View this article online: https://www.insurancejournal.com/news/international/2013/05/13/291660.htm
The European Insurance Forum, held in Dublin on the 9th and 10th of May, presented an opportunity to examine Ireland’s progress in overcoming the financial crisis that caused a severe recession beginning in 2008. It also highlighted the role played by the country’s re/insurance industry in managing that crisis, as well as the larger picture of a battered European Union emerging from the depths of the most serious economic upheaval the world has seen since the 1930’s.
Since 2004 Sarah Goddard, the CEO of the Dublin International Insurance & Management Association (DIMA), has played an important role in making sure that Ireland’s insurance sector remains a bulwark for the reconstruction of the country’s economy. It may still be too early to celebrate, but the signs are there that the country is recovering.
After the conference concluded Sarah told the IJ why, and reviewed many of the long term changes in the European Union, and its re/insurers, that have come about as a result, not only of the financial crisis, but also in response to the rapidly changing makeup of the global business community, as technology makes the world smaller and smaller.
“One of the reasons we chose to have it [the conference] on the 9th and 10th of May was because the 9th was Europe Day,” Sarah said. She explained, as did Damien English, a member of the European Parliament in his keynote speech, the significance for all Europeans. On that date in 1958 the first steps were taken to bring Europe’s nations together to make certain that the wars of the first half of the 20th century would never happen again. The EU’s 27 member nations are the direct result of that initiative.
Ireland currently holds the EU presidency, a post that rotates among member nations every six months. “There’s been a lot of activity in holding this position; Ireland is helping broker the future,” Sarah said. “We’re seeing things like the single banking union being brokered by Ireland, to bring a new mechanism into banking regulation in the way that banks are structured within Europe,” a role that Irish “politicians and civil servants should be rightly proud about.”
In addition to the engagements on banking Ireland is also involved in trying to iron out a deal for the adoption of the EU’s budget, which “didn’t get passed, when it was supposed to do so at the end of last year.” She said it is looking increasingly likely that the budget will be passed before Ireland’s presidency finishes at the end of June.
These actions are “a move towards the future,” in contrast to the turmoil over the last several years, which were almost exclusively given over to dealing with the financial crisis, as more countries were bailed out. Ireland expects to be completely clear of its engagements with the International Monetary Fund (IMF) and the EU’s bailout fund by the end of this year. “That will be a great step forward,” Sarah said. “In a lot of circles Ireland is being personified as the ‘Poster Boy’ of those economies;” the ones that have suffered serious impacts from the economic crisis. “We’re going in the right direction.”
As DIMA’s CEO Sarah is closely involved with the Ireland’s re/insurance industry. A number of companies, brokers and related service providers, mainly lawyers and accountants, are now based in Ireland, mostly in and around Dublin, for European and international operations. They continued to be a bright spot amid the gloom. The financial services industry in Ireland “has been very resilient; a lot of the fundamentals for the insurance and reinsurance sectors didn’t actually change as a result of what has happened with the sovereign downgrade -with the banking crisis,” she said.
In fact there have been some positive developments. “The cost of doing business in Ireland has come down,” and even though unemployment remains high (around 300,000 in a country of 4.5 million), “there are actually a lot of really good people who, are now available.” Many of them have come back to the market, and they offer the industry opportunities to expand their business “by having really good people on the ground.”
The economic crisis has produced other effects, notably an overhaul of the financial services regulatory system. It was introduced two years ago, and the regulator, Matthew Elderfield, “was very clear that it will be ‘the best in the world.'”
Another change involved the “fitness and probity” of those who run companies. They “should be of the right caliber and [possess] the right experience to be able to go about that job in the best way possible.”
As far as the long delayed Solvency II regulations are concerned, Sarah explained that at least some of them will come into force at the beginning of 2014, and that Ireland’s re/insurance industry has worked with the country’s Central Bank on the provisions. They will “come into play in Ireland,” although their adoption has not yet been made mandatory for EU countries, which are given the choice of complying or explaining why they haven’t.
Ireland is firmly committed to compliance, “partly because we have such a big industry proportionally to the size of the nation,” Sarah said. There are approximately 250 [companies] who operate in many different sectors. Some companies – XL, Willis – “have their global headquarters here, while others have their European headquarters here” – PartnerRe Europe, AXIS. “So it’s really important that the business environment and the regulatory framework is very much fit for purpose.” As Elderfield pointed out in his address to the conference the regulations must “be fit for the 21st Century.”
Sarah explained that Solvency II permits an insurance or reinsurance company to develop its own internal model “to work out what its solvency requirements should be.” Provided they are approved, the company doesn’t have to use the standard model. “Ireland has the second largest number of internal models to be approved in the whole of Europe,” she said; “more than Germany, more than France; it’s only second to the UK.” As home to many companies that do business across Europe, Irish regulators are also involved in vetting the models with their counterparts in other EU countries, which gives Irish regulatory provisions increased importance.
The regulations that are being implemented across Europe are essentially creating a “hub and spoke” system, with the lead regulator being located where a company’s headquarters are situated – the hub – and regulators in other EU countries where it does business vetting the rules for their jurisdictions – the spokes.
Sarah described Zurich’s situation as an example. It has its hub for a lot of its “European insurance operations here in Dublin, so they’ll have branches in other European countries; there are a number of organizations that are operating like that now. Irish regulators will liaise with other regulators on that particular issue.”
Discussions at the conference also focused on emerging risks, opportunities and countries. One of these, Sarah pointed out, is the study at the University of Limerick on nanotechnology. “It involves liaising with the scientific community to better understand [the risks].” She also said “a number of people at the conference had shown interest in that sort of work that’s going forward.”
DIMA has “strong links with the university that go back more than a decade,” and it now offers advanced courses, leading to an MSc degree in risk management, a field that is becoming increasingly important to the re/insurance industry in particular and to most businesses in general. “We’ve got a very complicated world nowadays, and interconnectivity, which maybe people didn’t realize,” Sarah said. “In fact prior to the way everything went as far as the cross pollution, if you like, the economic turmoil in the U.S. showed up the complexity of the system.”
Supply chain risks exemplify this complexity, and have been highlighted recently in Europe with revelations that horsemeat and to a lesser extent pork was being mislabeled and sold as beef. “One processed meal, one ready meal [frozen or packaged food] may have 450 different stages before it lands in your shopping basket, goes into your oven and ends up on your plate,” Sarah said. “That’s a good illustration of where we get to as far as complexity is concerned. And then you get the challenge to the risk manager as to how do they deal with this risk, which can be so far down the chain.”
The re/insurance industry faces other risks as well, beginning perhaps with the ongoing low interest rate environment. While the industry has been facing this problem for several years now, “what happens if that changes?” When interest rates finally rise, which is more or less inevitable,” what difference will that make?”
Reserving policy, which regulators are planning to examine more profoundly, is another challenge for the industry. It’s just one of a number of “new pressures coming into the industry,” Sarah said. All of the “new capital” coming into the re/insurance industry is another one. In fact, as she pointed out, the supply of capital is sufficient enough that even a catastrophic event like Superstorm Sandy, which resulted in industry losses of around $19 billion, “hasn’t had much of an impact, if any impact, on rates.”
The new capital in the reinsurance market is primarily used to fund insurance linked securities (ILS), cat bonds and other vehicles such as side cars. “There are new products, which are competing with traditional products,” Sarah said; but there’s also “investment in the traditional reinsurers, because a lot of investors don’t see that there are other areas where they can make a return.”
That situation, coupled with the low investment returns, “are things, which are really challenging management at the moment, but they are getting their arms around these issues. So, whether we’ll see some more consolidation, whether we’ll see the competition aspect getting pulled by something, but if ‘Sandy’ wasn’t big enough to make a change in the market, the question is, is there anything big enough to make a change in the market?”
Some events might make a difference, such as one similar to asbestos, or a huge liability, such as environmental pollution. But Sarah cited XL’s CEO Mike McGavick’s indictment of the insurance industry’s increasing irrelevance as an important consideration. His speech, given at last year’s EIF conference, and repeated at the Reinsurance Rendezvous in Monte Carlo, posits a question that remains unanswered. “With technology and those types of risks, are we embracing them?” Sarah said. Unfortunately the re/insurance industry is still slow to do so.
On a more positive note she pointed out that there are “still strong traditional markets, and there are emerging nations, Southeast Asia, for example, where perhaps some of the lines that are tried and tested, and the products that have been tried and tested in other markets are now being offered to policy holders over there; so, there’s that kind of geographic diversification. And there is the beginning of an approach to things like cyber risk and nanotechnology, which I’m sure will bear fruit in the future.”
The re/insurance industry always seems to be in some kind of crisis, but, if you are going to run a business that takes on the risks that its clients/customers don’t want, that’s an integral part of your business model. Given how well the industry – with some notable exceptions; bond insurers and AIG – fared during the recent financial crisis, it should be able to deal with all of the emerging risks and new regulations, while it continues to handle auto accidents, house fires, professional liablities and the occasional natural catastrophe.