Vol. 2 | #13 : Opportunities and : … · exposures via captives as RMb continues internationalisation says FSDC HONG KONG Adrian Ladbury [email protected] @ComRiskonline

www.commercialriskonline.comVol. 2 | #13SPRING 2017

Insurance is too cheap, says Parima chairman

PARIMANicholas [email protected]

@ComRiskonline

F RANCK BARON, CHAIRMAN of the Pan-Asia Risk and Insurance Management

Association (Parima), has taken the unusual step of suggesting that insurance rates are too low.

Speaking to Commercial Risk Asia, ahead of the association’s conference in Manila, [see p14] he said risk managers must be prepared to pay the proper price for a proper insurance programme if they are to be taken seriously.

“Conventional insurance is too cheap and does not reflect the true value of what insurance should be,” said Mr Baron. “We do not value insurance enough because we are not willing to pay enough for it.”

He cited the lengthy negotiations that typically accompany the initial purchase or renewal of insurance programmes as a practice that seldom takes place in the purchase of other financial

products. “When you go to a bank for a corporate loan, there is limited negotiation on terms and conditions or interest rates but there is always a negotiation on insurance.

“I am not asking for more premium but the right price for the right product. At the moment, there are risk managers paying a lot for what is a piece of paper rather than proper protection.”

While rates are low and capacity is high for the off-the-shelf products, prices rise and capacity shrinks when companies seek more tailored coverage, notes Mr Baron. Furthermore, the willingness of some companies to seek the lowest premiums rather than the best protection is also affecting the commitment of some major insurers to the region, as evidenced by management changes and mergers and acquisitions.

DOUBLE-DIGIT GROWTHConsequently, risk managers

that are looking to build long-term and customised risk transfer programmes must be prepared for possible changes to the martketplace, said Mr Baron,

adding that not every international insurer can achieve the double-digit growth they anticipated when establishing their Asia-Pacific presence.

The effect of a long-lasting soft market has indeed become a concern for international insurers in the region. At Parima’s last conference in Singapore in November, a panel of international insurance heads told Commercial Risk Asia’s editorial director Adrian Ladbury that while they remain committed to the region, rates might be reaching an unsustainable level.

“They cannot get any lower,” said Kent Chaplin, chief executive, Lloyd’s Asia. He cited competition and overcapacity as the contributing factors. But risk managers must also play their part in changing the way insurance is managed. “We are in this together [insurers and risk managers],” he said.

Meanwhile, Rob Brown, chief executive of Axa Corporate Solutions, emphasised the need for risk managers to ensure they are getting the right insurance given that, in a soft market, some insurers may simplify or restrict their coverage in order to be comfortable giving insureds the price they are looking for.

Mr Baron is not the only Parima executive to be concerned about unsustainable rates. “My view is that this is a very unhealthy market and unless we see some stabilisation on the pricing and better understanding of the specific risks, there will eventually be a very significant systemic collapse of some key markets,” said David Ralph, speaking to Commercial Risk Asia last year as part of the Risk Frontiers Survey.

COUNTRY REPORT:PHILIPPINES: Opportunities and challenges in a growth economy 19-20

INDUSTRY INTERVIEW:PARIMA: Time for risk managers to seize the day .......... 16-17

Concern over lack of speciality risk coveru veteRan bRokeR dennis Mahoney warns that overcapacity in the international insurance market could lead insurers to exit certain high risk lines.

p3

Risk Frontiers surveyu the launCh oF ouR annual research project into the dynamics of risk management in the region with a focus this year on technology and ERM.

p5

Captives competitionu domiCiles jostle FoR position in the race to be the captives centre of choice for APAC’s risk managers.

p6

Workers’ rights violationsu FiRms aRe Failing to addRess an endemic abuse of human rights for workers across Asia.

p8

Rising risk for top execsu a seRies oF sCandals, landmark legal cases and new codes of corporate governance is leading to greater interest in D&O insurance.

p9

Legalu CommeRCial Risk asia’s regular legal column, in this issue delves into Australia’s moves to protect corporate whistleblowers with legislation due in 2018.

p11

Risk manager interviewu CommeRCial Risk asia talks to Shangri-La Group’s Parikshit Sen Gupta about emerging risks in the APAC market and how they should be managed.

p18

Commentu when Risk manageRs should StAnD up to their superiors.

p4

INSIDE–

Franck Baron

FSDC calls for government support in aggressive promotion of captives and wider insurance business

International risk managers could look to Hong Kong to manage Chinese exposures via captives as RMb continues internationalisation says FSDC

HONG KONGAdrian [email protected]

@ComRiskonline

T HE HONG KONG FINANCIAL Services Development Council (FSDC) has

revealed plans to fight back against progress made by Singapore in recent times, and to use tax breaks to attract reinsurance, marine and captive insurance business back to the domicile.

STRATEGICRisk managers in China, the

wider Asia-Pacific region and worldwide will be interested to see that the FSDC, formed by the Hong Kong Special Administrative

Region (SAR) government in 2013 to advise it on strategic direction, wants to establish Hong Kong as a “world class” and “leading” captive domicile by 2020.

This comes as Labuan revealed further plans to build its captive business and Guernsey unveiled further agreements signed with Chinese authorities to help them develop captive business in mainland China, and in future use the European island as the base for their international captive operations [see report on pages 6-7].

Interest in the captive opportunity in China and the wider region is currently very high and Hong Kong does not want to be excluded from this obvious opportunity to regain lost ground.

The FSDC has issued recommendations to the government that it hopes would

see five to ten captives licensed per year and 50 captives in total, mainly from mainland China, by 2025.

REGIONAL“This is a realistic goal given

the number of organisations in mainland China and the surrounding region that have the size, scale, risk profile and the relevant growth plans to utilise captives,” states the FSDC in its report, entitled Turning Crisis into Opportunities: Hong Kong as an Insurance Hub with Develop-ment Focuses on Reinsurance, Marine and Captive.

Specifically looking at the development of the captive sector, the FSDC makes the following proposals:

hong kong: p21

Chinese company faces record fine from US for breaking Iran sanctions

SANCtIONS

Nicholas [email protected]

@ComRiskonline

aCHINESE TELCO PROVIDER

is facing a $1.19bn fine for violating US economic sanctions, in a case that should act as a warning to international firms of the business risks associated with US sanctions and export rules.

Zhongxing Telecommunications Equipment Corporation (ZTE) fell foul of

sancTions: p21

Wilbur Ross

01-CR-Asia-2017-Mar-Front.indd 1 18/3/17 11:04:20

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www.commercialriskonline.com33Commercial Risk Asia

NEWS

MERGERS

Adrian [email protected]

@COMRISKONLINE

RISK MANAGERS IN ASIA-PACIFIC and worldwide had better prepare themselves for a rapid evolution in

the structure of the international insurance industry, which could well result in a shortage of specialty capacity in higher risk lines from the traditional market in the short term at least, according to veteran international broker Dennis Mahoney.

The international insurance and reinsurance market is currently awash with capital, as pension funds and other capital seek alternative forms of return in a persistently poor global investment market. There would have to be a truly cataclysmic market loss to force a rapid, global hardening across all lines as last seen in 2001 after the terrorist attacks on the US.

The outlook for interest rates and the need for leading listed companies to invest the bulk of their assets in safe but very low return government bonds means that there is little prospect of a dramatic turnaround in investment returns to compensate for ever tighter underwriting margins.

RESERVES RULESThese factors coupled with stricter

solvency rules, such as Solvency II in Europe that demands signifi cantly higher capital to be set aside for higher risk specialty lines of business, mean that the standard listed insurers and brokers need to manage their exposures and volatility very carefully.

This is leading to exits from higher risk lines and territories by top insurers and brokers, and the recent trend of shifting large chunks of risk into the arms of adverse development cover specialists such as Berkshire Hathaway, Enstar and Riverstone, according to industry veteran Mr Mahoney, CEO of Lloyd’s and international broker RFIB, making the keynote speech at the recent Dubai World Insurance Congress.

Mr Mahoney said there have been 21 such legacy deals with a value of $30bn since September 2015. Berkshire Hathaway’s recent $20bn deal with AIG being by far the largest.

Mr Mahoney also pointed out that the changing dynamics of the industry are leading to a signifi cant shift in the way the distribution model works.

The former CEO of Aon UK and current director of Bermuda-based specialty Ironshore said the underlying economics, rise of new capital and technology are seriously disrupting the traditional insurance to reinsurance chain. He added that this particularly demands a reaction from brokers that risk being marginalised, as corporate customers, for example, can now go direct to the primary insurance market or even capital markets via their captives.

The rapidly changing distribution model and market structure is evidenced by the arrival of Berkshire Hathaway Specialty Insurance in the international primary insurance space, in which it formerly only really played as a reinsurer. Warren Buffett’s group has also recently

moved into the direct commercial insurance space via National Liability & Fire, which offers direct workmen’s compensation cover to commercial customers.

It is also no coincidence that RFIB itself recently announced the appointment of Jack Gressier as a non-executive independent director of its holding company TopCo, and that TopCo announced the creation of Limehouse Agencies, a new underwriting platform

At the time of the launch, Mr Gressier said: “The traditional insurance model, on which the large brokers and carriers were built, is being transformed. The arrival of new, non-traditional capital in conjunction with new and advanced disruptive technology has created a new paradigm in risk transfer.

Mr Mahoney warned delegates at the Dubai event that they can no longer hope to be bailed out by the market cycle and a wholesale hardening in rates as in the past, as the market has changed. “Don’t think of this as a soft market. This is the new norm,” he said.

“You go back to the fundamentals of the insurance market. Insurance companies make money when premiums exceed claims. In the past, they could even make money on 100% combined ratios because they could make money on the fl oat (assets invested). This is no longer necessarily the case,” pointed out Mr Mahoney.

“The economic cycles of the past will not necessarily be repeated. If there is no infl ation and no interest rate rises of any signifi cance, all the investment…all the money is locked into incredibly low rates,”

he added.All this points towards a more

conservative approach from the traditional market, as they have to focus on the removal of volatility in the face of ever tighter margins, explained Mr Mahoney, hence the legacy deals.

“Everybody is trying to get risk off the past. AIG, Zurich and others are saying that they are not sure reserves are adequate anymore because of the investment income, so they have to get rid of the volatility. The number of legacy deals is huge. They have got to get rid of the volatility and there is no point holding onto the money because they cannot get the return [in a tightly regulated environment that demands a highly conservative strategy]. At the same time, capital is under pressure from Solvency II,” he said.

This environment also means that traditional players are having to focus very sharply on underwriting profi ts and manage their capital and capacity very carefully. Under the new solvency rules, this will inevitably lead to a retreat from higher risk and higher cost lines, particularly where historical data is scarce, argued the broker.

“Everyone is looking to Big Data to get rid of the volatility and if the data is not there, it is a problem. Hiscox just pulled back political risk and WR Berkley’s managing agency has reportedly suspended the underwriting of its London market marine business and placed the future of the $30m book under review. Such lines may only represent 5% of total income but 20% of the volatility so it’s diffi cult,” explained Mr Mahoney.

Lloyd’s-based Hiscox is a good example of this trend.

In its full year 2016 results presentation to analysts in February, the group explained that its more standard retail business is providing “bottom-line stability” for the group. The balance of insurance profi ts has changed over time to refl ect this.

The share of underwriting profi ts contributed by retail is up from 9% in 2012 to 56% last year. Meanwhile, the group’s more volatile and capital-thirsty big-ticket business (London market, reinsurance and insurance-linked securities) has seen its share down from 91% to 44% during the same period.

The group reported that rates are stable in retail but it faces “continued pressure” in big-ticket lines.

Hiscox said the greatest pressure is in the London market business, driven by marine and energy, aviation and big-ticket property. It would focus on the most profi table lines and reduce where rates are under most pressure.

Hiscox said it would “shrink where margin is evaporating”, such as in aviation and exit if necessary. It announced the closure of its political risks business, transfer of its healthcare business in Bermuda and sale of DirectAsia Hong Kong.

Mr Mahoney also sees a similar trend in the broking sector.

He pointed out that Aon, for example, has recently exited ten African markets and sold its employee benefi ts outsourcing business, as it focused on the safest and highest return business.

“Aon Africa was a diffi cult business and complex. Why do it? Greg Case (CEO of Aon) says ‘we do not need this and we need to reduce the volatility’. The group sells the employee benefi ts outsourcing business and fl oats off a big chunk where the margins are below target. This trend will continue as businesses increasingly get out of classes and territories that do not have the supporting data. Carl Icahn arrived on the AIG board and called for a wholesale breakup of the group, because he does not see why it needs to be global anymore,” said Mr Mahoney.

MERGER TRENDFor all these reasons, the broker

believes the recent spate of mergers and acquisitions in the international insurance and reinsurance market will continue. Some $22.6bn-worth of deals were announced last year alone, he pointed out.

He said these deals are not all necessarily about cost cutting in the traditional sense but rather, they make economic sense and refl ect the changing nature of the insurance model itself.

Bigger is better in some respects and the only response to the constant desire for improved returns. The bigger groups offer broader distribution capabilities and enhanced multichannel relationships with clients, he pointed out.

For the brokers, the pressure is on to truly harness the power of data and analytics, argued Mr Mahoney.

“There is an increased need for brokers to have access to and understand data as clients’ insurance programmes are increasingly now driven by Solvency II considerations, not cheapest price,” he said.

ECONOMIC DYNAMICS – RECENT LEGACY DEALS21 deals est. value of $30bn since September 2015

SEPTEMBER 2015: Aviva - Swiss Re - UK exposures$1.25bn

FEBRUARY 2016: Allianz Re (Fireman’s Fund) - Enstar - Asbestos, workers comp, construction defect, pollution, toxic tort

$1.1bn

FEBRUARY 2016: IAG (New Zealand) - Berkshire Hathaway - Asbestos and NZ quake ADLC

$429m

JULY 2016: QBE - Armour - Industrial disease, hearing loss,UK EL

$214m

DECEMBER 2016: QBE – Enstar - Asbestos , GL, workers comp, construction defect

$919m

DECEMBER 2016: Dana (auto parts manufacturer) - Enstar - Asbestos, environmental liability

$92m

JANUARY 2017: Hartford - Berkshire Hathaway - Asbestos, environmental liability, excluding UK

$1.5bnJANUARY 2017: RSA - Enstar - UK EL

$1.1bn

JANUARY 2017: AIG - Berkshire Hathaway - Adverse development cover commercial for long tail exposures

$20bn

Q1 2017: Hartford - Catalina - Asbestos, environmental liability, UK$588m

TBA: Axa - Riverstone$1.38bn

Source: Insurance Insider, RFIB Group

Shortage of high risk specialty cover feared as insurance industry rapidly evolves: Mahoney



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rUBicoN MeDia ltD © 2017Commercial Risk Africa is an online information service supported by a print newspaper published by Rubicon Media Ltd. Although Rubicon Media Ltd has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions or any opinions or advice given. This publication is not a substitute for professional advice on a specific transaction. All rights reserved. Reproduction or transmission of content is prohibited without prior written agreement from the publisher.

Events, dear boy, events…

W HEN ASKED TO name the biggest challenge to leadership, former British Prime

Minister Harold Macmillan replied: “Events, dear boy, events.” And events have certainly derailed the leadership ambitions of several senior politicians and corporate leaders in Asia-Pacific in recent weeks. In South Korea, Park Geun-hye has become the first president to be removed from office by the court.

An impeachment motion featured a full house of corruption and cronyism charges – abuse of authority, failure to protect citizen’s lives or uphold the constitution, violation of press freedom, receiving bribes and extortion in conjunction with long-term friend Choi Soon-sil. While the evidence was not deemed strong enough to prove all of the charges, Ms Park’s blocking of investigations, refusal to be questioned and non-attendance at any of the 20 court hearings did her case no favours.

And now, at the time of writing at least, Philippines President Rodrigo Duterte is fighting an impeachment motion proposed by political opponents for alleged corruption and abuse of power. The politician leading the impeachment charge has admitted that he faces an “uphill battle” to remove Mr Duterte but the allegations have come thick and fast in just a single year of his premiership, from overseeing anti-drugs death squads to hiding assets.

And then there is the US, where it is looking increasingly unlikely that President Trump will be able to make it through his first year without facing an impeachment charge.

What links all three leaders is the fact that they are surrounded by aides and advisers, yet have continued to have acted in cavalier ways that display more ego than judgment. But whose job is it to manage this personality risk? President Trump’s erratic leadership style has been notable in that it has forced so many of his cabinet secretaries to try and defend his initiatives and allegations, despite their seeming lack of logic.

What if this kind of dilemma were to happen in the corporate world? Scandals have emerged at a number of corporates in Asia-Pacific, and some of them have even had links to the political scandals noted above – such as Samsung and its links to Ms Park’s corruption charges. And of course, Mr Trump has come from a corporate rather than political background.

I would like to think that risk managers would consider it part of their role to highlight errors of judgment.

Many may only be at the beginning of their journey towards the boardroom, so not quite at the stage where they can call out their superiors for having bad ideas. But you have to begin somewhere.

Nicholas PrattEDITOR

COMMENT



SURVEY

RiSk FRontiERS SURVEY

Nicholas [email protected]

@ComRiskonline

iN 2016 WE LAUNCHED THE inaugural Risk Frontiers Asia Survey. During the course of the

year we interviewed more than 50 risk managers across the region and in a variety of industry sectors.

We asked them for their views on risk management and insurance – from the top three risks that keep them awake at night to the one insurance policy they would wish for were they to be in charge of an insurance company for a day.

We also canvassed their opinions on some of the classic issues for risk and insurance managers in the region – the use of global programmes, the amalgamation of general insurance and employee benefits and the development of the captives sector.

The results, which we published in November, with the help of our lead partners Generali and Parima, and presented at the Parima conference in Singapore, were illuminating.

Notwithstanding some regional disparity, notably between the more mature markets of Singapore and Hong Kong and the less developed domiciles of Vietnam or Myanmar, the use of global programmes and captives was broadly in line with the results from our surveys in Europe and Africa.

Risk management pRofession

This supports the idea that the risk and insurance management profession is rapidly developing and becoming as sophisticated as the more recognised markets in the US and Europe. For example, over 60% of risk managers employ a global programme or else plan to do so in the near future.

Similarly, the majority of managers use or plan to use a captive. And, in the course of conducting this year’s survey, it will be interesting to see whether these figures increase. So far this year we have seen the interest in captives increase in certain domiciles with ambitions to establish themselves as captive centres for the region and for both domestic corporates and multinationals expanding into Asia.

The Labuan Financial Services Centre in Malaysia has outlined plans to grow its captives sector. Hong Kong has done similarly and China continues to forge alliances with both insurance advisory firms like AM Best and offshore centres like Guernsey in order to further its own captives sector.

This year we want to use the survey once more as a barometer for the risk management profession by not only examining familiar issues like the level of boardroom access for risk managers but also

exploring the development of more sophisticated concepts like enterprise risk management.

How many managers have implemented an ERM programme? What does it look like and is there a standard definition for what has, in the past, been seen as a somewhat nebulous area of the profession? And, for those that do have an ERM programme in place, what benefits has it created?

CybeR & teChnologyLast year’s survey also asked

managers to identify their top risks and while natural catastrophes were an understandable concern in a region where the gap between loss events and insurance adoption is worryingly large, the survey showed that Asian risk managers are also concerned about the growing exposure posed by cyber and technology risks.

Consequently this year’s survey will feature a special focus on cyber risk and insurance. We will ask risk managers who is responsible for

cyber risk and how insurers and brokers help risk managers prevent cyber risk. What proportion of their cyber exposure is covered by insurance and where are the coverage gaps that they would like to see filled? Has there been any noticeable improvement in terms of cyber insurance either in capacity or pricing?

Or is cyber simply too big a risk to be left to insurers? Is it time that governments and other state bodies took a greater role in covering cyber exposure by establishing cyber pools in the same way we have seen occur for natural catastrophes and terrorism?

But we also recognise while technology has created new exposures for corporates, it is also instrumental in helping risk managers. We have seen the use of machine learning, artificial

intelligence, robotics and big data analysis make great inroads in other industries. Can the same technology be used to help identify, monitor and ultimately manage risks?

Do risk managers already employ these technologies or is it an area that remains aspirational rather than tangible? Do the products exist or is this another area that is visible only on the wish lists of our readers?

For example can wearable technology, a common feature in the Insurtech world and in the development of personal lines like health insurance, also be applied to the corporate risk world, such as in the example of warehouse workers and workplace accidents, or in the slips and falls monitoring for hotels and shopping centres looking to reduce their public liability?

The Asia region has a well-deserved reputation for technology advancement and adoption and we want to see if this is one area where risk managers and their companies can supersede their peers in other regions, rather than simply playing catch-up.

Unencumbered by the legacy of age-old infrastructure and the

inefficiencies of the insurance industry, we want to see if Asia has a genuine chance to forge new ground in the relationship between risk managers, their insurers and their intermediaries.

Are features like the annual renewal now redundant in an age of on-demand insurance? Will we ever get an insurance policy delivered upon its inception rather than six months down the line and after a claim has been made? Or will new technology render traditional insurance increasingly irrelevant?

One of our participants in last year’s survey, when questioned about the level of innovation in insurance, asked “where is our Steve Jobs?” Maybe that innovator will come from among the risk managers themselves and not their service providers.

Roundtables & inteRviews

So how will this year’s survey be conducted? The key to any research is the quality of the data. Therefore we will be looking to engage directly with as many of you as possible through face to face interviews.

We will also be conducting a series of roundtables in different local markets as we travel across the region, beginning here in Manila during the Parima conference.

Last year our roundtables in Malaysia, Singapore and Hong Kong proved enormously

beneficial both in terms of the survey itself and for our own understanding of risk management in the region and, more importantly, to understand the needs, demand and concerns of you, our readers.

We are also happy to announce Generali and Parima as our lead partners in the project once again.

The survey questions will also be available online for readers

to fill in. Anyone wishing to take part in ether the survey or a roundtable should contact [email protected] or vist www.commercialriskonline.com for more details

With the Parima membership passing the 1,000 mark earlier this year, there are many of you out

there and we hope you will help in making this year’s Risk

Frontiers Survey bigger and better than ever before.

Our survey says…“But we also recognise while technology has created new exposures for corporates, it is also instrumental in helping risk managers. We have seen the use of machine learning, artificial intelligence, robotics and big data analysis make great inroads in other industries...”

05-CR-Asia-2017-Mar-News.indd 5 18/3/17 11:05:35

www.commercialriskonline.com66Commercial Risk Asia www.commercialriskonline.com77Commercial Risk Asia

CAPTIVES@COMRISKONLINE

GUERNSEY HAS SIGNIFICANTLY STEPPED UP its ongoing effort to support the development of the Chinese captive sector and ensure that it becomes the number one destination for captives owned by Chinese companies as they expand

to Europe and beyond with more MoUs signed with leading Chinese institutions.

On 16 March Guernsey Finance, the island’s promotional agency, announced that on behalf of the island’s fi nance sector it had signed a Memorandum of Understanding (MoU) with the Beijing Airport Economic Core Zone (BAECZ).

The latest MoU was signed at a ceremony in Beijing between BAECZ Management Committee deputy director Jie Hu and Guernsey Finance chairman Lyndon Trott.

MEMORANDUM OF UNDERSTANDINGOnly two days earlier, it was announced that the

Guernsey Financial Services Commission (GFSC) had signed a Memorandum of Understanding (MoU) with the China Insurance Regulatory Commission (CIRC) of the People’s Republic of China.

Guernsey hopes that these latest agreements, coupled with its recent decision to set up a promotional agency in Hong Kong and the launch of a Mandarin website, will help attract Chinese insurers, captives and other fi nancial bodies to the island to manage their European and international business.

The captive concept is still relatively new to Chinese and wider Asian businesses but is fast catching on.

Guernsey is the leading European captive domicile that was home to some 804 international insurers at the end of 2015 compared with 797 at the end of 2014. Of these a total of 444 companies were captive protected cell companies.

Guernsey Finance said that the agreement with the BAECZ sees the parties agree to cooperate in the areas of captive

insurance market development, fi nancial innovation and international information exchange to “promote the viability of the Chinese captive market and wider communication between China and the global captive industry”.

The agency said that they will also encourage the efforts of Beijing Shunyi to become the regional captive domicile centre of China and support Chinese business in setting up captive insurance companies domestically and internationally.

As the agreement with BAECZ was signed Mr Trott said he was excited about the opportunities presented by the MoU.

“This MoU further refl ects our commitment to build and develop our cross-border communication with China, specifi cally the Beijing Airport Economic Core Zone – a key hub for China’s industrial, business and creative sectors,” said Mr Trott.

“Businesses in this zone are eager to learn the advantages of utilising captive insurance vehicles as opposed to insuring through the commercial market and Guernsey as Europe’s number one captive insurance domicile is perfectly placed to assist them with this,” he continued.

“Captives are going to be at the forefront of innovation in Asia’s insurance market and Guernsey is proud to be recognised

as a centre of excellence in this area. It has been nearly 10 years since we established our Guernsey representative offi ce in China and this MoU is yet another step forward in Guernsey’s development in the region,” added Mr Trott.

The BAECZ at Beijing Capital International Airport was created to boost the city’s airport-based economy and lead developments in fi ve key sectors: airport transportation and related industries, strategic emerging industries, industrial fi nance, business services, and culture and creative industries.

Deputy director Hu said he was “honoured” to receive a delegation from Guernsey.

“The signing of the agreement shows the close relationship and cooperation in captive insurance that exists between our two jurisdictions,” said Mr Hu.

KNOWLEDGE & EXPERIENCE“Based on the knowledge and experience that Guernsey has

from more than 50 years’ experience as an international fi nance centre, we are delighted to have such a partner to cooperate with and look forward to working with our friends from Guernsey after the signing,” he said.

The agreement between the GFSC and the CIRC signed two days earlier was the third insurance MoU struck between Guernsey and China in the last nine months.

The MoU was signed at a ceremony in Beijing between the CIRC’s director general, Bo Jiang, and the director general of the GFSC, William Mason.

GFSC explained that the agreement is designed to enable a fl ow of information between the regulators to ensure compliance with the relevant laws in each jurisdiction. This will help promote the “integrity, effi ciency and fi nancial soundness” of those doing business between the two places, said the supervisory authority.

Mr Mason commented: “I am delighted to have been able to sign this MoU which means that the GFSC now has MoUs with all of China’s fi nancial services regulators including the China Banking Regulatory Commission and the China Securities Regulatory Commission. As Chinese fi nancial services fi rms are expanding they are looking for a high quality domicile

Guernsey deepens links with Chinese captive sector as two more MoUs are signed

[FROM LEFT, SEATED] GFSC Director General William Mason and CIRC Director General Bo Jiang sign the regulatory MoU and [FROM LEFT, STANDING] Guernsey Finance Chairman Lyndon Trott and CIRC Vice Chairman Wenhui Chen.

Domiciles jostle for position as outlook for Asian captive market brightens

It is generally recognised that the captive concept is fast gaining recognition in Asia and that this region, and China in particular, offers a fantastic growth opportunity for those involved in this specialist business. It came as no real surprise therefore that while Hong Kong announces plans to seriously up its game in the captive and

reinsurance market, both Labuan and Guernsey made further moves to position themselves as the ‘go to’ centres for Asian captives. Adrian Ladbury reports

CAPTIVES

06-CR-Asia-2017-Mar-HK-Captives.indd 6 18/3/17 11:05:54


from which to conduct their international business and the signing of this MoU is symbolic of the openness of Guernsey’s insurance sector to Chinese-led business.”

The CIRC’s vice chairman, Wenhui Chen, who was present at the signing ceremony alongside Mr Trott, welcomed the progress represented by the MoU.

“The MoU between the CIRC and GFSC shows the strong relationship built up by an important jurisdiction from developed countries and another from the emerging markets. I hope the MoU will strengthen the relationship between China and Guernsey especially for the insurance industry and we look forward to cooperation after the signing.”

In June of last year, Guernsey representatives signed Memoranda of Understanding (MoU) with both the China Captive Alliance and the Kashgar government.

This was a statement of intent designed to facilitate business development initiatives between the two parties, international communication and information sharing.

GUERNSEY: NUMBER ONECharles Scott, managing director of independent insurance

manager Alternative Risk Management (ARM), signed the MoU on behalf of the Guernsey International Insurance Association (GIIA) and said at the time:

“Guernsey is Europe’s number one captive insurance domicile and is perfectly placed to offer guidance and share the expertise it has gained through more than 50 years of providing financial services. It also means that Guernsey is now well positioned to benefit from captive opportunities in the international arena that emerge from Chinese corporates.”

Guernsey Finance Asia representative Wendy Weng also signed an MoU on behalf of Guernsey’s insurance sector with the Kashgar government. Kashgar, located in the Xinjiang

autonomous region in northwest China, has become a dedicated centre for the country’s growing captive insurance sector thanks to the support of the People’s Bank of China, the CIRC, the China Banking Regulatory Commission and the China Security Regulatory Commission.

Ms Weng said: “China’s developing and evolving captive insurance sector recognises that there is plenty it can learn from Guernsey in this area and we are more than happy to help where we can. There is significant interest in China and Asia generally in doing business with Guernsey and we hope that this MoU will help to facilitate those business flows.”

In November of last year, Guernsey Finance also held a masterclass in Hong Kong to explain the advantages of using captives as opposed to insuring through the commercial insurance market.

Kate Clouston, director of International Business

Development at Guernsey Finance, said of the captive concept: “It’s a concept that is still being understood in China and Asia in general, but that is where future growth in the captives sector will be concentrated, as opposed to the US and Europe where their use and advantages are already well-known. Captives are certainly going to be at the forefront of innovation in Asia’s insurance market and Guernsey is proud to be recognised as a centre of excellence in this area. The interest shown by the audience at this event makes us believe there are significant opportunities for Guernsey practitioners to partner with corporate and individual clients in the region and to help build the market.”

In the last six months, at least three Chinese delegations have visited Guernsey to better understand the range of Guernsey’s specialist insurance, fund, private wealth and asset management products.

“Guernsey is Europe’s number one captive insurance domicile and is perfectly placed to offer guidance

and share the expertise it has gained through more than 50 years of providing financial services.

It also means that Guernsey is now well positioned to benefit from captive opportunities in the international

arena that emerge from Chinese corporates...” charles scott, alternative risk management, guernsey

CAPTIVES

Labuan targets captive sector as part of new niche strategy

l abuan international business and financial centre [Labuan ibfc] will intensify its efforts

to grow its captive insurance business this year along with other niche sectors such as leasing, commodity trading and wealth management.

The latest third quarter figures published by the ibfc showed that the number of captives based there had increased from 41 to 42. The ibfc hosts three insurance managers, 14 general insurers, 44 reinsurers and 79 brokers.

The ibfc stated: “The increasing interest among Asian corporates to establish captives as a risk management strategy also presents immense opportunities in offering risk solutions that complement onshore activities.”

BUSiNESS ENaBlERLabuan ibfc cEO, Danial Mah

Abdullah, said: “We believe the changes in the way cross-border investment and trade are conducted due to demands for greater transparency is a business enabler for Labuan ibfc.”

He added that Labuan is a “substance enabling” jurisdiction that adheres to the international protocols on transparency and exchange of information. This, added to the fact that Labuan ibfc is part of the larger global Malaysian “offering”, enables it to tap into these strengths to “power the next stage of its evolution.”

“We will be focusing on developing the niches with high growth potential and these sectors have been showing a positive upward trend in driving the midshore centre’s development in the recent years,” explained Mr Abdullah.

“These sectors are leasing, captive insurance, commodity trading and wealth management. for instance, our Q3 2016 numbers showed that there was an increase of 14% in commodity

trading companies operating in Labuan ibfc and about 13.8% increase in the establishment of private and charitable foundations,” he added.

Mr Abdullah added that Labuan ibfc continues to show “sustainable growth” with more than 13,000 companies incorporated last year, up 6.4% year on year. “This reflects the continued growth of the midshore centre despite the uncertainties in the global economy,” he said.

“We hope this growth trajectory will continue with the inflow of investors, global corporations and reputable service providers to the centre, especially from markets such as china,” said Mr Abdullah.

iNtEGRatiONHe added: “businesses operating in

Asia or out of the region can still find opportunities, if they take advantage of integration initiatives such as the ASEAN Economic community. Labuan ibfc could be the ideal entry point for these businesses into the burgeoning

market of ASEAN for substance creation.”

Transparency and compliance with global regulations is important to help attract serious and sustainable business, not least in the insurance sector. Labuan ibfc says that it is committed to being a top class and highly regulated environment.

“for Labuan ibfc, the need to conform to the international regulatory requirements has always been key to our principles and aims of ensuring the sanctity of the jurisdiction itself. The unrelenting demand for transparency provides an edge for Labuan as we have always and will continue to maintain a high regulatory and supervisory standard alongside our commitment to transparency,” it stated.

The ibfc added: “The requirement for transparency and the need to conform to initiatives such as cRS and base Erosion Shifting (bEPS) will soon be the new normal for all future financial activities.”

in October 2016, the Malaysian parliament passed the finance bill 2016 that adopted the OEcD’s bEPS 13 recommendations on transfer pricing documentation that are prepared by multinational companies.

Rules and guidelines on the preparation and submission of country-by-country reporting will soon be introduced by Malaysia.

COMPliaNCE“it is expected that more action

points will be adopted in due course, as part of Malaysia’s overall commitment to these standards,” says the ibfc.

Malaysia has also adopted the Anti-Money Laundering Act 2001 (AMLA 2001). “As a federal territory of Malaysia, the AMLA requirements are also imposed in Labuan ibfc pursuant to provisions of the AMLA 2001 as well, ensuring the highest level of compliance to the anti-money laundering and terrorism financing requirements,” added the ibfc.

labuan Financial Centre

06-CR-Asia-2017-Mar-HK-Captives.indd 7 18/3/17 11:06:03


Companies operating in Asia are being urged to give workers a voice to mitigate risk

worker’s rights

Ben [email protected]

@ComRiskonline

V IOLATIONS OF WORKERS’ HUMAN RIGHTS are endemic across most Asian countries, and initiatives to tackle the issue at source – and within supply chains – are not fit for purpose, warns UK-based consultant Verisk Maplecroft.

In its Human Rights Outlook 2017, the firm stresses that risks are particularly acute down the Asian supply chain, where modern slavery is rife and migrant workers are at particular risk of abuse. Supply chain blindspots are most prevalent where modern slavery risks are high, it adds.

Maplecroft advises companies and their risk managers doing business on the continent to liaise with workers directly and give them a voice to help solve some of these issues and reduce human rights violations throughout the supply chain.

Discussing Maplecroft’s recently published report, the firm’s supply chain analyst Hannah Broscombe pulled no punches in her assessment of poor human rights conditions for Asian workers.

“Rampant and systematic labour rights violations are endemic across many industries in most Asian countries,” she told Commercial Risk Asia.

Ms Broscombe explained that China, Myanmar, India, Bangladesh and Vietnam are some of the highest risk countries for human and labour rights violations, specifically in labour intensive sectors such as manufacturing, agriculture, fishing, domestic work and construction.

Migrant workers are particularly at risk of human rights abuses in Asian supply chains, said Ms Broscombe. “They generally have little opportunity for redress given their limited labour rights,” she said.

MODERN SLAVERYMaplecroft identifies modern slavery as a key risk for

businesses with supply chains in India, China, Thailand and Bangladesh. “Modern slavery can be particularly difficult for companies to detect, as complex supply chains and the prevalence of sub-contracting often obscure transparency,” said Ms Broscombe.

The Maplecroft report warns that at the global level, measures to assess and manage human rights supply chain risk are not up to scratch, with companies not carrying out appropriate due diligence or acting on audits.

“The ability of business to conduct effective human rights due diligence is fundamentally flawed, because safeguards designed to identify and prevent violations in supply chains are too weak,” the report warns. “Our number one issue across the board in 2017 is the limitations of the social audit. We highlight an initiative led by major auditing firms to improve trust in audits by accrediting auditors; but since many firms do not analyse or act on their audits, brands are highly exposed to violations, even among the suppliers they assess.”

Lack of supply chain due diligence to track and mitigate human rights violations is rife within Asian companies and, as a result, is a big risk for their supply chain partners.

“Human rights due diligence as a concept is relatively new in Asian business circles and remains a work in progress,” said Ms Broscombe.

“As many of the worst human rights abuses happen deep down the supply chain in primary industries where large multinationals have little oversight, thorough human rights due diligence should be part and parcel of any company doing business in Asia,” she added.

Ms Broscombe explained that while new laws, such as the UK’s Modern Slavery Act, are requiring companies around the world to report on efforts to eradicate modern slavery from their direct operations and supply chains, there is not the same push from Asian governments.

Voluntary corporate social responsibility initiatives, such as those promoted by Association of Southeast Asian Nations [ASEAN] institutions, are “insufficient”, she added.

Companies face huge problems in promoting social dialogue among suppliers. According to Verisk Maplecroft data, workers cannot join or form independent unions in at least 84 countries around the world.

The problem is acute in garment-exporting countries that are heavily concentrated in Asia. China, Pakistan, Bangladesh and Indonesia – all leading garment-producing nations – are classed as “extreme” or “high” risk in Maplecroft’s index, which measures freedom of association and collective bargaining globally.

Workers and trade union officials calling for better working conditions in countries where the right to organise is restricted, often face harassment and abuse. The Bangladesh garment sector is a key example, where 35 trade unionists have been arrested and jailed since December 2016 for participating in wage protests and work stoppages.

Maplecroft believes that strengthening the ability of workers to unionise and voice their concerns is key to improving working conditions in Asia, reducing workers’ rights violations and mitigating the risk of nasty surprises

in the supply chain. “A key dilemma facing multinational companies with

supply chains in Asia is how to promote the voice of workers, in order to improve working conditions in countries where restrictions on freedom of association and unionisation apply,” said Ms Broscombe.

A collaborative approach between workers and multinational companies to put pressure on manufacturers to respect trade unions is needed, she continued.

“Improving ‘worker voice’, by finding ways for workers to talk directly to brands, will keep moving up the agenda in 2017 as companies seek ways to prevent labour violations deep in their supply chains, where they have less leverage. Two recent headline events – the Rana Plaza building collapse in Bangladesh and the discovery of endemic slavery aboard Thai fishing vessels – alarmed brands because they were taken unawares by scandals that were open secrets in the countries in question,” notes Maplecroft in its report.

The International Labour Organization and non-govern-mental organsiations argue that had workers been better protected, without fear of retaliation, and had communication with workers been better, brands might have had early warning of such supply chain risks.

SUPPLY CHAIN RISK“As scrutiny of supply chains grows, more brands are

likely to turn to social dialogue to guarantee decent working conditions,” adds Maplecroft.

Adam Lee, organising and campaigns director at global trade union Industriall, tells Maplecroft that if companies really want to know what is going on in their supply chain – violations of wages, working hours, child labour and forced labour – they need to work with an organisation that represents workers.

“You can’t just send in an auditor every three months. If companies want to clean up their supply chains they need more transparency – workers need a role in the process,” he advises.

Some companies are tackling the problem by using technology to enable workers to raise concerns discreetly and anonymously, explains Maplecroft.

“Technology offers innovative ways to communicate with individual workers direct, allowing brands to hear in real time what is happening on the shop floor. Platforms that allow workers to report if wages are being withheld, for example, are a safety check on the validity of audits and give workers a voice when unions are restricted. However, virtual dialogue leaves workers highly vulnerable to retaliation if their confidentiality is compromised. And to respond to virtual complaints and address violations, brands need independent unions and suppliers to work together,” states the firm.

news analysis

rights

Firms failing to tackle endemic violations of workers’ rights across Asia

“Workers and trade union officials calling for better working conditions in countries where the right to organise is restricted, often face harassment and abuse. The Bangladesh garment sector is a key example, where 35 trade unionists have been arrested and jailed since December 2016 for participating in wage protests and work stoppages...”

08-CR-Asia-2017-Mar-Interview.indd 8 18/3/17 11:06:18


D&ONicholas [email protected]

@ComRiskonline

A SERIES OF SCANDALS AT THE very top of some of Asia’s largest and most high profile corporates have demonstrated the need for corporates to

consider their D&O insurance policies.Interest has also been heightened by a

landmark tribunal currently taking place in Hong Kong, which could have serious implications for D&O insurance in the region.

The case involves a Chinese state-backed conglomerate Citic, formerly known as Citic Pacific, which specialises in mining. The company ran into trouble back in 2008 when the chairman Larry Yung discovered a HK$15bn loss through unauthorised currency hedges, leading to the resignation of two officers.

In 2014, the Hong Kong Securities and Futures Commission (SFC) brought a case against five of the directors for failing to disclose the losses, seeking HK$1.9bn ($245m) in compensation for more than 4,500 of its investors.

CLASS ACTIONS COMINGA judgment is expected late this quarter

and, if successful, the case could trigger a raise in rates for what is still an emerging area of insurance in the region. Of particular concern is the possibility that a ruling in favour of the SFC could open the path to a series of similar claims, akin to class-action lawsuits, which are currently a rarity under most legal systems in the region.

“If the case set a precedent and becomes a systemic risk, it may have the potential to reset the D&O pricing in this market,” said Lei Yu, Hong Kong chief executive at Marsh, in a report in the Financial Times.

The article also cited Zurich, AIG, Chubb and Allianz as some of the insurers most exposed to this case.

The D&O insurance market is currently worth around $100m and premiums are low, due to high competition and low claims. But one large claim would most likely lead to repricing in the market, with insurers raising their premiums to cover their losses.

The case against Citic is not the only one brought by the SFC in recent weeks. In January, it filed lawsuits against UBS, Standard Chartered, KPMG and two company directors over alleged market misconduct regarding the initial public offering of China Forestry Holdings.

The SFC has also announced an intention to file another lawsuit on behalf of investors against the directors of HK-listed company Hanergy Thin Film Power.

And former Hong Kong chief executive Donald Tsang is currently behind bars, awaiting a likely jail sentence for misconduct in office and deliberately concealing a conflict of interest, further underlining a stricter treatment of corporate misdeeds from Hong Kong regulators.

Meanwhile, top executives at two of the most celebrated corporates in the region have been skewered by scandals. South Korea-based Samsung and Japan-based Toshiba have suffered serious blows.

In February, the chairman of Japanese conglomerate Toshiba, Shigenori Shiga, was forced to resign following a $6.3bn loss accrued in its nuclear business, which not only

threatens the solvency of the company and has forced it to put its profitable chip-making business up for sale, but could also lead to a downgrade in Japan’s sovereign rating.

Toshiba’s woes were further exacerbated when it failed to report its third-quarter earnings accounts on time, citing auditing problems. The company’s share price tumbled by 10%.

These latest troubles come less than two years after a massive accounting scandal was uncovered at the company where, over a period of six years, pre-tax profits were inflated by more than $1.2bn.

South Korean electronics giant Samsung faces its own executive troubles. The company’s head, Jay Y Lee, is currently in jail facing charges of bribery and embezzlement over his part in a corruption scandal that has already led to the removal from office and impeachment of South Korean president Park Geun-hye.

Yet, despite the high profile corporate scandals and their implications – tighter regulations, punitive penalties, shareholder litigation – the take-up of D&O insurance is still relatively low among Asian executives, in comparison to other regions.

This disparity has not gone unnoticed by specialty insurers in the region. A report issued in November by Allianz Global Corporate & Specialty (AGCS) – D&O Insurance Insights: Management liability Today –

highlighted the growing exposure for Asian corporate leaders.

The report cites increasing oversight in many Asian markets – Hong Kong authorities have commenced proceedings against public companies that failed to disclose price sensitive information, and in Singapore it is now a criminal offence for a director to use their position to gain a financial advantage.

“Regulator activism has been on the rise around the world. Regulators increasingly share resources and information both nationally and across borders,” says Damian Lynch, regional head financial lines Asia, AGCS.

“Some Asian countries have increased director obligations, while regulators have become more aggressive and fearless in attempts to stamp out corrupt practices,” he says.

CORRUPT PRACTICESOf note among Asian countries taking

recent action against corrupt practices are the Chinese response to GlaxoSmithKline’s 2013 bribery case, for which the company was fined nearly $500m, and charges of corruption against the Japan Transportation Consultants in 2014 for bribery activities in Vietnam, Indonesia and Uzbekistan, for which the company was ordered to pay around $1m in penalties.

Corporate litigation has also increased in many other states, such as Japan and Thailand. “Many Asian countries could see larger D&O liabilities in future, owing to changing attitudes towards corporate governance and accountability, increased regulatory activity and a growing compensation culture,” states the report.

Insurers have also highlighted the growing cyber threat as another cause of D&O liability. AIG has written about the need for company directors to include a provision to protect against liabilities related to cybercrime.

“AIG sees cybercrime as one of the most pressing threats facing boards today,” wrote Jason Kelly, head of Asia-Pacific financial lines at AIG Asia-Pacific, on Hong Kong news website EJ Insight. “Nowhere does cybercrime represent more of a risk than in Asia.”

news analysis

D&O

D&O risk on the rise in AsiaCorporate scandals, landmark tribunals and new corporate governance codes are increasing executives’ exposure

Singapore forms council group to review corporate governance code

singapOreAdrian [email protected]

@ComRiskonline

THE MONETARY AUTHORITY OF SINGAPORE [MAS] has formed a Corporate Governance Council to review the Code of Corporate Governance (CG

Code). The council is chaired by Chew Choon Seng, former chairman of the Singapore Exchange.

The new chairman of the council said it is important that Singapore-listed companies go beyond “mere box ticking” and “boilerplate” explanations, engage meaningfully with their stakeholders and implement corporate governance practices that lead to long-term

and sustainable business performance.The Singapore corporate governance code was

last reviewed in 2012. Changes were introduced to strengthen board independence and enhance remuneration practices and disclosures.

The MAS pointed out that corporate governance practices globally have continued to evolve since then. It said it has monitored these market developments and industry feedback on how its code could be improved.

“A review of the CG Code and practices is thus timely to ensure that they continue to support sustained corporate performance and maintain investor confidence in our capital markets,” stated the MAS.

The authority said the new council will consider how the “comply-or-explain” regime under the CG Code can be made more effective.

It said this would include an improvement in the quality of companies’ disclosure of their CG practices and explanations for deviations from the code. The

council will also propose mechanisms to monitor the progress made by Singapore-listed companies as they strengthen their corporate governance practices, stated the supervisor.

The new council members are drawn from various stakeholder groups, in a move the MAS hopes will provide a “broad and diverse” perspective on corporate governance matters. Representatives from MAS, the Accounting and Corporate Regulatory Authority and the Singapore stock exchange will also be appointed to the council.

The council will consult the public on its recommendations, including changes to the CG Code, before finalising them.

Mr Chew said: “We need to ensure that our CG Code remains relevant and progressive, and supports sustained business growth and innovation. The review of the CG Code will therefore take into account changes in our corporate landscape as well as international developments. With market participants paying greater attention to the corporate governance practices of listed companies, companies are now under increasing pressure to become more transparent and accountable to their stakeholders.

“It is important for our listed companies to go beyond mere box ticking, and boilerplate explanations. They must be able to engage meaningfully with their stakeholders and implement CG practices that lead to long-term sustainable business performance.”



japanAdrian [email protected]

@ComRiskonline

T HE DECISION BY Japan’s leading non-life insurers to significantly expand their international operations

through high profile acquisitions in the past couple of years, has helped them to offset higher levels of financial leverage and manage their interest rate exposures. The deals were not cheap but made economic sense, according to AM Best.

The expansion of the Japanese insurers in recent times has been quite dramatic. In 2015 alone, Japanese insurers had spent a huge $22bn by October on overseas acquisition. This compared with $6bn in 2014 and was more than three times as much as any year since 2000.

In the non-life sector, the biggest deal was Tokio Marine’s acquisition of US-based HCC Insurance Holdings in 2015 for $7.5bn. Added to Tokio Marine’s 2007 acquisition of Lloyd’s agency Kiln for £442m, this gives the insurer a truly global footprint the specialty market. Tokio Marine paid a premium to share price of 35.8%.

Also that year, Mitsui Sumitomo (MS&AD) acquired London-based Amlin for £3.5bn, thus gaining important access to the London, Bermuda, European and Miami markets. Mitsui paid a premium to share price of 36% to gain this footprint.

And in late January of this year, shareholders of Endurance Specialty – the Bermuda-based international insurer – voted in favour of its acquisition by Sompo Holdings for $6.3bn, a premium to share price of 40%.

The Japanese insurers have been prepared to pay such a premium for these deals because growth in their core domestic market is limited, interest rates remain very low in Japan and the Bank of Japan’s monetary stimulus strategy means that money is very cheap.

STABLE IMPROVEMENTSThe big Japanese insurers recently posted their

third-quarter results. AM Best notes that the Japanese non-life insurance groups have reported moderate increases in their financial leverage but adds that interest rate coverage remains stable because of improvements in their operating results, partly driven by the recent international acquisitions.

The credit rating agency says the profitability of the three major non-life insurance groups improved during the nine months ending December 2016, mainly because of the absence of large-scale catastrophe losses in the domestic market. “Improved underwriting results of the domestic non-life insurance market and growing contributions from overseas insurance businesses fully offset the decrease in interest and dividend income,” states the agency.

“The major non-life insurance groups have reported positive growth in terms of premium income and earnings

from their overseas businesses, from organic growth as well as the consolidation of recently acquired operations, particularly at Tokio Marine Holdings,” notes AM Best.

“In recent years, the non-life insurance groups have made large-scale acquisitions in overseas markets, which boosted their earnings. Although the risk-adjusted capitalisation has been negatively affected by the large amount of goodwill from these acquisitions, the non-life insurance groups still maintained strong levels of risk-adjusted capitalisation due to their efforts to reduce investment risk and the issuance of subordinated debt,” continues the credit rating agency.

“In particular, the groups have effectively taken

advantage of the low interest rate environment during the period by reducing funding costs in debt issuances,” adds AM Best.

According to the agency’s analysis, the financial leverage of the combined non-life insurance groups increased from 4.5% in March 2016 to 6.1% at the end of December. The level of leverage varied across groups during this time.

It points out that debt issuances during the past nine months were intended to fund overseas acquisitions and support the capital position of the group companies, in particular life insurers, against potential risks such as a sudden rise in interest rates. Sompo, for example, issued hybrid bonds in the domestic market in July 2016 to prepare for a potential acquisition.

In October, the group announced it would acquire Endurance and this would be partly paid for by the hybrid bonds.

ENHANCED CAPITALMore recently, both Tokio Marine

and MS&AD issued subordinated bonds at the operating level and holding level, respectively.

“The proceeds are meant to enhance the capital position of each company’s domestic life insurance operations. Despite the relatively small contributions to the groups’ earnings and capital, the life insurance operations make up most of the

groups’ interest rate risk,” states AM Best. “Although these life insurers have relatively well

managed asset/liability matching compared to the traditional life insurers in Japan, a sudden rise in interest rates would significantly reduce their regulatory capital position, given their high exposure to long-duration bonds in their investment portfolios,” it adds.

The rating agency points out that the Japanese non-life insurance groups have been more active debt issuers in recent years.

Following the big catastrophe losses in 2011, a number of companies swiftly issued hybrid bonds to shore up their capital positions.

But the hybrid bond issuances during the past year have been employed ahead of large acquisitions or to take advantage of the low interest rate environment prior to a potential increase in rates, comments AM Best.

“The Japanese non-life insurance groups are expected to remain active in the debt market to support the growth and manage risks of the group companies. Their diversified businesses should provide stable operating results, which will support sufficient interest coverage,” states AM Best.

“Group-based capital management is becoming more important in managing specific risks that each operating company faces. These groups intend to maintain sufficient capitalisation at their operating subsidiary levels while keeping limited available capital at the ultimate holding company. In this respect, the diverse capital needs that have emerged at the operating company level require a more active role at the ultimate parent company in raising capital and allocating it appropriately,” concludes AM Best.

news analysis

japan

Japanese insurers’ global expansion justified by improved

operating results: AM Best

“The Japanese insurers have been prepared to pay such a premium for these deals because growth in

their core domestic market is limited, interest rates remain

very low in Japan and the Bank of Japan’s monetary

stimulus strategy means that money is very cheap...”

John Charman

10-CR-Asia-2017-Mar-Japan.indd 10 18/3/17 11:06:43

LEGALPERSECTIVE


Corporate whistleblowers call for protection and compensation

AUSTRALIA

Dean Carrigan & Yvonne LamClyde & Co, Sydney

@CLYDECONEWS

PROTECTION FOR CORPORATE whistleblowers is on the increase. For example, China

and India have recently followed the US lead in enacting legislation. Despite enhanced rewards and protections, whistleblowing laws also pose signifi cant risks and corporates, their risk managers and their insurers will need to be aware of the changing legal landscape in all of the territories where they operate.

In November 2016, the Australian government announced that it would be implementing enhanced legislative protections for corporate and public whistleblowers by mid-2018.

As part of the Australian government’s commitment to legislative reform for whistleblower protections, an inquiry into corporate and public sector whistleblower protections in Australia by the Joint Parliamentary Committee on Corporations and Financial Services is due to report on 30 June 2017.

SUBMISSIONSThe fi rst phase of the inquiry

was completed in February 2017, with the Parliamentary Committee conducting its fi rst public hearing and receiving more than 30 submissions from various industry groups, individuals and law fi rms.

Under the current whistleblower regime in Part 9.4AAA of the Corporations Act 2001 (Cth) (the Corporations Act), corporate whistleblowers are only protected from civil or criminal liability and victimisation if they:◆ make a disclosure in good faith

to an appropriate person (ie

ASIC, the company’s auditor, or a director or senior manager of the company);

◆ identify themselves by name; and

◆ have reasonable grounds to suspect that the company by which they are employed or contracted to may have breached the Corporations Act or the Australian Securities and Investments Commission Act 2001 (Cth).The information disclosed and

the identity of the person making the disclosure is also treated as confi dential by the person to whom a protected disclosure is made.

It is currently necessary for corporations to design and implement their own whistleblower protection system, as the legislative regime in Australia does not provide all the relevant protections to whistleblowers.

Legislative reform has arisen from criticism of the existing legislative provisions, which have not offered adequate protection to corporate whistleblowers, who have exposed recent misconduct in the fi nancial services industry such as the high-profi le issues in

the Australian banking, fi nancial planning and life insurance sectors.

The main criticism has been that Australian corporate whistleblowers have no right to compensation, where they have lost their jobs and livelihoods after blowing the whistle at their former employers and then encounter diffi culties in securing employment elsewhere.

The key message from the Australian government is that the enhanced whistleblower protections which are on the radar for corporate and public sector whistleblowers will be at least as strong as the protections which have been recently legislated for union members and offi cials who become whistleblowers, under the Fair

Work (Registered Organisations) Amendment Act 2016 (Cth).

If the new union whistleblower protections are treated as a baseline for the changes ahead for the corporate sector, it is likely that any regime proposed will provide for anonymity, prescribed timeframes for dealing with issues raised, protection for witnesses, a positive duty on organisations to take steps to prevent victimisation and the potential awarding of damages for victimisation.

While the potential award of damages for victimisation under the proposed reforms will go some way towards compensating corporate whistleblowers who suffer detriment, it is also possible that

the future Australian legislative regime may contemplate “bounties” for whistleblowers, similar to the highly lucrative bounties which are currently available for whistleblowers in the US, such as the recent payout of US$3.75 million by the US government to the fi rst Australian employee to receive a US whistleblower bounty in relation to a tip off to US investigators about BHP Billiton’s overseas activities several years ago.

ROBUST REGIMEThe potential for an Australian

bounty rewards programme is being considered by the Joint Parliamentary Committee on Corporations and Financial Services inquiry.

Australian companies will need to start considering whether their existing whistleblower policies and frameworks will still be suitable under the more robust regime. Once the enhanced protections are put into place, they are likely to motivate more whistleblowers to come forward in reporting corporate misconduct, especially in an environment where lucrative bounty rewards may be on offer.

LEGAL EYE: THE BRIEFS

Regulatory boost for Asian growth companies

THE MONETARY AUTHORITY OF SINGAPORE [MAS] PLANS to strengthen the fi nancing channels for “next generation Asian growth companies” and build technology infrastructure to support innovation, reports law fi rm Pinsent Masons. The authorisation process and regulations on venture capital [VC] managers should be simplifi ed to help startup businesses, MAS said.

VC and private equity [PE] assets under management in Singapore have grown by an average 30% per year in the past fi ve years, MAS said, “but the industry is still at an early stage

and there is scope to expand both the number and variety of VC managers”.

New tax treaty between India and CyprusCYPRUS AND INDIA HAVE SIGNED A NEW DOUBLE TAX

treaty which is expected to foster increased use of Cyprus as a gateway for investment both into and out of India, according to lawyers at Harneys. The new treaty entered into force on 14 December 2016, with its provisions being effective in Cyprus as of 1 January 2017 and in India as of 1 April 2017. Simultaneously, the Indian tax authorities have rescinded the designation of Cyprus as a notifi ed jurisdiction with retroactive effect from 1 November 2013. This means that a refund can be claimed for excess withholding tax paid during that period by eligible claimants.

HSBC faces fresh investigations in India

BRITISH BANK HSBC HAS SAID IT WAS FACING A FRESH investigation by tax and law enforcement agencies around the world, including India, the US, France and Belgium, for alleged tax evasion, money laundering and unlawful cross-border banking solicitation, reported Business Line. The bank has set aside $773 million to deal with the fi nancial impact of these investigations. In February 2015, Indian tax authorities issued summons and a request for information to an HSBC company in India. In August 2015 and November 2015, HSBC companies received notices alleging that the Indian tax authority had suffi cient evidence to initiate prosecution against HSBC Swiss Private Bank and an HSBC company in Dubai for allegedly abetting tax evasion of four different Indian individuals and/or families.

“It is currently necessary for corporations to design and implement their own whistleblower protection system, as the legislative regime in Australia does not provide all the relevant protections to whistleblowers...”

11-CR-Asia-2017-Mar-Legal.indd 11 18/3/17 11:06:57


insurance products

productsNicholas [email protected]

@ComRiskonline

Allied World launches three PI products for Australian market

S WITZERLAND-BASED INTERNATIONAL insurance and reinsurance group Allied World continues its

expansion in the Australian market with the launch of three new professional liability products.

These are D&O liability insurance, architects and engineers professional indemnity insurance, and miscellaneous professional indemnity (PI) insurance.

The miscellaneous PI cover is designed mainly for professional services providers such as interior designers, management consultants, advertising agents,

educational institutes, accountants, technology firms, architects, surveyors and engineers of all disciplines.

The products are targeted at Australia-based small, medium and large companies and have a

maximum capacity of AUD$10m.Kym Beazleigh, vice-president,

professional liability, Australia, said: “The launch of these three primary policies represents the next step in Allied World’s journey towards becoming a highly recognised provider of professional liability products, solutions and claims service in the Australian market.”

Mr Beazleigh added: “We will continue to leverage our global capabilities to strengthen our offerings in Australia and build on our existing success across the region, with a focus on delivering holistic, tailored, high quality solutions to our clients across a broad range of industries.”

RMS develops agri-risk models for India and China

RISK MODELLING FIRM RMS HAS added agricultural risk models for India and China to its suite

of emerging risks models. The London-based firm said that it also plans to expand coverage across Asia-Pacific and the Americas.

RMS said that the addition of the models is part of the company’s “strategic focus” to help its clients close the coverage gap.

“RMS is very well positioned to develop agricultural risk models and help ramp the industry’s understanding of the risk,” said

Mohsen Rahnama, chief risk modelling officer and general manager of the RMS models & data group.

“We understand the framework and principles of the models, and will combine our 30-plus years’ experience in climate hazard modelling with the latest data collection and processing technology, and scientific understanding of the risk, to build the next generation of agricultural risk models for the industry,” he added.

Mr Rahnama said that the modelling work that the firm does that lies outside its long-established analysis of catastrophe risk for the insurance industry is important in this field.

“The recent conclusion of our drought stress-testing project for the banking industry has given us deep insight into the drivers of water scarcity, which is a key hazard for agricultural risk,” he added.

RMS said that as part of its model development, its parent company DMGT has transferred all the model assets from its AgRisk business to RMS.

The firm said that will leverage the capacity of its global model development operations to provide a complete agricultural risk management service for local and global (re)insurers, such as “high-touch” modelling support, analytical services, training and event response.

“Countries throughout Asia-Pacific are experiencing rapid growth. RMS is committed to helping our clients’ success in these dynamic markets by providing a comprehensive suite of risk and analytics solutions,” said Steve Hurcom, senior vice president, client development Europe and Asia. “Agricultural risk is one of the top concerns and big opportunities for our clients in Asia-Pacific and Latin America, and they need robust models to manage the risk as part of their overall enterprise risk,” he added.

Asia-Pacific and Latin America are strategic priorities for RMS. The company plans to release significant modelling capability this year for local and global clients that underwrite business in these regions.

The new agricultural risk models for India and China will be followed in April by updated earthquake models for Indonesia and the Philippines; four new earthquake models for Singapore, Malaysia, Thailand and Vietnam; in addition to wind and typhoon models for Taiwan and South Korea.

Sompo develops online reputation insurance for corporates

jAPANESE INSURER SOMPO HAS launched a new insurance policy designed to protect a business from

online attacks on its reputation, otherwise known as ‘enjo’.

The practice, also known varyingly as flaming or doxing, refers to mass, sustained attacks via social media or the flooding of websites with negative comments. Typically these attacks emanate from the fans of celebrities maligned by news websites or public outrage at corporates that become engulfed in scandals of their own making.

Japanese media cites the examples of a tabloid newspaper Friday which became the target of an ‘enjo’ attack after accusing actor Hiroki Narimya of cocaine abuse.

Well established corporates have also fallen foul of enjo assaults including McDonald’s Japan following the revelation that it had been selling tainted chicken to customers.

Sompo’s policy will offer financial compensation to the targets of such online attacks, regardless of whether the reasons

for the online assaults are groundless or based on fact. The policy does have some exclusions though and will deny any claims in the case of what it deems to be deliberate trolling.

According to Japanese daily Nikkei, in the event of any viral negativity that is harmful to a brand or image, Sompo will cover the cost for a positive media campaign, research into why the negativity began and any public apology that may be required.

Premiums will run from between 500,000 to 600,000 yen and of course in the event of any deliberate trolling on the part of policy holders, any claims will be denied.

AXA launches global parametric insurance unit

AXA HAS LAUNCHED A UNIT dedicated to parametric insurance products, called AXA Global

Parametrics. Parametric insurance is so called because it does not indemnify the pure loss, but makes a payment upon the occurrence of a triggering event.

The triggering event can be wind speed or temperature, for example, which could precipitate a loss or a series of losses. A wide variety of risks can be covered through parametric insurance, from adverse weather affecting construction businesses to causing crop losses for farmers.

An advantage of parametric cover is that it pays out quickly and can be used to protect against risks not always covered by insurance. A windstorm might not damage a grower’s crop but it might prevent the crop from being delivered to the port.

AXA’s parametric insurance team has been part of AXA Corporate Solutions since 2014, but the newly created AXA Global Parametrics will broaden the range of solutions to better serve existing customers and expand its scope to SMEs and individuals, AXA said.

Tanguy Touffut, previously global head of parametric insurance at AXA Corporate Solutions, was appointed CEO of AXA Global Parametrics, effective 1 March, reporting to Gaëlle Olivier, chief executive of AXA Global P&C.

The parametric approach offers a simple, accurate, transparent and affordable insurance solution to clients worldwide, AXA said. For instance, AXA can provide custom covers based on weather or vegetation indices, using high resolution satellite data to measure soil moisture or plant development.

AXA Global Parametrics has been chosen by AXA as a testing ground for its blockchain initiative.

Products focus

Kym Beazleigh

12-CR-Asia-2017-Mar-Feature.indd 12 18/3/17 11:07:10


ON THE MOVE

appointmentsNicholas [email protected]

@ComRiskonline

HDI Global plans expansion in ASEAN and Australasia property business

HDI GLOBAL SE IN ASEAN AND Australasia, the regional operation of the German insurance group, plans

to further expand its ASEAN and Australasian property insurance book and has announced the transfer of Graham Silton from Australia to Singapore to help drive the strategy.

Mr Silton will run HDI Global’s property business out of Singapore. He was previously based in Sydney as underwriting manager property ASEAN & Australasia.

Mr Silton joined HDI Global in May 2015 and has grown the property portfolio and expanded the property underwriting team in Australasia and Southeast Asia. His assignment to Singapore reflects HDI’s ambitions to continue expanding its reach in the growth regions of ASEAN and Australasia, said HDI

Global in a statement.“I am very excited about Graham’s move

to Singapore to run our growing property portfolio from our Singapore office. Graham is an outstanding underwriting manager and a recognised lead underwriter. I am confident that with his vast international experience Graham will make a significant impact in Southeast Asia and Australasia,” said Stefan Feldmann, regional head of ASEAN and Australasia at HDI.

Kai Brüggemann will become underwriting manager property & marine in the Sydney office. In addition to his new property responsibility in Australasia he will continue his marine activities in Southeast Asia.

Mr Feldmann said: “Kai is an excellent leader, who has previous led our global marine portfolio and I am very happy to have in him a highly experienced underwriting manager to lead our property and marine team and our growth aspiration in those important business lines.”

Swiss Re opens office in Kuala Lumpur and appoints new Japan head

sWISS RE CORPORATE SOLUTIONS [SRCS] has commenced operations at its newly opened Malaysian office.

Based in Kuala Lumpur, the office has been granted a reinsurance licence by the Labuan Financial Services Authority and will target medium to large Malaysian businesses, servicing them with local broking partners and intermediaries.

According to Fred Kleiterp, SRCS’s APAC chief executive, a local presence will help the insurer to grow what it sees as a key market in the region and collaborate.

“We will use our large net capacity and the financial strength of the Swiss Re Group to provide traditional and customised reinsurance solutions to corporations across several industries, including oil and gas, manufacturing, agriculture, marine,

aviation and construction,” he said.The Malaysian unit will be headed by

Juerg Stoll, formerly SRCS country head in Japan, and he will report to Jonathan Rake, who heads the Southeast Asian team and welcomed Mr Stoll’s appointment and the launch of the Malaysia operation.

“I’m looking forward to building our team in Malaysia further from the local insurance talent and providing clients and brokers with our world-class solutions and services locally,” he said.

Meanwhile, Mr Stoll has been replaced by Paul Waddington, who has previously worked in London, Hong Kong, Taiwan and Japan.

“I’m delighted Paul will lead our business in Japan. He brings over 18 years of local industry knowledge, a deep appreciation of our value proposition and a commitment to finding opportunities for growth in Japan,” said Mr Kleiterp.

“Since we started our Japanese operations in 2011, we’ve built a strong reputation as an earthquake and commercial property insurance specialist. Paul will be responsible for broadening our client base across mid-market and large corporate segments, and further developing our product offering.”

New Asia head for Generali

G ENERALI HAS APPOINTED ROBERTO Leonardi as its regional head for Asia. Mr Leonardi, former regional chief

health and marketing officer at AXA Asia, replaces Jack Howell who vacated the role in August 2016 to become Asia Pacific CEO of Zurich.

Mr Leonardi will be based in Hong Kong and will report to Generali CEO of Global Business Lines and International, Frédéric de Courtois. He will be responsible for all Generali insurance activities in Asia as well as any initiatives designed to increase the insurer’s presence in the region.

“Rob has the track record and technical knowledge to drive our Asia businesses to the next level. Generali has a solid geographical presence in Asia with operations in 10 markets, many of which present fast growing opportunities and where we have forged deep partnerships with distributors and customers,” said Mr de Courtois.

“In particular, Rob’s experience in the health segment is a strategic fit to Generali’s ambitions of accelerating our efforts to become a leading player in an area where we already have significant market share and capability.”

Navigators hires new leadership team for Asia

US-BASED GLOBAL SPECIALTY insurer and reinsurer The Navigators Group has made a series

of senior appointments to its leadership team in Asia.

Jon Doherty has been appointed as managing director of Asia, Sang Kyoun

[S K] Kim as chief underwriting officer, and Paul D’Souza as chief operating officer/chief financial officer for the region.

All three joined from Chubb’s Asian operations.

Navigators said the team will be based in Hong Kong. The hires build upon Navigators’ existing participation in Lloyd’s

China, where the company has operated since 2010 under the leadership of Junci Wu.

The group said: “This initiative further enhances Navigators’ ability to service the global needs of our agents, brokers

and policyholders and provides access to this substantial market. Navigators Underwriting Division enables Navigators Syndicate 1221 to access reinsurance business throughout China and other Asia-Pacific regions.”

The initial focus of the new team will be to provide Navigators’ marine, casualty and other specialty products through agents and brokers as well as strategic partners across north Asia, said the insurer.

“Jon, S K and Paul all have a wealth of insurance experience in the region,” said Michael Casella, Navigators’ president of international insurance. “Their in-depth knowledge of the Asian marketplace and strong long-term relationships will support a thoughtfully executed expansion of our business in Asia,” he added.

Mr Doherty will serve as managing director of Asia and be responsible for overseeing all activities in the region. Mr Doherty has nearly 30 years of experience in the insurance industry and was with Chubb Group of Insurance Companies for more than 20 years. He served most recently as strategic marketing manager for the Asia-Pacific zone.

As chief underwriting officer in Asia, Mr Kim will be responsible for all underwriting activities in the region. Mr Kim has worked in the industry for more than 25 years, the majority of which he spent at Chubb group of Insurance Companies. Most recently, he served as Chubb’s Korea branch deputy representative.

Mr D’Souza brings 20 years of international experience in finance to the chief operating officer/chief financial officer role. Previously, Mr D’Souza was senior vice-president and chief financial officer, Asia-Pacific zone, at the Chubb Group of Insurance Companies.

Hyperion hires Johnson to lead FP’s Asian marine business as growth continues

MARK JOHNSON HAS BEEN appointed chief executive of FP

Marine Risks, the Hong Kong-headquartered specialty marine business of UK-based Hyperion Insurance Group.

Hyperion, the world’s largest employee-owned

insurance group, also announced that as of 1 April 2017, FP Marine will become part of RKH Specialty, Hyperion’s specialty broking arm.

The broking group recently entered AM Best’s annual list of the world’s top 20 broking groups, following its acquisition of RKH Holdings that was completed in April 2015 along with other transactions.

Hyperion said Mr Johnson brings a “wealth” of commercial experience, with more than 20 years in senior roles in Hong Kong and the wider Asia market. He joins from broker JLT, where he was chief executive of JLT Thailand. Before that, Mr Johnson was head of AIG’s commercial lines division in Hong Kong and its major accounts practice in Asia.

FP Marine group chief executive Richard Walker commented: “Despite the challenging market conditions of the past 12 months, we are now in a good position to work with Hyperion on growing the group’s business in Asia, having concentrated our efforts towards refocusing on our core strengths. I am confident that Mark is the right person to lead FP Marine into its next phase and look forward to supporting him in achieving this.”

It was a busy year for Hyperion. Other than the acquisitions, the broking group said it made “strong progress” on operational integration in the UK. This included the rationalisation of London locations, embedding of business-specific support services, and systems integration. From 1 October 2016, the group reorganised its management structure around three pillars: Howden, for retail broking; RKH Group, for specialty and reinsurance broking; and DUAL, for managing general agent operations.

The group also made a number of senior appointments during 2016, which included the appointment of Goh Chye Huat as chief executive officer, Southeast Asia, Howden; and Richard Clapham as chief executive, Europe, DUAL. Mr Clapham was joined by new chief operating officer Stephen Manning and new chief financial officer Mark Hudson.

Apart from the big merger with RKH, Hyperion has also made a number of other important acquisitions in recent times as it continues its march up the global specialty insurance broking league table.

In December 2015, the group acquired 75% of Chelsea Risk Management, a marine insurance agency based in San Francisco that specialises in coverage for ports, terminals and logistics operators. This added a marine capability to DUAL’s US operations.

In March last year, the group acquired 100% of PMG Financial Services, the UK’s largest independent specialist surety broker. In April, Hyperion expanded its Iberoamerican retail broking operations with the launch of Howden Portugal.

And in September 2016, the group completed the acquisition of a majority stake in Euroassekuranz Versicherungsmakler, Germany’s leading independent retail insurance broker to mid-market clients. This acquisition formed a strategic partnership that connects the specialisms of Howden in Germany (financial lines and marine) with those of Euroassekuranz – industrial, commercial and real estate.

As the annual results were revealed, group CEO David Howden said diversification by line and geography was critical for success in this uncertain economic and political era.

“Against the backdrop of political events of the past six months, the value of the natural hedge provided by our balanced model and geographic and product diversification is clearer than ever.”

He also stressed how important it is to continue to attract top-class talent such as Mr Johnson and Mr Chye Huat in Asia.

“We are well positioned in the face of external factors, and our differentiated platform and employee-ownership model make Hyperion a unique place to work. I am delighted that we continue to attract some of the brightest talent from inside and outside the industry,” added Mr Howden.

People moves

Stefan Feldmann

Fred Kleiterp

Roberto Leonardi

Jon Doherty

David Howden

13-CR-Asia-2017-Mar-Feature.indd 13 18/3/17 11:07:22


NEWS

baNkiNgNicholas [email protected]

@ComRiskonline

BANK NEGARA MALAYSIA has described the decision by the Malaysia

Competition Commission (MyCC) to fine the 22 members of the General Insurance Association of Malaysia (PIAM) a whopping RM213.45m for supposedly infringing competition rules as “most unfortunate”.

MyCC issued a statement in late February that, in response to a number of press articles, Dato’ Abu Samah Shabudin, CEO, felt the need to confirm that it had issued a Proposed Decision against PIAM and its 22 members for being parties to an “anti-competitive agreement” to fix the motor parts trade discount at 25% for six vehicle makes – Proton, Perodua, Nissan, Toyota, Honda and Naza. A rate of 15% was fixed for the Proton Saga BLM model.

PRICE PER HOURPIAM also fixed the hourly

labour rate at RM30.00 per hour for the PIAM Approved Repairers Scheme (PARS) workshops.

The MyCC said that it proposed to impose various remedies including financial penalties against the PIAM insurers.

“The MyCC is allowed under the law to impose a financial penalty of up to 10% of the worldwide turnover of each enterprise. The

Proposed Decision is a written notice setting out the facts on which the MyCC makes its assessment and its reasons for arriving at the Proposed Decision. It is issued to the enterprises concerned to assist them to make representations and provide any other information to support their representations to the MyCC,” stated the competition authority.

The insurance companies, including local arms of AIG, Zurich and Allianz, were given 30 days to respond and the MyCC said that it would then make its final decision.

The central bank was clearly not impressed with the MyCC’s decision.

Early last month it issued a statement, again in response to media queries. It stated: “The pro-posed decision is most unfortunate as it will severely impact consumer interest. Public benefit is served by the arrangement that was mutually agreed on between PIAM and the Federation of Automobile Workshop Owners’ Association of Malaysia (FAWOAM).”

Indeed, the bank said that the deal had been arranged under clear rules issued by itself.

“The arrangement was put in place in response to a clear directive from Bank Negara Malaysia to the general insurers in 2011 to address

disputes between workshops and general insurance companies over insurance claims payments for motor repairs. Such disputes had given rise to protracted delays in repairs and caused significant inconvenience to consumers. Complaints were also received by the bank on unsatisfactory and high costs of repairs. The bank had received more than 500 complaints of this nature in 2011 alone prior to

the arrangement. Such complaints have now been reduced by 50%,” it stated.

The bank said that the arrangement was needed to reflect reasonable costs of repairs in an environment where motor insurance premiums are regulated by a tariff.

“Inflated claims, if not effectively controlled, would have necessitated significant adjustments to the tariff premiums affecting all consumers, or risked general insurance companies withdrawing altogether from the motor insurance market. This occurred in 2012 in relation to motor third party bodily injury claims, when more than one million motor vehicles were referred to the motor insurance pool for declined risks due to difficulties faced by consumers to secure motor

insurance at the prevailing tariff rates. The bank subsequently sought and obtained the government’s approval to implement staggered and limited incremental revisions to the tariff. The tariff still remains in place today,” it explained.

BROAD REFORMSLast year the bank announced

plans to implement broad reforms in the motor insurance market, including the gradual liberalisation of the motor insurance tariffs.

It said that this plan aims to promote a more competitive motor insurance market and at the same time ensure affordable motor insurance premiums in the long term. “Without appropriate arrangements to control inflated and fraudulent claims which are being addressed as part of the reforms, these objectives will be severely undermined,” stated the bank.

“Bank Negara Malaysia firmly believes that public interest is best served by continued progress on the reforms in the motor insurance market. Any decision to review the arrangement independently of these reforms without taking into account consumers’ interest would prevent the public from enjoying timely settlement of motor insurance claims at reasonable cost and affect confidence in the quality of repair work. The bank will continue to pursue a resolution of this matter in the best interest of the general public,” it concluded.

Malaysian central bank disputes CompetitionCommission attack on insurance sector

“Last year the bank announced plans to implement broad reforms in the motor insurance market, including the gradual liberalisation of the motor insurance tariffs...”

lLOYD’S SYNDICATES ARE not wasting their time as they prepare to enter the Indian insurance market following regulatory approval given to the London-based

market to open a reinsurance branch by IRDAI, the insurance supervisor.

Lloyd’s announced in January that it had been granted final approval for an R3 reinsurance licence under IRDAI’s new regime and that it planned to be up and running in time for the April renewals.

Lloyd’s is of course not a company itself but rather a market made up of some 60 separate insurance businesses, known as syndicates. As in Singapore and China, the corporation of Lloyd’s provides the regulatory approval, infrastructure and support services but it is up to the individual syndicates to set up shop on the ground and market themselves to brokers and risk managers.

SYNDICATESAccording to Vineet Aneja, a partner at Clasis

Law, a commercial law firm based in Mumbai, Delhi and London that is associated with Clyde & Co, individual syndicates are keen to take advantage of the new opportunity.

“The establishment of Lloyd’s India will presage a period of intense activity among syndicates keen to increase their exposure to India. We are experiencing a flow of enquiries as syndicates wishing to participate in Indian reinsurance business move to set up service companies in India. Lloyd’s’ news reflects the ongoing internationalisation of a market which has been working hard to broaden its appeal to foreign insurers,” said Mr Aneja.

The lawyer pointed out that during the past couple of years there has been a raft of changes to the legal framework,

as the supervisor worked out how to provide Indian business with needed access to international insurance and reinsurance capacity, and help promote the development of a healthy local market at the same time. Now is the time for action.

“If 2015 was about the introduction of new rules, 2016 was about their implementation. Now that the new legislation is bedding in, international players are finally able to start building or strengthening their presence in one of the world’s most promising insurance markets. With a population of more than 1.25 billion, a rapidly emerging middle class and comparatively low insurance market penetration, India is

undoubtedly an attractive market for insurers,” said Mr Aneja.

OWNERSHIP LIMITSOne element of the new rules is that the

limit on ownership of a joint venture (JV) for a foreign insurer has risen from 26% to 49%. Mr Aneja said this is an interesting option for

insurers keen to enter the market. “Joint ventures also remain a tried-and-

tested means to access local knowledge or technical expertise, to build or strengthen a position in new markets.

Following the recent change in the law in India, we have seen a number of international insurers move quickly to increase their stakes in local JVs to the new permitted level of 49%, up from the previous limit of 26% via the automatic route – ie without prior approval of the government,” he pointed out.

“We believe that setting up a branch or subsidiary will also continue to be an attractive route to growth, especially where barriers to M&A exist. The new rules in India have seen the large global insurers move quickly to set up new offices and position themselves in a market which offers genuinely huge potential,” concluded the lawyer.

Indian insurance buyers can expect tougher renewals

indian non-life insurance rates will rise by up to 15% in some classes of business in the coming 1 April renewals as insurers struggle to maintain

margins because of rising losses and stubbornly poor investment returns, according to a report from Indian news agency Press Trust of India.

The agency reports that insurers plan premium increases in over 10 industry segments. These include pharmaceuticals, power, cement and group health insurance. IRDAI, the national insurance supervisor, has also said that premium increases are needed particularly in motor third-party liability insurance and group health insurance.

“I won’t be surprised if the [premiums] go up as the pricing has already reached rock bottom,” IRDAI member (non-life insurance), PJ Joseph reportedly told PTI.

“The market is so competitive that it gives us very little scope for increasing [premiums]. Still, we are working very closely with GIC Re to increase the pricing of over 10 large loss-making portfolios,” Sanath Kumar, chairman and managing director of National Insurance reportedly said.

New India Assurance, the biggest non-life insurer, is also ready to raise premiums in certain segments, according to the report.

“At New India Assurance, the premium hike may happen in segments like fire and group health in the new fiscal year,” chairman and managing director G Srinivasan is reported to have said. “Premium rates have fallen much below the required rates and hence the rates will have to be readjusted,” he added.

Lloyd’s syndicates keen to tap Indian opportunity, says local lawyer

Kuala Lumpur

14-CR-Asia-2017-Mar-News.indd 14 18/3/17 11:07:37

Copyright © 2016 Allianz Global Corporate & Specialty SE. The material contained in this publication is designed to pro-vide general information only. Information relating to policy coverage, terms and conditions is provided for guidance purposes only and is not exhaustive and does not form an offer of coverage. Whilst every effort has been made to ensure that the information provided is accurate, this information is provided without any representation or warranty of any kind about its accuracy. 1) In France, the name of our cyber insurance product is “AGCS Cyber Data Protect“Allianz Global Corporate & Specialty SE, Commercial Register: Munich, HRB 208312

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Cyber_ad_A4_V3r_2016_final.indd 1 26.04.2016 11:40:1915-CR-Asia-2017-Mar-FPA-AGCS.indd 15 17/3/17 18:45:45


interview Nicholas [email protected]

@ComRiskonline

2 017 HAS BEGUN AT A BREAKNECK PACE FOR the risk management community, including the Pan Asian Risk and Insurance Management Association (Parima). The association’s annual congress in Singapore in late November came in

the wake of the shock election result in the US and triggered a wave of uncertainty that has gathered increasing pace.

As political tensions rise between global superpowers, notably the US and China, global trade agreements are looking more tenuous by the day. The stability in the region is also under threat with North Korea becoming increasingly provocative towards its neighbours and tensions rising in the South China Sea where there is so much disputed territory.

clarion call But every potential crisis is a potential opportunity, not

least for risk managers. “We are now entering a very interesting and challenging

time for risk management,” says Franck Baron, Parima chairman. “For the first time in 40 years of risk management, geo-political and macro-economic factors are combining to have a real and tangible impact on corporate risk.”

There have been specific issues and exposures that have

arisen in the past, some of them restricted to certain industries, regions or exposures but never before has the impact been so widespread and systemic.

“If you look at what is happening across the world right now, in Turkey, eastern Europe, the UK and the US, North and South Korea, China, Japan and the Philippines,” says Mr Baron of the changing landscape. “It is all creating tremendous uncertainty and the impact needs to be understood by the risk managers and not just the chief executives.”

It is in essence acting as a clarion call for risk managers to assert themselves and their profession within the corporate culture, says Mr Baron. “It is time for risk management to be taken seriously because these developments are having concrete impacts on risk management and risk financing.”

For example, the impact from political risk was previously limited to well-known problem spots, say Argentina for example, and the risk was artificial to some degree. Now though, the threat of having assets frozen or travelling staff marooned in foreign countries is very real.

This risk is international as well – from Hungary, Russia and Poland to APAC regions like China and the Philippines and even supposedly stable states like the US and the UK which have multiplied any existing uncertainty thanks to unexpected election results in 2016.

taxing questionsIn addition to changes in international tax regimes,

the changing geo-political environment is also threatening long-standing global trade agreements, says Mr Baron. “For a number of years there has been an increase in globalisation but now we are seeing this being rolled back and several agreements being unwound.”

For example, one of the first casualties of the Trump presidency in the US, was the Trans Pacific Partnership which includes Australia, New Zealand, Japan, Malaysia, Vietnam and Singapore among its members, but no longer the biggest member, the US.

The risk managers charged with the responsibility for mapping all of these risks now face an opportunity to move beyond a spreadsheet of potential exposures to actually becoming involved in the company’s decision-making, says Mr Baron.

“Those risk managers that do have a seat at the top table now have real cases to base their decisions on and to convince the rest of the board that their strategy is correct. For the risk managers that are not yet at board level, the door is opening.

interview

PAriMA

Seize the dayThe current era of uncertainty is a great opportunity for Parima and its members

to seize the initiative and demonstrate the worth of risk managers

“Risk managers are starting to look for opportunities to further develop themselves, network and share with each other. They see the value in what Parima is doing and in being part of a regional community...”

stacey huang

stacey Huang



Political risk is now a real exposure and they have a role to play and a voice to be heard when it comes to reducing this exposure.”

In many ways, political risk is the perfect exposure to describe the evolution of risk management, says Mr Baron. It is halfway between risk management and risk financing. It is not about just buying insurance but it is also a risk that can be seldom entirely contained internally. Hence there is a legitimate place for political risk coverage.

The issue is whether political risk insurance is sufficiently dynamic to cater for the uncertainty around the exposure and whether there is enough capacity for the specific demands of companies, says Mr Baron. “I would say that there is plenty of capacity for the vanilla political risk but if a risk manager has specific demands, capacity can be restricted and the price can go up.”

off-the-shelfThe same principle applies to cyber, D&O

and other emerging risks, he says. “All of the insurers have off-the-shelf products but if you want to build a customised programme that reflects the risks that you face, it gets very expensive.”

Not that Mr Baron is complaining. In fact, he says, prices should increase. “Conventional insurance is too cheap and does not reflect the true value of what insurance should be. We do not value insurance enough because we are not willing to pay enough for it. When you go to a bank for a corporate loan, there is limited negotiation on terms and conditions or interest rates but there is always a negotiation on insurance.”

The willingness of some companies to seek the lowest premiums rather than the best protection is also affecting the commitment of some major insurers to the region. There have been management changes and mergers and acquisitions which have added to the uncertainty of insurers’ strategies for the region.

The predictions of double digit growth in APAC cannot come true for all international insurers so risk managers that are reliant on their carriers to build long-term and customised risk transfer programmes must also be prepared for some changes in the marketplace and be able to proceed accordingly.

For many years, there has been talk of emerging risks but, says Mr Baron, those risks are emerging no more. They are here.

Mr Baron expects all of these issues – geo-political risk, cyber and big data, the right price for insurance – to all be discussed at the upcoming Parima conference in Manila. But if there is one over-riding issue he hopes will dominate the debate it is how risk managers can expand their remit and seize the opportunities created by the current uncertainty in the political, economic and corporate world.

“For the first time in a risk management conference we have two chief executives, from two of the largest companies in the Philippines, to address the risk managers and insurers and explain how they look at risk, the role that risk managers should play and the scope of risks that they should be managing,” says Mr Baron.

“The risk manager’s role needs to be more strategic and enterprise-wide and not just about compliance and certain operational risks. The same also applies to the use of insurance. They need to move from a non-sophisticated buying role to a strategic and customised purchase programme.

“All of the presentations, debates and workshops at Manila will be designed to address these two central issues,” says Mr Baron.

In early 2017 Parima passed the 1,000 member milestone. Total membership now stands at 1,084. It was just over three years ago, in late 2013, that the association was incepted and membership has accelerated in the last two years, going from 142 in the first quarter of 2015 to 615 the following year and to its current level in 2017.

The rate of growth demonstrates a growing risk maturity and recognition of the profession, says Stacey Huang, Parima executive director. “Risk managers are starting to look for opportunities to further develop themselves, network and share with each other. They see the value in what Parima is doing and in being part of a regional community. By having a critical mass, it opens the doors for risk managers to have a stronger voice in elevating risk management as a function.

“Of course, this also validates the work that Parima and our partners are doing; the conferences, events, workshops, educational programmes, tools, resources and certification are contributing to this mission in raising the standards of risk management across APAC,” says Ms Huang.

She attributes the recent growth to the association’s Philippines chapter, which has

now become the second biggest member base after Singapore.

The themes for the event are sustainability and resilience and some of the topics on the agenda will go beyond the traditional insurance-based subjects, covering areas like political risk, talent shortage and corporate sustainability.

In addition to the growth of the Philippines chapter, more recent growth has come from the likes of Thailand, Malaysia and Japan, thereby reducing the concentration in insurance centres like Hong Kong and Singapore, says Ms Huang.

“Much of this is down to the fact that we have held more events across the region. We have also appointed more board members in countries like Japan and Malaysia, such as Takashi Kubo, and they have been central in recruiting more members and helping to build the credibility of the association.”

One of the biggest changes in the membership in the last 12 months has been the rise in those responsible for enterprise-wide or strategic risk management as part of their daily activity. “This is hugely encouraging,” says Ms Huang.

Another welcome development is the expansion of risks covered by members in their daily jobs, including areas like talent risk. At the same time, the percentage of members solely concerned with compliance has reduced. “I think this is hugely important because risk management has to be seen as more than compliance and box-ticking,” says Ms Huang.

Despite the growth in membership there is still plenty of untapped potential in the region, says Ms Huang. “At the moment, 50% of our membership comes from companies in the Forbes 2000. If we want to take the

association to the next level, we have to break into the SME sector.”

This is easier said than done as few of these companies will have a dedicated risk manager, says Ms Huang. “However, whether it is the chief financial officer or another high-ranking executive, these companies still have to think about risk in a structured way.”

One advantage is the fact that the current membership covers such a wide range of industry sectors, says Ms Huang. “25% of the members can be categorised under the broad banner of ‘financial services’, but if you drill down further into the statistics, there is no single industry sector that accounts for more than 8% of the membership and the 643 companies that it covers.”

Parima is also looking to make inroads into some of the smaller markets in the region – such as Sri Lanka, Cambodia and Myanmar – and will be reliant on the existing good work of the various country representatives on the association’s board to further this ambition.

In 2016 Parima focused on education, forming the Lloyd’s-Parima Professional Development Programme with the London insurance market and establishing a certification programme in partnership with the Australia and New Zealand Institute of Insurance and Finance – the Parima Anziif Certified Risk Professional. The first exams are set to be taken in March.

This year the focus will be on developing a career path for the profession, says Ms Huang. “We want to create a career toolkit that establishes best practice and standards and shows how people can become risk managers and how they can accelerate their professional development.”

moving up agendaShe feels that there is currently a lack

of research around the risk management profession and salary benchmarking.

However, she is encouraged by the relative seniority of the Parima membership. More than half the membership is a c-suite member, head of department or senior manager. “This shows that risk management is moving up the agenda.

Parima, which is a not-for-profit association, has also signed a number of new corporate partners so far this year. Alongside US-based insurer Liberty International Underwriters (LIU) and Japan-based Mitsui Sumitomo Insurance Group, Parima has also partnered with non-insurers such as Singapore-based disaster recovery specialist Belfor Asia and the Labuan International Business and Financial Centre (Labuan IBFC), which is currently looking to promote itself as the destination of choice for corporates looking to establish a captive business in the region.

Parima is also looking to recruit more of the risk service providers beyond the general insurers, such as loss adjusters, claims management firms and consultants.

Ms Huang says that the entry of these new companies allows for more diversity within the organisation, touching different aspects of risks and exposes the broader issues that need to be addressed by risk managers as well as presenting more opportunities for future educational collaborations.

interview

PAriMA

“If you look at what is happening across the world right now, in Turkey, eastern Europe, the UK and the US, North and South Korea, China, Japan and the Philippines… It is all creating tremendous uncertainty and the impact needs to be understood by the risk managers and not just the chief executives...”

franck baron



COMMERCIAL RISK ASIA talks to Shangri-La Group’s Parikshit Sen Gupta about his wide-ranging role and the emergence of new risks for Asian businesses

profileNicholas [email protected]

@ComRiskonline

ONE OF THE MOST NOTABLE TRAITS OF ASIA’S growing risk management industry is the eclectic nature of its protagonists. It is rare that anyone responsible for a company’s risk management does not have other responsibilities thrust on

their shoulders.In the case of Parikshit Sen Gupta, vice-president, finance

for the Shangri-La Group, his work for the Hong Kong-based hotel group has included oversight for finance, supply chain management, investment management, e-commerce, procurement and risk and insurance management.

Mr Sen Gupta has been with the Shangri-La Group for almost seven years. Prior to his current role, he was at the Tata Group, where he spent a considerable time in the hospitality division and was exposed to the insurance world for the first time, after a claim following the 2008 terrorist attack on the Taj hotel in Mumbai.

Mr Sen Gupta then joined Shangri-La in Hong Kong as vice-president of finance and head of procurement, a role that included responsibility for insurance and risk management. One of his first tasks was to instil a policy of adopting more global programmes.

The use of global programmes in Asia is still in its relative infancy. To some, this is seen as a sign of the immaturity of the corporate insurance market in the region. But there is a growing number of companies looking to turn their disjointed insurance policies into a smaller number of global programmes, covering multiple countries and using much fewer carriers.

The fact that insurance and risk management is often included within the procurement department is also interpreted as a sign of the immaturity of risk management within the region. “The maturity is not that apparent,” says Mr Sen Gupta. “There are not as many rules or enforcements as there are in other regions. Nor has the Asian market been hit by some of the larger emerging risks, like cyber.

“The Asian insurance market is based more on natural catastrophe rather than risks through human intervention, such as cyber or D&O. Risk management will only play a role when they know they can mitigate the risk.”

That maturity will come when they have a large claim, says Mr Sen Gupta. “We see that cyber and BI risk are in the news and in the media and the books but until they happen, they do not really resonate with many boards. When they are buying the policy, the priority is to reduce the broker’s commission rather than to see what mitigation steps they can take internally to reduce their premium. So it is definitely a frustration,” says Mr Sen Gupta.

Top risksAnother frustration for risk managers is not being able to

find an insurance product to match their exposures. The first item on Mr Sen Gupta’s wishlist of new insurance products would be a political risk policy specific to Asia-Pacific. Geopolitical uncertainty is a current global concern. Thanks to a series of electoral shocks in Europe and the US, this uncertainty is now as commonplace in the west as it is in some of the emerging world.

But, says Mr Sen Gupta, while risk management is a more institutionalised process in the west, in Asia there is a more singular approach.

“There are numerous political risks in Asia – a change in leadership in China and the intention to crack down on corruption, demonetisation in India, which could create a risk in the supply chain. Legally and structurally, these countries are evolving whereas the US and the UK, for example, are more resilient to political change.”

Another implication of political uncertainty is economic volatility – one more risk to be managed. For companies looking to expand internationally, this means borrowing in a

currency that is stable and then offloading that currency risk in local markets.

Supply chain risk is another emerging exposure that is high up risk managers’ agenda and, as a former head of procurement, Mr Sen Gupta has a number of suggestions for managing this risk without having to revert to supply chain-specific insurance policies that have yet to mature. “There is an increasing cost and risk of procurement, so you should slowly start pushing local sourcing. You have to also look at the scalability and resilience of your suppliers. And look at your business rules and cancellations policies so that you are sharing that risk with your customers or your suppliers.”

Cyber risk is also happening in Asia but not all people are aware of it, says Mr Sen Gupta, despite the possibility that a big claim could be just around the corner. “There is greater cloud use in Asia. There are more data centres being set up in Hong Kong and Singapore. We also do a lot of penetration tests and simulate a situation where you have been hacked. That is an area that is developing. You have to be very wary about data protection and policies. People make mistakes but if you have a big data leak it could be a big issue.”

In the US and Europe, regulation has been the biggest driver of greater take-up for cyber insurance, more specifically the introduction of mandatory notification in the event of a data breach. But in most parts of Asia there is no similar edict. The exceptions would be certain industries, such as the payment card industry, which has global regulations.

Reputational risk is another related area of concern, says Mr Sen Gupta. But despite the fact that the subject is consistently raised by risk managers as a priority in various industry surveys, there is a lack of appetite for reputation-related insurance in Asia, says Mr Sen Gupta.

In part, this is because very few Asian companies have

really experienced a significant reputational risk event, except for Sony which has suffered two in five years – the 2011 data breach of Sony’s PlayStation network that exposed more than 70 million customer accounts; and the 2015 hack of Sony Pictures, which dumped confidential memos and unreleased movie scripts onto file-sharing sites.

There is overcapacity in Asia in terms of insurance. After the Thai floods and the Japanese earthquakes, there have been no big natural catastrophe events, so the reserves have piled up and the prices have fallen. A number of risk managers have looked to exploit the low premiums and to expand and improve the scope of their coverage. For example, some have been able to buy sub-limits for political violence coverage.

Despite the improvement in coverage, there are still some outstanding areas of exposure that are less difficult to transfer to the insurance market, says Mr Sen Gupta, such as delays to the completion of greenfield construction projects.

DELAYs LossEs“It is not necessarily project risk but [rather], a fiscal loss

recovery kind of product to cover the loss of income from delays in execution and completion. I do not feel this is an area that has been explored by insurers but there would need to be a lot of focus on ensuring that the policies had the right wording. And perhaps it could be a product where the loss is shared by the insurer and the insured.”

Like many other risk managers in Asia, Mr Sen Gupta is also interested in the idea of setting up a captive. The rationale for taking the captive route is that if you have an insurance policy where your claims ratio is very low, the insurer is making money on your account. For example, property, liability and cyber may be areas of exposure best suited to a captive, as opposed to health insurance, says Mr Sen Gupta.

“For anyone looking at setting up a captive, I think it is important to look at the potential savings on offer if the right location with the right tax benefits can be found. It can make a lot of economic sense but it requires a lot of organisation and the right location,” he explains.Three bits of advice for risk managers1. Risk managers need easy access to quality information so

that their role becomes contemporary and relevant. You cannot be looking at last year’s claims ratio when you are looking to negotiate next year’s coverage. Technology is key to this. None of the global brokers have been able to supply this information in an accessible way, as opposed to a system so complicated that only a few of their employees can work it. If you have that information, you can share it with your senior executives and help them to get a better understanding of the company’s risks.

2. Expenditure on risk management rather than insurance premiums is much more preferable. Your premiums should be a derivative of your risk management – the better your risk management, the lower your premiums. That is a much more sustainable approach.

3. Professional education. Risk management should be featured much more in mainstream programmes, as a chapter in a finance programme, for example, rather than a standalone risk management qualification.

prOfilesen gupta

The keys to the kingdom

“We see that cyber and BI risk are in the news and in the media and the books but until they happen, they do not really resonate with many boards. When they are buying the policy, the priority is to reduce the broker’s commission rather than to see what mitigation steps they can take internally to reduce their premium. So it is definitely a frustration...”

parikshit sen gupta

shangri-La Barr Al Jissah resort oman

18-CR-Asia-2017-Mar-Profile.indd 18 18/3/17 11:08:24


country focus philippines

country focus

As Parima takes its conference to the Philippines for the first time, COMMERCIAL RISK ASIA editorial director Adrian Ladbury takes a look at this growth economy, the opportunities and challenges and state of the insurance market

@ComRiskonline

t HE PHILIPPINE ECONOMY IS THE THIRD LARGEST IN THE ASEAN region behind Indonesia and Thailand and is considered, along with these two nations, to be the tiger economies of the region.

It is making good progress in its transition from an agriculture-based economy towards a more service and manufacturing-based economy.

According to latest IMF data, real GDP regained strength from a slowdown in mid-2015 to record a robust 5.9% growth rate in 2015 and 6.9% in the first half of 2016. Both consumption and investment grew rapidly, while net exports were held back by weak external demand.

Job creation was also strong: the unemployment rate declined to 6.3% in 2015 and

6% in the first half of 2016. The outlook for the Philippine economy remains favourable despite external headwinds, said the IMF.

Real GDP growth is expected at 6.4% in 2016 and 6.7% in 2017 on continued “robust” domestic demand and a “modest” recovery in exports. This growth is driven by continued strong momentum in domestic demand and more recently fiscal stimulus, stated the international bank.

The alleviation of the wide income and growth disparities between the country’s different regions and socioeconomic classes, reduction of corruption, and investment in the infrastructure are needed to ensure future growth.

As this report shows, President Duterte clearly has some way to go before the corruption problem is sorted. Not only does he face his own battles in terms of political opponents’ efforts to impeach him, the recent spat over the effort to clean up the country’s mining sector shows how complex such a challenge can be, especially when international interests and investment are involved.

But the news that the seven major Japanese conglomerates are keen to make significant investments in the nation’s infrastructure is good news and augers well for the future path of this nation.

A healthy insurance sector is needed to support such a growth plan and it looks like the market is on track, though the new solvency requirements will require some adaption and consolidation.

[email protected]

CountRy: Philippines

Philippine broking sector continues growth path

tHE PROPORTION OF BUSINESS HANDLED BY brokers in the Philippine non-life sector continues to grow based on the latest numbers from the

Insurance Commission. The supervisor reported that in 2015, insurance

and reinsurance brokers handled some ₱53.27bn of direct insurance premiums, some 9.75% higher than the ₱48.54bn in 2014. Insurance brokers accounted for 95.41% of total premiums handled while the reinsurance brokers accounted for the remaining 4.59%.

The commission reported that the increase in brokered premium production was attributed to increases of 36.57%, 28.78%, 24.60% and 12.21% boost

in health, life, engineering and fire business, respectively. This constituted 75.92% of the total premiums produced.

As a result of the higher premium volume handled by brokers, the commissions earned improved by 24.4% up from ₱5.52bn last year to ₱6.87bn this year.

One new insurance broker was granted a licence in 2015. This brought the total to 64. One new reinsurance broker gained a licence bringing the total to 22.

One notable new entrant to the Philippine reinsurance market is JLT Re, reinsurance arm of London-based global broker JLT.

APPOINTMENTSThe broker recently announced the appointment

of William Pang as managing director for JLT Re Philippines, subject to regulatory approval.

Mr Pang relocates to Manila and will be responsible for the overall management of JLT Re Philippines. His focus will be on strategy, market development and team expansion amongst other areas, said JLT.

Mr Pang has been with JLT Re for the past five years based in Singapore, managing clients in

Singapore, Philippines and Vietnam. Before joining JLT Re he had 14 years at Munich Re

as deputy head of client management, and more recently he was head of client management at Asia Capital Re.

“The Philippines is a natural progression for JLT Re’s regional expansion plans, given that it’s the third largest economy of the ASEAN countries after Indonesia, Thailand and Malaysia,” said Stuart Beatty, JLT Re Asia Pacific CEO.

“It is already a key region of focus for us and we intend to invest further with an aim to be a market leader in the future. This is part of our broader strategy to establish a presence in key countries so we can develop a focused client servicing capability across Treaty, Fac and Analytics and grow our market position. William will play a key role as he already has excellent relationships in the Philippines,” Mr Beatty added.

JLT said that Mr Pang will still continue to be involved with key clients in Singapore and Vietnam and will report to Kenny Moyes, CEO of JLT Re Asia, based in Singapore. As part of his new role Mr Pang will also join the JLT Re Asia Pacific Executive Group.

19-CR-Asia-2017-Mar-Philippines.indd 19 18/3/17 11:08:41


country focus philippines

Insurance commission reveals four insurers will close and a further eight looking at mergers as new solvency rules bite

RECENTLY INSTALLED COMMISSIONER FOR THE Philippines Insurance Commission Dennis Funa has revealed that the national insurance market

is undergoing a process of consolidation as its new capital and solvency rules kick in.

In January of 2015 the commission announced a new insurance code and stronger minimum capital requirements designed to prevent insolvencies and bolster the national market.

The tougher new rule-book is forcing a consolidation and M&A process in the sector, as confirmed by the Insurance Commission recently.

Under the new code, for new insurance companies the required paid-up capital/ statutory deposit is ₱1bn. For existing companies the minimum networth/trusteed surplus rose from ₱250m up to ₱550m at the end of last year. By 31 December 2019 the required level will rise again to ₱900m and again up to ₱1.3bn by the end of 2022.

For new professional reinsurance companies the capitalisation requirement is ₱3bn paid-up capital. At least 50% of the capitalisation requirement needs to be contributed surplus or ₱400m.

For existing professional reinsurance companies the minimum net worth has risen from ₱2bn up to ₱2.25bn by the end of 2016. It will rise again up to ₱2.5bn by the end of 2019 and again up to ₱3bn by the end of 2022.

In mid-January, Commissioner Funa warned Philippine insurers that they need to take the new rules seriously.

Mr Funa explained that companies that fall short of the new capitalisation only had until this month (April) to reach the threshold.

“One of the important drivers in the growth of the insurance industry is the higher capitalisation requirements of insurance companies leading to higher public confidence in insurance,” said the new commissioner.

Despite the rising strength of the local insurance market, as shown by latest figures published at the end of last year, mergers and acquisitions are expected to occur as a result of the new solvency requirements.

It is thought that four insurers will have to cease trading as a result of the new rules and mergers are being considered by at least eight non-life players. Two other non-life insurers are said to be looking for fresh investors.

The Manila Standard recently reported that Mr Funa said that insurers that have submitted plans for mergers but are unable to meet the 30 April deadline would be given “ample” time to complete the deals and go through the proper due diligence process.

The underlying strength of the Philippine insurance market is, however, improving based on latest numbers published by the commission.

The figures showed strong growth in premiums written, particularly in casualty and fire, higher profits, higher assets held by the insurers and a higher net worth for the industry as a whole.

At the same time the Insurance Commission reported good progress on its raft of changes introduced in 2015 to modernise the industry and ensure that it is able to meet policyholder liabilities and play a bigger role in the national effort to eradicate poverty.

The market has also adopted the ASEAN Corporate Governance Scorecard in preparation for the ASEAN Financial Integration as endorsed during the ASEAN Capital Markets Forum (ACMF).

New solvency requirements introduced in January 2015 required a significant increase in reported surplus by the end of last year for both new and existing insurers. This level will increase in two more steps between now and 2022.

At the end of last year the Insurance Comm- ission reported that the Philippines non-life insurance sector achieved total combined gross premiums written of ₱63.66bn, a 15.56% increase from

the ₱55.09bn reported in 2014. This was attributed to increases of 18.67%, 15.81%

and 11.95% in casualty, fire and motor businesses, respectively.

Fire business held the largest share accounting for 34.53% of the total. This was followed by motor that accounted for 30.91%, then casualty with a share of 21.06%.

Total net premiums written in 2016 rose by 14.07%, a rise from ₱32.06bn in 2014 to ₱36.57bn in 2015. This comprised 21.42%, 16.80% and 12.18% increases in casualty, fire and motor businesses, respectively, and constituted 86.79% of the total net premiums written.

The bulk of the total net premiums written came from motor business that accounted for some 50.12% of total net premiums written. This was followed by casualty business at 21.08%.

Total premiums earned by Philippine non-life insurers grew to ₱34.38bn in 2015, up 10.69% compared to the total of ₱31.06bn in 2014.

Losses incurred rose by 10.17%, from ₱12.49bn in 2014 to ₱13.76bn in 2015. The increase was attributed mainly to the 50.00%, 19.26% and 12.26% increases in losses from surety business, motor and casualty, respectively.

In 2015, the overall loss ratio slightly fell by 0.47% year-on-year, from 40.21% to 40.02% in 2015. The Insurance Commission said that the improvement was led by a fall of 18.82% and 7.38% in the loss ratio of fire and allied perils and marine, respectively.

The Philippine non-life insurance sector posted net income of ₱2.73bn, up by 37.88% from ₱1.94bn in 2014. This was led by a 22.63% increase in underwriting gain. Domestic companies accounted for 88.92% of these assets.

The growth in the total reported total assets was led mainly by an increase in assets among domestic companies. This rose from ₱139.72bn in 2014 up to ₱143.90bn in 2015. The corresponding liabilities grew slightly up to ₱97.22bn, a minimal increase of 3.41% compared with 2014.

The rise was attributed to increases of 50.96%, 43.73% and 11.60% respectively for other liabilities, reserves for unearned premiums and premiums due to reinsurers.

Total net worth of the Philippine non-life insurance sector reached ₱64.58bn in 2015, slightly up by 2.57% year-on-year from ₱62.96bn. The Insurance Commission said that this was primarily caused by increases of 6.89%, 1.68% and 1.41% in investments in fluctuation reserves, unassigned surplus and paid-up capital, respectively, which constituted 85% of the total net worth.

During 2015, the Insurance Commission issued Certificates of Authority (CAs) to four composite insurers, 66 non-life insurance companies and one professional reinsurer.

It also granted CAs to 34 Mutual Benefit Associations (MBAs) 22 of which were microinsurance MBAs and 12 were regular MBAs.

There were a total of eight foreign non-life firms authorised in the Philippines in 2015 of which one was a composite and eight pure non-life.

Philippines mining spat underlines rising significance of environmental risk in Asia

The scale of the effort to persuade asian businesses to take a more long-term view of their activities particularly in relation to the environment and climate

change has been made clear as the Chamber of Mines of the Philippines sued Environment Secretary Regina Lopez because of her recent effort to close 23 mining companies and suspend five others for violation of environmental laws.

Last year’s influential Global Risks Report produced by the World Economic Forum concluded that business leaders in Asia are generally oblivious to the long-term environmental risks posed by climate change and environmental damage caused by their activities, preferring instead to focus on more immediate economic risks such as asset bubbles, energy price shocks and cyber attacks.

Zurich, a strategic partner on the report, stressed the scale of the problem in the region. “Asia benefits from largely strong national governance and, certainly relative to the rest of the world, strong economies…but there is an umbrella risk that Asia takes too much of a short-term view at the expense of longer-range planning, particularly where the impact of climate change comes in,” commented Steve Wilson, Zurich’s chief risk officer for the general insurance business at the time.

“We have a constant tension in this part of the world between economic development and its impact on environmental sustainability,” said Stuart Spencer, Zurich’s chief executive of its general insurance business in Asia Pacific. “But what the report is really trying to stress is that we can’t afford to put environmental considerations to the back shelf,” he added after the report was published.

Risk managers with companies in the Asia Pacific region have a duty to ensure that their companies comply with the latest environmental and sustainability rules and agreements. But this latest twist in the Philippine mining industry dispute perhaps underlines the potential difficulty of the task on the ground. It also underlines the rising significance of political risk for risk managers with all forms of companies, not least multinational companies with operations in fast emerging markets such as the Philippines.

The problem was caused by a government decision to carry out an environmental audit of the mining sector that was commissioned with the best intentions.

In the run-up to the announcement of the results, the Philippine government signalled that it was optimistic the drive to clean up the industry would actually lure investment.

Environment Undersecretary Leo Jasareno told Bloomberg in an interview last summer: “You are attracting investments because investors are assured that when they put their money on the ground, there’s sustainability.”

The results of the audit were, however, not pretty. The country is the world’s top nickel producer, accounting for about a quarter of global mined supply. The audit results would potentially see two thirds of the industry shut down and ruin significant investments made by foreign mining companies in the sector.

On 6 September, Ms Lopez announced that she would close 23 mining companies and suspend five others for violating environmental laws.

In October, The Straits Times reported that Lepanto Consolidated Mining Company filed a corruption complaint against former Mines and Geosciences Bureau director and Environment Undersecretary Leo Jasareno for violation of the Anti-Graft and Corrupt Practices Act.

Lepanto claimed that the audit team actually signed a report concluding that “the company substantially complied with the pertinent provisions of the environmental and mining laws, rules and regulations” and did not recommend a penalty, reported the newspaper.

The company said Mr Jasareno’s conflicting statement caused “undue injury” to the firm, “besmirched” its reputation and caused a drastic fall in its share price.

The latest development is that the Chamber of Mines sued Ms Lopez before the Office of the Ombudsman accusing her of violating the Anti-Graft and Corrupt Practices Act and the Code of Ethical Standards for Public Officials and Employees.

The chamber said that the announcement of the closures and suspensions were made even before the affected mining companies were given the results of the audit.

The chamber also criticised Ms Lopez for her “false” and “unfounded” allegations against the mining companies that created problems for them with the public and their international clients.

—Adrian Ladbury

New solvency regime forcing consolidation and M&A in Philippine insurance sector

Dennis Funa

19-CR-Asia-2017-Mar-Philippines.indd 20 18/3/17 11:08:49

21-CR-Asia-2017-Mar-FPA-Generali.indd 21 17/3/17 18:20:35


News

the US Export Administration Regulations (EAR) and Iranian Transactions and Sanctions Regulations and received the record-breaking penalty following a five-year investigation by US authorities.

US Commerce Secretary Wilbur Ross proclaimed that the massive fine should be taken as a sign of the Trump administration’s willingness to punish any corporates that violate its trade laws, using the kind of bombastic language that has become familiar since the new president took residence in the White House.

“We are putting the world on notice: the games are over. Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences. Under President Trump’s leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers,” said Mr Ross.

US EQUIPMENTZTE was accused of evading

US export laws and entering into contracts with Iranian firms to supply, build and operate telco networks using equipment and software from the US, between 2010 and 2016. It was also accused of illegally supplying telco equipment to North Korea.

ZTE became the subject of investigations by the House Select Committee on Intelligence, Office of Foreign Assets Control (OFAC), Bureau of Industry and Security (BIS), Department of Justice and the FBI, following a Reuter’s story in 2012 on ZTE’s use of a third-party Chinese company to procure and re-export US goods to Iran.

ZTE is accused of resuming its illegal trading activity with Iran and using another third-party Chinese

entity to serve as a conduit, despite ongoing investigations into its activities and having informed the US government agencies that it had wound down and ceased its Iran-related activities.

ZTE is also accused of having sent 283 shipments of US export-controlled items to North Korea, in violation of the EAR.

“Despite ZTE’s repeated attempts to thwart the investigation, the dogged determination of investigators uncovered damning evidence of an orchestrated, systematic scheme to violate US export controls by supplying equipment to sanctioned destinations,” said Douglas Hassebrock, director of the BIS’s Office of Export Enforcement, which spearheaded the investigation.

INVESTIGATIONIn addition to the $1.9bn

settlement, which comprises three separate payments to the OFAC, BIS of the Department of Commerce, and the Department of Justice’s National Security Division respectively, ZTE also agreed to active audit and compliance agreements to deter any future violations, along with a seven-year suspended denial of export privileges. “The investigation into ZTE’s activities indicates a willingness on the part of the US government to pursue non-US corporations other than financial institutions and use civil and criminal measures to enforce US export controls and sanctions regimes,” states law firm Herbert Smith Freehills.

“The ZTE settlement also provides guidance as to the type of conduct that may trigger large penalties in a sanctions enforcement action, and highlights the importance of non-US companies enacting sanctions and exports control compliance programmes,” it adds.

Chinese regulator reveals big social plans for 2017ReGULATION

THE CHINA INSURANCE Regulatory Commission (CIRC)

has laid out its big plans for the year and says it will focus on finance and taxation, internet finance, medical sports, agriculture and water conservation among other matters.

The supervisor plans to accelerate its strategy of promoting the growth of private medical insurance to support the state system.

CIRC says that it will “vigorously” promote agricultural insurance.

“It is necessary to further improve the structure of the agricultural insurance system, increase the support [provided by] fiscal and taxation policies, raise the level and coverage of agricultural insurance, strengthen the innovation of agricultural insurance products,

establish and perfect the risk dispersion mechanism of agricultural insurance, and effectively protect the legitimate rights and interests of farmers,” states the supervisor.

Overall, CIRC says that it will act to help ensure that insurance is used to improve the standard of living among Chinese citizens and deal with practical problems.

It said it will “actively promote” the medical liability insurance system, earthquake catastrophe insurance, environmental pollution liability insurance, elevator liability insurance, electric bike cross-insurance, electric new energy vehicle insurance and other “livelihood” insurance.

CIRC said that the development of the old-age insurance system has become a new “hot spot”.

The supervisor said that an “accelerated” development of various forms of the health care model is needed to deal with the ageing of the population.

Internet insurance regulation has also become a new focus, said CIRC.

—Nicholas Pratt

hong kong: Interest in captives in Asia Pacific is currently very highu The recently formed

Independent Insurance Authority (IIA) is to issue a guidance note “as soon as possible” for captives, covering topics such as captive management, captive operations, captive risk management and more.

u The IIA should have a “sales” leader to actively promote Hong Kong as a captive insurance and reinsurance centre. This role should originate opportunities, support the application process and develop the business case for a Hong Kong captive. The sales leader would also create supporting documentation and materials on the benefits of captives and the “unique proposition” of the Hong Kong captive domicile. They would also explain how captives can drive better risk management within a group and promote “soft” advantages such as supporting the business by having the captive advise on business risks and providing solutions directly to the business.

u Organise events in Hong Kong – through organisations such as the Hong Kong Federation of Insurers, IIA, Hong Kong Insurance Law Association, the Chartered Insurance Institute Hong Kong and other bodies – to promote and support the Hong Kong insurance industry. Company visits and training/information sessions are also needed for chief executives, chief finance officers and chief risk officers, to demonstrate and promote captives.More broadly, the FSDC is

worried that, as a major Asian insurance centre, Hong Kong faces a serious challenge and is “lagging behind” its Asian competitors in many areas, especially reinsurance, marine and captives. These are all crucial elements for Hong Kong’s development as a financial centre and as a “super connector” in China’s massive Belt and Road initiative.

The FSDC points out that the recent departure and/or downsizing of Munich Re and other global reinsurance companies highlights the failings of Hong Kong as a centre for the reinsurance industry. “Further departures are expected in the near future if action is not taken,” states the report.

Singapore is identified as a serious threat to Hong Kong. “The position of Hong Kong as Asia’s reinsurance centre was lost to Singapore after 1997. Over the past 20 years, the number of captives and volume of reinsurance and marine business in Singapore have grown significantly, contributing to its development as a regional insurance hub,” it points out.

The FSDC believes that, following implementation

of the China Risk Oriented Solvency System (C-ROSS) on 1 January 2016, more reinsurance placement will be diverted to onshore reinsurance companies in mainland China.

“Insurers and brokers are also diverting reinsurance businesses away from Hong Kong to Singapore, Shanghai and other reinsurance centres to concentrate their reinsurance purchases and enjoy economies of scale and tax benefits offered by these hubs,” it adds.

To address these “failings” and improve Hong Kong’s competitive position for captive, marine and reinsurance business, overall it recommends the following measures:u c-ross – Come to an

agreement with the China Insurance Regulatory Commission to apply SAR status to Hong Kong under C-ROSS. Hong Kong is currently grouped “offshore” with all other non-Chinese jurisdictions. The FSDC said this would involve the creation of a new category between “onshore” and “offshore”. “This amendment is our highest priority for stopping further loss of business and talents to the other regional financial centres and for rerouting insurance business from other offshore centres to Hong Kong,” it states.

u tax – To stay competitive in the region, Hong Kong can consider an extension of the current offshore reinsurance tax incentive to direct insurers in respect of their reinsurance businesses and to cover reinsurance of offshore life risks. It also proposes the introduction of tax incentives to insurers on marine hull and liability policies and tax incentives to brokers to encourage the placement of businesses in Hong Kong. Tax concession could also be provided to Hong Kong-registered/flagged ship owners that take insurance policies from Hong Kong insurers, and tax incentives could be provided to Hong Kong insurers that place their reinsurance businesses with Hong Kong-registered reinsurers. Finally, the FSDC proposes accelerated negotiations of Double Taxation Agreements with other countries to match with those of Singapore and London.

u insurance regulatory framework – The FSDC suggests the insurance regulator should speed up the implementation of a risk-based capital regime tailored for Hong Kong; issue guidance notes on captive management, risk management, insurance-linked securities and corporate governance; and create a dedicated resource to promote the use of captives and Hong Kong as an insurance centre.

u business promotion – The FSDC suggests it could team up with the Hong Kong Maritime and Port Board to organise business development workshops for getting both the insurance companies and the shipowners/ship registrars together to develop further marine insurance business.

u talent development – It is proposed that, to “incubate a line of young talents”, specific insurance courses in tertiary institutions should be created that enhance the current CPD programmes.“Hong Kong has all the

necessary ingredients. Hong Kong’s politically neutral status can attract vast insurance and reinsurance businesses from north Asia business regions like mainland China, Japan, Korea and Taiwan, and become a comprehensive financial centre,” states the FSDC report.

“Support from the government is crucial on talent development and to raise the profile of Hong Kong as an insurance underwriting and broking centre. More regular regional and global insurance summits and conferences should be organised in Hong Kong.

“We are keen to arrange regular outreach sessions with Financial Services and Treasury Bureau and Independent Insurance Authority, gather relevant stakeholders to work together and turn the aforementioned crises into opportunities,” it adds.

Returning specifically to captives, the FSDC sees a big opportunity for international companies to manage their Chinese risks via Hong Kong captives as the country continues the internationalisation of the RMB.

“With mainland China’s initiative to internationalise the RMB comes the potential for Hong Kong to increase its financial product offerings. With close financial links, Hong Kong is the easiest and closest place to help facilitate China’s desire for internationalisation of its currency. This leads to the potential for the growth of captives in Hong Kong,” states the report.

“With an increasing amount of international exposure in mainland China, there is a market for companies with a desire to maintain a captive’s risk exposure in RMB to eliminate the risks of currency exchange rate fluctuations.

“American companies such as Procter and Gamble, Pfizer and General Electric, that would traditionally establish a captive closer to home, may have needs to cover their mainland China-based exposure with an Asia-based captive. Hong Kong is a perfect location for these companies given its close ties to mainland China and its own establishment as a global offshore centre for the RMB,” adds the report.

CONTINUED frOm PAGE 1

sanctions: “Putting the world on notice”: USCONTINUED frOm PAGE 1


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Vol. 2 | #13 : Opportunities and : … · exposures via captives as RMb continues internationalisation says FSDC HONG KONG Adrian Ladbury [email protected] @ComRiskonline