Adrian Ladbury (AL): What is your view of the current state of the commercial and corporate insurance market and what is the outlook overall?
Richard Taylor (RT): By its nature the insurance market is a very broad concept, with each sector being in their own commercial cycle. Relative to this article our expertise lies in the corporate risk space, which we would look at here in a couple of key areas: P&C and motor fleet.
Pricing in P&C remains stubbornly static with little or no sign of hardening. If anything, those attempting to attract the prime risks are still driving premiums down. Perhaps now to an unsustainable level.In motor fleet, and particularly our specialty, large fleets, the recent changes and uncertainty around the discount rating calculations caused a spike in premiums.But if one factors that out, we are seeing general pricing stability across the market. That said there are pricing variances, mainly driven by risk appetite. For example, bus and coach programmes have lesser appetite, and as such we are seeing genuine increases.The key factor driving this soft market has to be the seemingly endless capacity that continues to come into the sector. Much of it being from existing carriers, rather than new entrants. With a clamour to write the ‘prime’ risks this is materially driving premiums down.If there is a capacity shortage it thereby naturally falls to those programmes with negative loss ratios or in the higher exposure areas such as (petro)chemical, power generation, pharmaceuticals, wood working and recycling, to name a few.Effectively it is this end of the market that is bearing the pressure of any rate increases to subsidise the under-rated business at the other end of the risk appetite spectrum.
AL: What is your view of the insurability of supply chains? This is clearly a potentially huge area of risk and opportunity for the insurance market, but also an area in which a lot of money can be lost. What is your view?
RT: Rounding off our capacity points made above, we see a few areas where risk appetite varies materially; supply chains have real challenges when it comes to insurance classes such as contingent business interruption (CBI) and cyber.When one considers how supply chains are structured today the reason for these sensitivities becomes apparent. For some time, they have become more complex in structure, with many multiparty arrangements within them. This serves to create a raft of emerging intangible risks that sit alongside the traditional.We have seen increasing uncertainty amongst those in control of the chains to be able to fully comprehend the extent of their chains, or have tools available to allow them to map the extent to which this creates risk exposures for them, tangible and intangible in equal measure.With a three-dimensional depth of the supply chain and the interrelated relationships that all suppliers have within it, there is too often a lack of appreciation of the effect a failure – that can be three, four or even more times removed – will have upon the organisation.A simple failure can bring the whole supply chain to a halt, causing any number of financial and reputational losses. One only has to look at the effects of the Thai floods or Tianjin explosions to witness the consequences within supply chains.We believe that the industry needs to coalesce to create tools that address these issues. Tools that create robust supply maps and transparency across the chain and shared amongst all relevant stakeholders within it. Only then can truly proportionate risk protections be put in place.We are investing in such tools here at HDI and are aware of others doing likewise. In our thinking we also realise that the maps we are creating are only snapshots of a fixed moment. By their complexity, supply chains have become constantly evolving, mapping them is therefore intensive and laborious. It is imperative that any tools recognise this and empower clients, and by extension us, to respond with agility.
AL: What about cyber? This is also a fast-evolving risk that is difficult to identify, measure and manage let alone transfer. What is your thinking in this important area?
RT: If supply chains are complex to comprehend, then repeating this in something as broad as fast-evolving cyber risks is perhaps even more so. The product offerings in the market are generally good, but making them proportionate to each client’s actual exposures, both risk and quantum, is less developed.An important pre-requisite for us to write cyber cover and perhaps offer higher limits is that we really understand the underlying risk. Therefore, we require comprehensive risk information, and an in-depth risk dialogue with the client. This is even more important if the potential customer has a very decentralised and heterogeneous IT and information security landscape.We also need to deeply understand the clients’ needs. Simply put, it is not our ambition to just sell a product. Our target is to create a tailor-made solution fitting the clients’ true needs. Without this risk dialogue, we do not think it is the right approach to sell cyber products.
AL: How could and should the insurance market improve service, particularly in claims, and reduce the overall cost of the system for the benefit of all parties?
RT: Your question has a focus upon claims. At the outset, I would like to say that for our corporate markets, we believe the industry does a fantastic job servicing claims. With the complexity of clients’ risks and the related insurance products created to protect them, there are many grey areas of interpretation that confront our claims specialists daily. The fact that the vast majority of these are resolved amicably every day stands testament to the quality of service.When we look at how this is achieved, it gets to the heart of your question. Corporate insurance programmes are highly specialised and not transactional. We therefore work tirelessly to build long-term professional relationships with clients and their brokers. Like any relationship, the longer they exist, the better the understanding between us grows. This builds trust and a common desire to do the best for each other.Bringing our claims specialists into these relationships from the outset adds real value. Working collaboratively, it means we minimise any grey areas ahead of a claim and can deliver a more certain outcome.Of course, not all of this is delivered internally and like any insurer we work with a range of external claims experts, including third party claims administrators. This does not mean that we abrogate any of our responsibilities to our clients. Rather we work hard to ensure those we work with meet our claims culture with the same rigour as internally at HDI.This text was first published by Commercial Risk Europe. Publication on this website by courtesy of Commercial Risk Europe:
Adrian Ladbury: Who within the organisation should be the risk manager’s best friend?
Dirk Schilling: Risk managers should have many friends within the organisation because they should be fully embedded and aware of all aspects of the business and operations. They are the individuals who link all the dots together. If you had to pick one individual who should be the risk manager’s friend then it should be the CFO because risk and insurance management goes hand in hand with financial risk. In both areas the key is to avoid and manage volatility. The risk manager also needs to understand the product side of the business so that they can make a meaningful assessment of the potential impact of catastrophes such as earthquakes. Then there is the legal side, which remains very important. Contract risk must be understood and managed and this must be done in cooperation with legal.
How would you describe the state of the commercial and corporate insurance market in Germany currently? Can risk managers expect a tougher time during coming renewals because of the big catastrophe losses last year?
We already see evidence of the first cases of shortage in capacity here and there, primarily in the property insurance segment. This applies, for example, to accounts with a negative loss ratio over the past years, as well as for highly exposed risks such as the petrochemical industry, power generation, pharmaceuticals, the wood-working industry and recycling to name a few. From my point of view, this does not come as a big surprise. Frankly speaking, after 16 years of a worldwide softening market and with regard to our book of business, I do not think there is any room for a further decrease of rates in general. The contrary is true: in property insurance premiums have to rise; in the liability line of business, free extension of coverage without adequate premium is not possible anymore.
What about capacity? We hear regularly that insurers have expansion plans in this market but it does not seem to make sense because there is already overcapacity. Why is this happening and what is the response of a leading insurer such as HDI?
There may be high capacity available in traditional lines but this is not necessarily the case in more specialty lines. In these areas, such as high excess layers, these market players feel they can move in and out quickly and easily. For certain specialty lines such as cyber there is still a need for additional capacity because insurers need to be cautious in this area, for which there is little experience and the market as a whole really cannot offer more than €100m to €150m in limits for a programme. It also depends upon the sector.
Supply chain has become an increasingly important risk area. Is this really an insurable risk and how can it be more effectively managed and insured in your view? What can insurers do to help customers?
This is an insurable risk area and should be a priority for any ambitious risk manager. The risk manager needs to drill into various roles and functions to truly understand the supply chain and analyse it properly, find out where the major exposures and impacts lie. We can also help the customer make their supply chain more resilient, improve transparency and ensure that the company has backup suppliers. A better understanding of the risk leads naturally to better pricing. It is about transparency and alignment. You need to be really specific and dig deep into the supply chain. The key is to persuade the client and the wider company that this really adds value and is not just another insurance cost. The risk manager really has an interest here. It is the perfect opportunity for the ambitious risk managers to show they can add real value.
Has the arrival of the GDPR sparked increased interest in cyber insurance and are you seeing rising demand for the cover in Germany as a result?
Awareness of data protection has definitely increased this year, partly because of the GDPR. Previously this was largely the domain of data and IT specialists, but now the discussion is much wider. Now every organisation knows they have an exposure and they have had to rethink their data protection policies and strategy.
There has been an increase in demand for cyber cover and we are very satisfied with our growth level in Germany. Demand really picked up late last year among larger companies and is now spreading down into the middle market. We are very satisfied with this as it demonstrates the rising awareness among our clients concerning the great dangers of cyberattacks. There are still only a handful of companies that can offer meaningful cover to larger corporations in this area. There is plenty of competition in the middle market as you would expect. Is there adequate capacity for larger clients? Towers of coverage can be built up to €100m to €150m and more can be found in non-traditional markets.
What one big change would you bring to the commercial and corporate insurance market to make it more efficient and reduce cost?
The introduction of common standards and claims data on a single platform for the whole market would be perfect. The banking sector has the SWIFT system, which is a messaging network that financial institutions use to securely transmit information and instructions through a standardised system of codes. Why does the insurance sector not have such a tool? It would make transactions between customers, brokers, insurers and reinsurers so much easier and efficient, and would help build essential data, at least for the 20 major data points.
Do global programmes still make economic sense for risk managers, given the recent rise in protectionism, trade wars and increasingly complex and challenging fiscal rules such as the US tax on export of reinsurance premiums?
Global programmes are still the way to go. They give the company a centralised programme that enables them to steer the insurance from headquarters and ensure that coverage is comparable and fit for purpose. It is of course the most cost-efficient approach. But it is not getting any easier because of the political tide, which appears to be going in the way of trade barriers and protectionism. There has also been a shift in tax policy again in the US. It has recently introduced the tax on export of reinsurance premiums by international insurers. Some insurers without US subsidiaries have to deal with 5% tax this year, rising to 10% and 15% in future, and need a solution.