After the risk managers expressed their views on how re/insurance carriers were handling such matters as innovation, new policies and claims handling at the Federation of European Risk Management Associations’ (FERMA) bi-annual forum, the carriers got a chance to respond.
The first to speak was Peter Hancock, Executive VP and CEO of AIG, who painted a rather upbeat picture of the current state of the insurance industry, describing the market as “developing.” He explained that the casualty markets seemed to be reviving, and that insurers now had “more understanding of risk.”
Hancock also sees the influx of alternative capital into the re/insurance market as a positive development, not so much for the capital it brings to back policies, but rather to enable re/insurers to expand the types of services they can offer clients. He sees innovation and collaboration with the new capital providers as an opportunity.
Axel Theis, CEO of Allianz Global Corporate and Specialty (AGCS), noted the “uncertainty” prevailing in today’s world, which requires innovative products to provide solutions for the “interconnected world” we now live in. In addition to uncertainties surrounding natural catastrophes, the industry also faces regulatory, legal and tax uncertainties, as well as more risks related to supply chains and D&O coverage.
“Insurance equals stability and continuity,” he said, which can be achieved by creating “trust in relationships [between insurer and client], making sure they are solid and keeping your promises. We’re there to help our clients in a crisis.” Handling that crisis requires coordinating claims management and putting in place good underwriting, based on risk consulting. Theis agreed with the risk managers’ panel that companies should “not outsource claims,” but should “pay them and keep control over them.”
XL’s CEO Mike McGavick reiterated a central theme he’s focused on for the last two years, namely that the re/insurance industry has failed to keep up with a period of economic growth, and is becoming less relevant to the global business world. His evidence? Between 2001 and 2011 the industry’s contribution to global GDP declined from 3.4 to 2.8 percent.
McGavick’s solution is for the industry to “stop looking backward, to think anew,” and to reorient the way it does business to cope with “rapidly changing risks. Innovation has to be the industry’s top priority and, if the risk industry is losing ground, we have to look to ourselves,” he continued. “We can’t blame someone else. We have to ask, what are we doing to raise awareness of how risk is changing and the true trade off of risk for a company?”
He also cited XL’s commitment to innovation. “Our payroll is our research budget,” McGavick said. “Our job is to look at the challenges out there in the world and the extraordinary amounts of information available and apply an insurance mindset to convert our knowledge into a product and solution.”
Thomas Hürlimann, CEO of Global Corporate at Zurich explained that technology isn’t the only area that’s changing rapidly. Around 50 percent of the world’s population lives in cities, and that is expected to continue to increase. 70 to 80 percent of those metropolitan areas are subject to natural catastrophe risks, which are expected to increase in frequency and severity.
As a result he said the industry “needs more than new products.” It also needs more risk managers, who are “more relevant,” who take a “holistic approach” and can identify “new and different risks.”
Lloyd’s CEO Richard Ward, citing the legendary decision after the San Francisco earthquake and fire to “pay all claims,” said Lloyd’s does just that. “We engage with our clients, and we’re willing to pay claims.” Lloyd’s paid total net claims of £12.9 billion ($20.55 billion) during 2011, including £4.6 billion ($7.33 billion) of catastrophe claims, which pretty much proves his point.
Inevitably, however, problems do arise when claims are made that might or might not be valid, as defined by the wording of the policy. Theis noted that such situations should prompt a review of the policy wording; while Hancock said it offers an opportunity to be more objective, to make the policy conditions clearer, and to “get rid of outdated wording.”
Some insurance products are not easy to construct – cyber liability being a case in point. Hancock said he saw very little take down for it from large companies, “only smaller ones.” It’s very difficult to calculate what the cost of a claim might be, and, as a result the policies for cyber risks that are available are quite costly. Hancock’s solution is “more research,” and specifically with the software suppliers and the insurer’s client “to get a good product at an affordable price.”
“Data management is necessary for innovation,” said Ward. New products will be more expensive, he explained, but they need to be produced, and as they are, the expense should be reduced. He added that the “risks CEO’s fear most aren’t the ones they can insure against, but the risks that they can’t.”
One of those is reputational risk. Theis agreed that “reputational loss isn’t really insurable; however, he added that companies can “insure the costs of reestablishing their reputation.”
As businesses get more complex at all levels, the complexity of insuring the risks increases. “Complex, interconnected supply chains and the collection and storage of information in data houses in areas of the world prone to natural hazards, are just some of the issues challenging risk managers and insurers,” McGavick said. ”It’s a constant challenge to find the real risks.”
Hürlimann agreed that because of the complexity it does take more time to engage in the assessments necessary to understand the risk, and therefore to create solutions that will work, which in turn means that the initial take up on such policies is often low, but eventually it does happen.
The questions concerning alternative capital came up again. Hancock pointed out that as insurance coverage in emerging markets is still quite small, the additional availability of capital could be an incentive for companies in those markets to acquire more insurance. For Richard Ward the question is more one of supply and demand. He said the “while the supply must meet the demand, there must also be some benefit [to a company] from buying insurance.”
In that context the premiums paid for that insurance have to be seen as a useful expense for the company. Theis pointed out that the policy acquired is in some ways “substitute capital,” as it protects the company from having to conserve capital to provide against costly risks. Hancock said it “creates value and promotes growth,” adding that “premium dollars should be spent on the greatest risks.”
So what did the four panelists feel was most important for their companies? “Product relevance,” said Ward. “Get the best people,” said Theis. ”Innovate and make more of a difference,” said McGavick. “Growth in emerging countries equals a need for insurance,” said Hürlimann.