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Greg Case Dominic Casserley Evan Greenberg Michel Liès Ming Lee Mike McGavick Alex Moczarski Tad Montross Chris O’Kane Bertrand Wollner
SPONSORED BY
CEORISK FORUM
Summer 2013www.reactionsnet.com
2 CEO Risk Forum 2013 www.reactionsnet.com
COnTEnTS
CEORISK FORUM
SUPERVISION
4 In regulation, ’tis a gift to be simple There’s a danger that multi-layered, over-lapping
regulation of the insurance industry will create more problems than it solves, says XL CEO Mike McGavick
TERRORISM
6 Why Tria must be extended The US economy needs the certainty provided by
the TRIA terrorism insurance programme, says Evan Greenberg, chairman and CEO of ACE
MARKET DYNAMICS
8 The vandals and the handles Aspen CEO Chris O’Kane believes that ILS investors
could have a damping effect on underwriting cycle volatility
RISK PERCEPTION
12 Navigating the new world of risk The magnitude, complexity and speed of risk is
increasing exponentially – and most companies are woefully unprepared to deal with it, says Greg Case, president and CEO of Aon
CLIMATE CHANGE
14 Call to action on CO2
Whatever the causes, climate change is real and our industry must factor in important underwriting safeguards, says Tad Montross, CEO of Gen Re
SPONSORED BY GR-NEAM
16 Inflation: Nescience, or “nobody knows nothing” John Gilbert, Chief Investment Officer, GR-NEAM
BROKER EVOLUTION
20 Surviving the shifting sands of risk The complexity and volatility of today’s risk environment
creates opportunities for those prepared to adapt and innovate. Standing still is no longer a viable strategy, says Dominic Casserley, Willis CEO
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CEO Risk Forum 2013 3www.reactionsnet.com
COnTEnTS
Reactions Publishing Group
CEO Risk Forum editor Garry Booth, Zigzag Publishing, [email protected]
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©Euromoney Institutional Investor PLC. London 2013
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REINSURANCE ANNIVERSARY
22 Swiss Re’s story: connecting generations Risk has evolved in the 150 years since Swiss Re
opened for business, but reinsurers’ value to society is unchanged. By Michel Liès, CEO of Swiss Re
CONVERGENCE
24 Reinsurance at the crossroads Insurers are looking for new ways to achieve profitable
growth in a difficult environment and alternative capital can help, says Alex Moczarski, chief executive of Guy Carpenter
SPONSORED BY RUSSELL GROUP
27 Specialty risk management — a class apart Recent man-made and natural catastrophe events
have underlined the importance of underwriting risk management in specialty business, says Suki Basi, managing director of Russell Group
EUROPEAN MUTUALS
29 Mutual benefits Mutual insurers have stepped up their game over the past
few years, says Bertrand Wollner, CEO of Signal Iduna Re
CATASTROPHE RISK MANAGEMENT
31 What’s next for cat modelling? Ming Lee, CEO of AIR Worldwide, believes a
transformation is underway in how companies think about and manage risk
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CEO Risk Forum 2013 29www.reactionsnet.com
The imminent demise of the mutual insurance model is frequently predicted by people citing its structural disadvantages, such as limited access to fresh capital. But to paraphrase Mark Twain, reports of the sector’s death have consistently proven exaggerated – even embarrassingly mistaken. The post-crisis performance of the European mutual sector once again demonstrated that the mutual sector is in rude health.
Today, Europe’s mutual insurance sector comprises more than 3,000 companies that are owned by, governed by and operated in the interests of their member policyholders. Together with their subsidiaries, these insurers account for more than 60% of all legal entities operating in the European insurance market. According to the Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE), the sector provides more than 150 million Europeans, i.e. more than one third of the Continent’s population, with insurance services. In addition, Europe’s mutual insurers employ close to 300,000 people.
The global financial crisis of 2007/2008 and the subsequent protracted economic slowdown have taken their toll on the European insurance industry. Turmoil and volatility in financial markets, sovereign debt crises in southern eurozone economies, negative real investment yields on high-quality sovereign debt and regulatory uncertainty in the context of Solvency II have put significant pressure on the sector.
Reflecting the overall economic malaise, premium volumes in the European market contracted by 8% between 2007 and 2011, down from !1.29 trillion to !1.18 trillion. Europe’s share of global premiums dropped from 42% in 2007 to 36% in 2011, according to Swiss Re.
Over the same period, mutual insurers managed to expand their total (non-life and life) volume of business by 15%. This strong outperformance has resulted in a significant gain in the mutual market’s share, which increased from 23% in 2007 to 28% in 2011, with premiums reaching about !300bn.
Since 2007, the mutual sector in nine of the 10 largest European markets recorded above-average premium growth. The biggest growth differentials were recorded in Russia (reflecting acquisitions by foreign mutuals) and in the UK where customer confidence in capital markets-based products offered by joint stock companies plummeted.
The shift in market share was primarily attributable to an 11% increase in mutual life premiums since 2007, whereas the total life market contracted by 17%. Therefore, European life mutuals recorded a significant increase in market share, from 19% in 2007 to 25% in 2011. The mutual non-life sector’s outperformance was less pronounced but still resulted in an increase in market share from 29% to 32% between 2007 and 2011.
Against this backdrop, it is not surprising that mutuals enjoy a very strong market position in a number of countries. In Denmark, Germany, Romania and Slovakia they account for 40-50% of total premiums. In the Netherlands and in Austria, their market share is above 50% and 60%, respectively (source: ICMIF).
A closer inspection of other relevant performance measures confirms the strong impression left by mutuals in the wake of the financial crisis. Between 2009 and 2011 Europe’s largest mutuals’ non-life business virtually stagnated. However, there are significant differences between Northern Europe (Austria, France, Germany and Sweden) and Southern Europe
EUROpEAn MUTUALS
0XWXDO�EHQHÀWVMutual insurers have stepped up their game over the past few years, says Bertrand Wollner, CEO of Signal Iduna Re.
LARGEST 10 EUROPEAN MARKETS% change in premium volumes 2007-2011
Global rank Total market Mutual market3 UK -27.6% +37.9%4 France -0.4% +7.4%5 Germany +8.1% +11.6%7 Italy +11.0% +32.1%10 Netherlands +4.9% +26.3%12 Spain +8.3% +22.5%16 Switzerland +7.5% +34.2%18 Ireland -17.3% +27.6%19 Russia +63.8% +285.9%20 Sweden +16.6% +4.1%Source: International Cooperative and Mutual Insurance Federation (ICMIF), Market Insights Europe 2011, p3
PERFORMANCE METRICS OF TOP 24 MUTUALS (from Austria, France, Germany, Italy, Spain and Sweden)
Total Top 24 Mutuals in !m 2009 2010 2011 DeltaGWP non-life 33,046 34,117 33,706 1.0%Technical result Non-life -191 -254 559 Net investment income 2,659 1,121 1,091 -29.5%Operating result before taxes -58 804 1’401 Mutual funds 32,902 34,845 35,815 4.3%Source: Signal Iduna Re (SI Re) research
Source: International Cooperative and Mutual Insurance Federation (ICMIF), Market Insights Europe 2011, p2
EUROPEAN MUTUAL PREMIUMS AND MARKET SHARE
350,000 Premiums !m Market share
300,000
250,000
200,000
150,000
100,000
50,000
0 20%2007
22.6%
2008
25.2%
2009
26.0%
2010
27.4%
2011
28.1%
25%
30%
30 CEO Risk Forum 2013 www.reactionsnet.com
(Italy and Spain). Based on our sample of firms, business volume in Italy and Spain contracted by 2.5% from 2009 to 2011. Net investment income declined by 46% and mutual funds slightly decreased by 0.5%. The Northern European countries’ mutuals fared markedly better, expanding premium volume and funds by 4.5% and 8.2%, respectively. Table 2 also reveals a return to healthy technical results in 2011 which was sufficient to cushion the impact of plunging net investment income and supported an overall increase in mutual funds.
Mutual resilienceThe financial crisis has arguably added to the attractions of the business model pursued by mutual insurers. They acquire capital through their policyholder members and not via capital markets. As a result, they tend to be more resilient to financial and credit crises. Mutuals are not focused on maximising returns for external shareholders. Instead, they adopt a stakeholder-oriented business model, with a primary focus on member-policyholders. Therefore, they generally engage in less risky activities, both on the assets and the liabilities side of the balance sheet, as compared with their joint stock peers. Of course, there were some individual mutuals that were severely affected by the financial crisis and its aftermath.
However, the unique features of the mutual insurance model became increasingly apparent and attractive in the post-crisis world where customers are considerably more wary of short-term oriented business models subject to the vagaries of the financial markets. In the eyes of an increasing number of policyholders, mutuals are viewed as the more sustainable and prudent business model. This perception is favoured by the fact that mutuals are generally smaller insurance businesses which tend to operate closer and are more aligned with the interests of their policyholders than their stock holding peers.
In summary, the financial crisis has highlighted the mutual business model as a potential alternative to an ‘anonymous model’ in two aspects. First in terms of governance, which is exercised by the policyholder owners rather than anonymous and independent shareholders; second, in terms of the underlying economic model. Investors in stock companies act according to their own financial targets and are quick to withdraw in times of turbulence or as other opportunities emerge. Therefore, in comparison with their mutual peers, stock companies tend to pursue more short-term and aggressive objectives.
In general, mutual insurers have stepped up their game over the past few years, responding to a more challenging operating environment. On the one hand, they have proved their mettle when it comes to external growth. The ability to capture opportunities in M&A as they arise is essential to the sector’s long-term viability. More recently, acquisitions played a major part in the growth of the sector, with sizeable M&A transactions recorded in the UK, Spain and Italy, for instance. Another example is Russia, where the mutual market has grown four times faster than the total market between 2007 and 2011, primarily reflecting acquisitions of local companies by foreign mutuals.
On the other hand, mutual insurers have developed ways of capturing economies of scale and scope in a manner that is consistent with their business model and existing ownership and governance structures. One specific approach is a merger between mutuals as a group of companies, which remain legally
separate entities, under unified control but without a parent company. Such mergers offer gains in operational efficiency as well as other commercial benefits such as a strengthened combined sales force, enabling the company to attract more members, enter new markets or offer new products to members. As such, M&A activities can partially offset mutuals’ disadvantage of not having easy access to (risk) capital.
One challenge facing mutuals is the difficulty in achieving cross-border co-operation with counterparts in other EU countries. Mutuals are still obliged to do this by setting up a holding company with joint-stock company structures, diluting their specific character of mutuality.
Since the 1990s the EU embarked on various initiatives to establish a legal framework enabling the creation of European mutuals. None of these initiatives has borne fruit so far. Member States were unable to agree on the scope of the proposed regulation, e.g. in the context of basic compulsory social security schemes managed by mutuals. These sensitive areas are not subject to the rules of the internal market or any specific EU legislation. Therefore, Member States insisted on remaining free to decide on the types of organisations to which a common European mutual legal form or statute would apply.
Essential role of reinsuranceThe structural challenges for mutuals highlight the crucial role of reinsurance. The vast majority of the 3,000 or so European mutuals are small insurance operations, focusing on national or even regional or local markets, sometimes specialising on one specific customer segment only. Cross-border expansion or collaboration is an option, which remains unavailable to most mutuals operating in the EU. Therefore, the scope for risk diversification is naturally limited and capital efficiency difficult to achieve. In addition, as mentioned above, mutuals have less access to capital other than policyholder funds.
Against this backdrop, mutual insurers are often heavily reliant on reinsurance in order to achieve higher levels of capital efficiency and to gain access to additional capital to absorb catastrophes and large losses.
Despite the overall health of the mutual sector, it is obvious that the protracted economic recession in Europe heightens their need for reinsurance. The distinct local and regional focus of most mutual insurers, often underpinned by a close alignment with the communities in which they are embedded creates a particular vulnerability to the economic fortunes of their home country. Another related risk factor is the sector’s close ties with local and regional financial institutions such as savings banks. Mutual insurers should monitor these risks very carefully and develop mitigation strategies.
For reinsurers, it is important to note that mutual clients are growing more demanding and versatile, too. For example, some of them have looked to tap the catastrophe reinsurance market by pooling their capacity and pursuing a common approach to risk transfer, either traditionally or alternatively through insurance-linked securities. There are even indications of collateralised sources of reinsurance capacity actively seeking to become part of mutual insurers’ reinsurer panels. Like any other cedants, European mutual insurers are watching the trends currently reshaping the global reinsurance market closely – and are ready to explore the opportunities arising from them.
EUROpEAn MUTUALS
