Be brutal to failing insurance ventures, urges Chubb chief

Associations, Conferences, Seminars, Forums, Insurance and Reinsurance, Marine Insurance — By on November 18, 2016 at 7:18 PM
Andrew Kendrick of Chubb Group.

Andrew Kendrick of Chubb Group.

Be brutal to failing insurance ventures, urges Chubb chief

By James Brewer

An industry leader has spoken out against any moves to prop up insurance businesses that become unviable.

Andrew Kendrick, senior vice president and regional president for Europe of Chubb Group, aimed his remarks at Lloyd’s.

Mr Kendrick was delivering the keynote address in London at the annual AM Best Insurance Market Briefing for Europe on November 16 2016.

He respected the view of Lloyd’s that it had to protect its central fund, but “market forces must be allowed to happen. Some people don’t deserve to be saved. I think Lloyd’s has done a terrific job, but sometimes you cannot help people doing the wrong thing.

“They (Lloyd’s) have a terrific reputation in the market, but I sometimes think they might over-mollycoddle. People won’t learn… unless things are dire.

“If you don’t see companies fail, then nothing is going to change. Robert Hiscox (former chairman of Hiscox the Lloyd’s insurer) said you have to see blood on the streets.”

His audience consisted of 150 executives, around 50 of whom were from overseas, from a wide variety of insurance enterprises. Mr Kendrick is a former member of Lloyd’s Franchise Board and former chairman of the London Market Association. He was Europe regional president for ACE before that group acquired Chubb for $29.5bn in January 2016.

Mr Kendrick, who called his address Lessons from a Remarkable Year, described the UK referendum campaign as rife with misinformation, confusion and noise, and depressing, but at a conference organised by Chubb recently almost two-thirds of those present were confident that the insurance industry would manage effectively the impact of Brexit.

“Insurers need strategies that provide for the greatest flexibility, whether there is a hard or soft Brexit…  It seems likely there will be more surprises along the way,” he said. He added: “The immediate repercussions in many ways have not been as bad as predicted.”

He said: “The London market has been tried and tested over 300 years and has constantly reinvented itself under pressure.” The industry could not afford to be complacent about Brexit, but he was confident it had the right forms in the Association of British Insurers and London market associations to deal with the challenges.

He said that in Europe “we cannot bet on market conditions getting any easier; be ready for more industry consolidation, and insurance must work harder to stay relevant. “

More than $75bn of new capital had come into the industry from hedge funds, pension funds and other sources. There was no longer a question about the long-term place of alternative capital in the insurance market, “the question today is: how much more is out there?”

There had been more than 200 start-ups recently challenging the traditional insurance model. “Insurance rates have reached, or are in danger of reaching, unsustainable levels in too many lines. I cannot remember any time when the rating environment has been more challenging, especially in the UK and London market. All of this is taking place against a backdrop of benign loss experience. Prior year releases are running at the highest level for 30 years.”

Mr Kendrick, who said that the Chubb-Ace tie-up was working extremely well, said that insurance should be prepared for more consolidation: the number of big deals has increased steadily in recent years. In 2013 there were nine deals of $1bn or more; in 2014 there were 14; in 2015 there were 24; and 18 had been disclosed in the first nine months of 2016.

“We need to work harder to stay relevant,” he insisted, adding: “Almost any risk can be insured when we have the expertise to underwrite it and the information to understand it.” For managing emerging risks, he drew a parallel with directors’ and officers’ liability, one of the classes which were once niche and were now mainstream. “I don’t doubt that cyber risk will join them. It requires us to broaden out the solutions and look beyond traditional insurance.”

He urged fellow practitioners to go deeper into risk management, loss control and crisis response. Pre-event loss control – helping the assureds with their planning – as well as post-loss control (making sure the client gets the loss adjusters there on time, paying the claim quickly and helping them get back on their feet) needed to be improved. “I do not feel we are the best at claims service in this industry.”

The industry needed to improve its record on diversity. “If we fail, we will not reflect the society we are here to serve.” He said that millennials (people who came of age after 2000) will make up 25% of the global workforce by 2025. They have different expectations of their working life than any of us. They are also more likely to move between employers.”

He was questioned whether the challenge of the industry being unsettled by the new economy was overstated. He replied: “Every single insurer must be looking at his or her proposition and asking, is it going to be relevant in five or six years’ time.”

Asked about continuing gaps in insurance access in terms of the traditional type of risks, Mr Kendrick referred to a high degree of self-insurance by the oil companies: “I think it is naive of some of the clients not to buy more catastrophe insurance.” When there was another big incident like the 2010 explosion in the Gulf of Mexico, there would be “dire consequences” for many clients. Insurance was still seen as an expense, rather than as “terrific value.”

The AM Best event set out to examine the impact of current economic conditions and ratings trends for insurers and reinsurers in the European sector and the London market.

Greg Carter.

Greg Carter.

Greg Carter, managing director, analytics for AM Best Europe Middle East and North Africa spoke of challenges that companies faced to meet shareholder expectations, low investment yields, and an abundance of reinsurance capacity “that defined the market” at a time when no other investments offered such a broad return on capital. Another dominating factor was continuing merger and acquisition activity, especially since the annual gathering of reinsurers, the Monte Carlo Rendezvous, when a couple of big deals had emerged, and there were rumoured to be more in the pipeline.

Particularly in the London market, underwritings teams and portfolios of business were still being moved “behind the scenes.”

According to figures compiled by AM Best and the Guy Carpenter brokerage, reinsurance capacity comprised $340bn traditional and $71bn convergence, at the halfway stage of 2016. For 2015 the figures were $332 and $68bn; in 2014 $340bn and $60bn; in 2013 $320bn and $48bn; and in 2012 $292bn and $19bn,.

Mr Carter said that before Solvency II requirements came into force, the market was already well capitalised and companies typically robust. One of the key benefits of Solvency II was that it had raised the level of risk management across companies and markets.

Carlos Wong-Fupuy

Carlos Wong-Fupuy

Carlos Wong-Fupuy, senior director at AM Best in London, outlined the natural catastrophe coverage schemes in the largest countries in Europe. He pointed out that there was an increasing gap between the economic loss and insured loss incurred by disasters.

In the light of climate change, weather-related events were increasing in frequency but there were man-made factors that had a bearing on impact, related to increased accumulation of exposures.

Only 30% of natural catastrophe losses were covered by the insurance industry, but globally there were huge variations. In the New Zealand earthquake of 2011, up to 80% of the losses were covered, whereas in Haiti coverage was under 1%. It was not just a problem in developing economies. Japan despite having a reinsurance programme with government support saw average losses covered 11% to 20%. In California the take-up rate was around 12%.

Despite high level of exposure to flood and earthquake, Italy had low household insurance penetration rates, below 2%.  Mr Wong-Fupuy instanced the 2009 earthquake in L’Aquila when the economic loss was some Euro10bn versus insurance claims of Euro250m. The Emilia Romagna quake of 2012 caused Euro12bn in damage and disruption, but insurance covered only 1bn. The Umbria 2016 events produced similar economic losses, and lower insurance claims as the region was more rural. Discussions were going on between the Italian insurance association ANIA and the government, on increasing insurance penetration rates, compulsory cover, reduction or elimination of rates on premiums, and state guarantee.

Mr Wong-Fupuy said there was no “one size fits all” solution to the problems, but incentives and restrictions to limit adverse selection of clients were key. There was a need for public-private partnership in catastrophe schemes, creating an opportunity for the private sector.

Catherine Thomas.

Catherine Thomas.

Catherine Thomas, senior director analytics at AM Best, warned that insurance company financial results over the last five years have been supported by substantial releases of reserves. Insurers and reinsurers had become increasingly reliant on their reserve holdings and reserve releases for profitability which has “set alarm bells ringing.” Most of the releases had come from short-tail property reserves.

The level of reserve releases was unsustainable as confidence levels declined. Reserve strengthening was required, but this would deplete earning, capital adequacy and reputation.

On the positive side, companies had strengthened their actuarial departments and there have been improvements in modelling and data analytics. What Ms Thomas called “proactive companies with robust feedback loops” were likely to emerge relatively unscathed. Insurers with diversification would be better able to deal with inflation and emerging risks.

Ms Thomas said that insurers will become increasingly vulnerable to large accumulated losses. Liability aggregation was one of the most complicated factors facing the insurance industry. She advised insurers to analyse the transport routes of their assureds as well as risk management approaches.

With global supply chains, local events could lead to international losses, which might occur over multiple years and territories. It was difficult to predict future losses from the record of past events. Globalisation of production and trade, and widespread use of new technology gave rise to complex interdependencies and exposures, large unexpected loss accumulations, and potential pressure on insurer earnings, capital and liquidity. Meanwhile the terms and conditions able to be secured by insurers were deteriorating

Mahesh Mistry, a director of analytics at AM Best, said that while emerging markets presented opportunities, many insurance firms operating in India, Russia and China were making losses, so growth in those markets did not necessarily translate into growth in profitability. Investment returns were declining from double to single digits but “there are pockets of opportunity.”

Excessive expansion was one of the main reasons for insurance failure. Is it sensible to grow in the current economic environment? There was now an opportunity for portfolio consolidation and realignment of strategy, to focus attention on select products and territories, and innovate into niche and non-traditional lines.

Mr Mistry presented an overview of the energy sector, where he said negative pressures were likely to persist for insurers, but there would be greater demand for insurance related to alternative energy sources including nuclear, solar and wind power and US shale oil. Since 2005 the level of capacity in the energy insurance market had more than tripled and rates have consistently declined. Premiums were likely to decline at the end of the day. Projects were being cancelled “and I think for energy insurers it is going to be a tough market.” Fifty per cent of oil supplies were coming from countries that tended to be very volatile.

Stefan Holzberger, chief rating officer of AM Best, said that there are a lot more headwinds for the sector than tailwinds. AM Best had a negative outlook on the sector for several years, and now “performance really matters in terms of rating.”

The benign claims environment had reduced return on equity to an average of 4% or 5%, which was below the cost of capital.

From its London office, AM Best covers more than 200 companies with its ratings in Europe, the Middle East and Africa.

AM Best has meanwhile released updated drafts of its credit rating methodology and criteria procedure for the US property and casualty capital adequacy ratio. This aims to provide greater detail, clarity and transparency to the rating analysis.

The agency has simultaneously released proposed revisions to criteria procedures for the capital adequacy ratio for US property and casualty companies; US and Canadian life and health companies; and insurance companies domiciled outside the US and Canada.

AM Best is requesting comment from interested parties on these draft documents, which are available in the methodology section of its website, by March 1 2017.

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