONE said that risk management has significant (73%) or some (20%) impact on setting their organisation’s business strategy.

Risk managers themselves broadly agreed. 87% said they have an impact on strategy, with 22% claiming this to be significant.

76% of C-suite executives said that their organisation treats risk management as a key strategic function. This number falls to 60% for risk professionals.

It is also revealing that C-suite executives valued an aptitude for strategy and business acumen as the key abilities and areas of knowledge needed by risk managers to help their organisations over the next three to five years. These skills were chosen by a margin of 2-to-1 over any other response.

The survey also considered exactly who has primary responsibility for executing the risk management approach and strategy within organisations. It is clear that there is ambiguity about where this responsibility lies.

While 47% of risk professionals

identified this as their primary role, only 16% of C-suite respondents agreed. Instead, most C-suite respondents (39%) rated the CFO as the primary executioner of risk strategy.

Reviewing the report, Carol Fox, Director of RIMS’ Strategic and Enterprise Practice, and Brian Elowe, Managing Director, Global Risk Management at Marsh, said that the 2014 Excellence In Risk Management survey results are broadly encouraging. The annual survey has been carried out since 2004.

‘MORE OPPORTUNITIES’ This year’s results show that risk professionals are deploying new approaches and building capabilities inside their organisations, but that there is ‘more to be done, more gaps to bridge and more opportunities to be uncovered and seized’, the pair wrote.

They said the survey confirms that unknown and as yet untapped opportunities exist for risk management professionals and their organisations to realise substantial benefits from mature

risk management practices.

“It is no longer news that risk itself is a priority at the senior leadership levels. What is clear is that the risk management function indeed has taken a more strategic role, as was suggested in the initial 2004 report, and that expectation gaps identified in the more recent years are aligning at last.

“There is positive movement in such areas as the strengthening of interactions between risk functions and boards; the use of analytics for both traditional and evolving strategic purposes; the development of cross-functional collaboration through such means as risk committees; the development of risk management personnel to include financial and operational skills; and the evolution toward an organisational risk knowledge centre,” they concluded.

A separate study released prior to the RIMS conference held in Denver, Colorado finds that corporations exhibiting mature risk management practices achieve up to 25% higher market valuations.

The study by The Journal of Risk and Insurance entitled The Valuation

Implications of Enterprise Risk Management Maturity based its findings on data from the RIMS Risk Maturity Model and the performance of publicly traded companies.

‘ENHANCED VALUE’ Its authors said: “Firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and relationships across the entire enterprise and as a consequence enhanced value when undertaking the ERM maturity journey.”

RIMS’ Ms Fox said that one of the biggest challenges in implementing an enterprise risk management programme is articulating its value.

“This research makes that value link quite clear. Although the study necessarily focused on publicly traded companies, the value proposition of enterprise risk management applies to notfor-profits and the public sector as well,” she said.

In a further executive report, RIMS has laid out five key steps to

help risk managers successfully move from traditional risk management to a broader ERM approach.

According to the Transitioning to Enterprise Risk Management report the five steps are: ■ Determine what value your organisation will gain from ERM ■ Scan the internal environment for what is already being done ■ Find a champion ■ Adapt processes to the organisation’s needs ■ Strive for continuous improvement.

“A robust enterprise-wide risk management framework provides a practical and sustained basis for improved profitability, greater operational efficiency, increased shareholder value and reduced financial volatility,” said Ms Fox, one of the report’s authors.

“Increasingly, research data supports ERM’s business value and competitive advantage in an ever more uncertain environment. As a result, risk professionals have an excellent opportunity to play a key role in their organisation’s ERM transition.”

ENDURANCE: Aspen seeks shareholder backing to stop bid Press Releases - Aspen

CONTINUED FROM PAGE ONE and investors.

He has led a rapid transformation of Endurance since taking the helm last May, with the exit and arrival of many staff in key positions and expansion into new lines of business and territories.

A number of the new hires arrived from Mr Charman’s former company Axis—from which he was dramatically ousted by fellow board members—and Aspen itself. Aspen has initiated legal action in response to the ‘poaching’.

The next big step in Mr Charman’s plan for Endurance is to acquire a complementary business, hence the approach to Aspen’s board to request it carry out due diligence with a mind to a potential takeover.

The Aspen board is, however, vehemently opposed to what it sees as an aggressive move that would benefit neither staff nor investors.

In the latest twist in what has become a public spat, Aspen reiterated, in a letter to shareholders sent on 21 April, its ‘serious concerns’ over Endurance’s ‘proposal’.

REJECTION Glyn Jones, Chairman of Aspen’s Board of Directors, said: “We have actively reached out to shareholders and have found overwhelming consensus for our rejection of Endurance’s ill-conceived ‘proposal,’ which undervalues Aspen, represents a strategic mismatch and carries significant execution risk.”

Mr Jones said that discussions with clients and brokers had confirmed Aspen management’s view that the move would result in ‘substantial dissynergies’.

“Mr Charman’s characterisations are merely an attempt to deflect from the real point that the ‘proposal’ is unattractive and not actionable,” said Mr Jones.

The Aspen chairman said that its

01_CRE_Y5_04_News.indd 22

02/05/2014 12:19

business where the most valuable board has concluded that Aspen will assets are its people will thrive, be able to create ‘superior value’ for and that the merging of the two Aspen shareholders based on the cultures will proceed smoothly company’s ‘standalone plan’. in the ‘collegial environment’ “We have built a diversified PRESS RELEASES established under Mr Charman’s business with a clear strategy, leadership,” it added. strong balance sheet, proven Aspen Insurance Holdings Board of Directors Rej ects Unsolicited Proposal from Endurance “The Aspen board of directors management team and is vehemently opposed to the disciplined risk management, 4/14/2014 10:25:25 AM hostile attempt of Endurance and are confident that continued HAMILTON, Bermuda--(BUSINESS WIRE)--Apr. 14, 2014-- Aspen rance Holdings Limited (“Aspen”) (NYSE:AHL) to address its business problems execution of our strategy provides itsInsuBoar anno unced today that d of Directors careful evaluation with the assistance of its value far in excess of what is financial and legal advi, after at the expense of Aspen and its sors, unanimously dete rmin t an suggested in a risky combination unsolicited proposal from Endurance Specialty Holdedingsto rejec shareholders,” concluded the Ltd. (“Endurance”) (NYSE:EN H) to acquire Aspen for with Endurance,” stated the in Endurance common stoc letter. $47.50 per share, 60% k and 40% in cash. letter, which was co-signed by Glyn Jone Endurance responded rapidly s, Chairman of the Boar d of Directors, said: “Afte Mr Jones and Aspen CEO Chris review and deliberati to the Aspen letter. r careful on, the Board of Directors unanimously determin that Endurance’s prop ed O’Kane.

Later that day it stated that osal is not in the best inter ests of Aspen or its shareholders. Enduranc e’s ill-conceived proposal The letter added that company Aspen’s refusal to consider its $3.2bn undervalues our , represents a strat mismatch, carries sign ificant execution Aspen’s recent investments in risk, and would result in subsegic proposal denied its shareholders the tantial dis-synergies. Furth ermore, most of the consideration to Aspe n shareholders would its Lloyd’s and US Insurance refle opportunity to receive a ‘highly be in a stock that would ct these problems. businesses are on track and the attractive’ premium and an ongoing “Aspen has a proven track record of performance board expects its book value to incre stake in a global industry leader. and a clear strategy to ase shareholder Endurance has a mixe d operating track increase ‘meaningfully’ as a result. record, new leadership,valuane.unpr Michael McGuire, Chief oven strategy, and no experience with large acquas isitioone ns. More Mr Jones and Mr O’Kane added ofoverthe parts of Financial Offi cer of Endurance, said: , thismost transactiodynamic n wou ld be highly disruptive to Aspen’s corporate cultu re, which has proven to that a combination with Endurance itsadva business.

“Having already rejected our proposal, be a significant competitive ntage in the mark ce.” would cause Aspen and its shareholders The letter etpla also stressed cultural Aspen’s defensive statement simply In making its determin ation, the Aspen Boar d Endurance of Directors considere to suffer from ‘difficulties’ it sees differences between and repeats inaccurate characterisations among othe d, r factors, the following : in Endurance’s business, such as its Aspen that would make a combination and ignores the plain fact that we are Aspen is executing a clear strategy to deliver supe rior value for shareholvery ders, while alleged ‘over-reliance’ on volatile crop diffi cult. offering its shareholders significant Endu rance’s proposal unde rvalues the company and carries significant risks. insurance, a ‘lack of progress’ in its “We have serious concerns about value for their shares and the A combination would burd en Aspen with Enduranc e’sdisruption underwritthe unproven ing team s with no other ‘nascent’ insurance businesses signifi cant personnel opportunity to participate in a larger, clear strat egy; an unprofita ble insurance business1; and a volat ile and challenge and a supposedly ‘weak’ reinsurance loss of attractive business that superior organisation going forward. d crop business.

Endurancand e has shown a public disdain for Lloyd’s, whic growth engi h is the ne of Aspe business. would result from combination of This is another clear sign of an n’s well-esta blishedainter national insurance business.

The Aspen letter also claimed that collaborative, teamwork- entrenched board and management EndurancAspen’s e has a mixed oper ating track record, no large acquisitions, new experience with lead ership and anwith in recent years Endurance’s earnings oriented culture that is not aligned with shareholder unprovenEndurance’s strategy.

The proposed transactio n jeopardizes Aspen’s corp which thecentralised, orate culture, have been driven ‘disproportionately’ management interests.”

Company believes is top-down a significant compone franchise value because nt of its it differenti ates Aspe by prior-year reserve releases. model,” stated the letter.

Mr McGuire said that Endurance n with clients and “The combination Endurance is not just ‘kicking the tyres’. proposes is, in our view, an effort HOSTILITY He added that the Endurance

by Endurance to solve its business “Endurance’s recent description of its directors have spoken to a ‘broad range’ issues at the expense of Aspen and its ‘collegial environment’ is inconsistent of Aspen and Endurance shareholders shareholders,” stated Mr Jones and Mr with the industry’s experience. Aspen and they agree with the strategic O’Kane. is currently in litigation as a result of rationale and financial benefits of a The Aspen letter also voiced Endurance’s orchestrated poaching deal. “This stands in stark contradiction serious doubts about Endurance’s of Aspen employees, and, according to Aspen’s mischaracterisation of commitment to the Lloyd’s market. to news reports, Mr Charman was market sentiment, which we strongly It said that Mr Charman has, in relieved of his positions at his last two question,” Mr McGuire said. recent times, publicly expressed companies for his less than collegial Endurance’s CFO said that ‘disdain’ for the market. A takeover attitude,” continued the letter.

Aspen’s ‘go it alone’ strategy is ‘cold would therefore represent a threat to “Yet, now Endurance assures comfort’ to investors who would like Aspen’s syndicate, which it described our and its own shareholders that a to receive a ‘significant premium’ for http://www.aspen.co/

Investors-Media/Med

ia-Center/Press-relea

ses/?ReqId=1918350

&print=true

Page 1 of 7

their shares. Aspen has ‘meaningfully underperformed’ Endurance and its peers since 2009 in combined ratio, return on equity and growth in book value per share, he added.

Mr McGuire said that Aspen simply cannot assert ‘meaningful alignment of interests’ with shareholders given the ‘paucity’ of the board and management’s ownership stake, both individually and collectively.

“This contrasts dramatically with chairman and CEO John Charman’s substantial ownership stake in Endurance as well as his commitment to purchase $25m of additional shares in connection with the transaction,” noted Mr McGuire.

‘DISDAIN’ Next, Mr McGuire rejected Aspen’s claims about Mr Charman’s alleged ‘disdain’ for the Lloyd’s market.

“John Charman has 30 years of experience in Lloyd’s, including as founder of the first Lloyd’s syndicate backed by corporate capital and as senior deputy chairman at the Council of Lloyd’s during its financial crisis.

Try as Aspen may to distort a yearold comment, the fact remains that he is and has always been a strong supporter of a well capitalised, larger Lloyd’s operation, which is what the combined Endurance-Aspen platform would be,” he said.

Then he tackled the question about cultural fit and management styles. Mr McGuire said that the ‘significant inflow’ of world-class talent that Endurance has attracted in the past year from across the industry is a ‘strong testament’ to the ‘winning culture’ it has created.

Mr McGuire concluded: “We will continue to take the steps necessary to make sure Aspen shareholders have the opportunity to realise a significant premium for their shares, even in the face of the misguided resistance of Aspen’s board.”

2/5/14 15:14:05

MAPFRE GLOBAL RISKS The conďŹ dence expert advice gives you MAPFRE GLOBAL RISKS and its team of highly experienced professionals provide specialized risk management services to major corporations across all sectors.

A global vision delivering specialized solutions.

23_CRE_Y5_04_FAP.indd 23

2/5/14 08:53:53

Global solutions, customised.

Beaded craftwork, South Africa – Where AIG insurers have done business since 1962

We understand that no two multinational businesses are alike.

Every organisation has its own risk exposures and risk tolerance. At AIG, we’ll work with you to help create a programme tailored to your specific needs, virtually anywhere you do business—whether that means local policies in some or all of the places you have exposure or a single global policy. Learn more at www.AIG.com

Insurance and services provided by member companies of American International Group, Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. For additional information, please visit our website at www.AIG.com.

AIG13029_FLO_A3.indd 1 24_CRE_Y5_04_FAP.indd 24

24/01/2014 09:50 2/5/14 08:53:03