Commercial Risk Europe — February 2016 by Calixa Creative

www.commercialriskeurope.com

WEF: GLOBAL RISK REPORT The report finds global risks are imminent and materialising in unexpected ways, concluding that it is now time to move beyond mitigation and build resilience . . 9–12

CHUBB.

Volume 7

#01

February 2016

AMRAE HOT SEAT: BRIGITTE BOUQUOT Ahead of the annual Amrae meeting in Lille this month, CRE spoke to Brigitte Bouquot and heard that she believes risk managers must be ready to influence decision-makers in a world that gets riskier by the day. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

AIG.

ACE’s record $29.5bn acquisition of Chubb proceeds on back of healthy profits More M&A activity is expected soon Adrian Ladbury aladbury@commercialriskeurope.com

[ LONDON ]—THE NEW CHUBB insurance group kicked off the year with an excellent set of full-year 2015 results and announced its new leadership team for Europe. The $29.5bn acquisition of Chubb by ACE was formally confirmed in January, just as a new report on mergers and acquisitions (M&A) in the sector from Willis Towers Watson concluded that many more deals will follow during the next three years. CHUBB: Turn to p22

ZURICH.

Zurich lures Greco away from Generali Ben Norris bnorris@commercialriskeurope.com

[ZURICH]—ZURICH INSURANCE Group has poached Mario Greco from Generali and will appoint the Italian as chief executive officer (CEO) on 1 May 2016. After weeks of media speculation, Zurich has announced that Mr Greco— who has been CEO of Generali since 2012—will succeed Tom de Swaan, who took over as head of the insurer on an interim basis when Martin Senn stepped down by “mutual agreement” in December. The appointment is subject Mario Greco to regulatory approval. Zurich’s board said the decision to move for Mr Greco follows a “thorough global review of external candidates”, as well as a comprehensive assessment of the attributes needed ZURICH: Turn to p20

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AIG pushed to limit by Icahn’s demands but refuses to cave in Adrian Ladbury aladbury@commercialriskeurope.com

[LONDON]—AIG CAME CLOSE TO giving in to activist investor Carl Icahn’s demands for a breakup of the group into three separate units, as it announced in late January that it would sell non-core assets and revealed a new structure that could lead to the sale of more operations if they do not perform as planned. The insurer’s embattled leadership announced plans to return at least $25bn of capital to shareholders during the next two years, execute an initial public offering (IPO) of up to 19.9% of United Guaranty Corporation and sell off other units such as AIG Advisor Group. It has also committed to a costcutting programme designed to realise $1.6bn in two years and a plan to reduce its commercial property and casualty (P&C) accident year loss ratio by six points by 2017.

Battle with Icahn may dominate agenda but $3.6bn of loss reserve additions needs further analysis Dirk Wegener

FERMA.

$3.6bn pre-tax in the fourth quarter of 2015. Accident years 2004 and prior represent $1.3bn of this figure. The remaining $2.3bn results in an increase of just under 0.7 points on average for the 2005 through 2014 accident year loss ratios, explained AIG. LOSS OF RESERVES Much of the restructuring, The insurer also revealed cost-cutting and performancerelated action appears to have further significant loss resoccurred because Mr Icahn erve increases, a continuing Peter Hancock has ramped up the pressure to trend during the past couple of years that risk managers may find break AIG into three separate entities, more worrying than the ongoing to avoid the group being classified as battle with Mr Icahn when the dust a Systemically Important Financial Institution (SIFI) and substantially settles. AIG said its fourth quarter non- raise profitability. In his latest public letter life loss reserve analysis had revealed the need to strengthen reserves by published on 19 January, the investor

said AIG’s management has been either “purposely misleading” in its public disclosures or is “negligently uninformed” about the feasibility of his de-conglomeration plan. HARD QUESTIONS “In conversations with management, I learned that disclosures provided on the third quarter earnings call regarding obstacles to deconglomerating AIG were, in some cases, materially inaccurate,” wrote Mr Icahn. The investor called on AIG’s nonexecutive chairman Douglas Steenland to force chief executive officer (CEO) Peter Hancock to finally admit that breaking up the group is the best plan and get on with such action. AIG: Turn to p20

RENEWALS.

Corporate rates down in relatively stable renewals Buyers set to adopt Insurance Act early Stuart Collins news@commercialriskeurope.com

[LONDON]—CORPORATE INSURANCE BUYERS saw rates fall yet again at renewal, although the market is stable in comparison with reinsurance, where prices tumbled in Europe and Asia. Renewals in January also saw buyers in the London market looking to apply the 2015 Insurance Act early, although some carriers were better prepared to deal with such requests than others. Overall, the market for large, risk-managed property/casualty clients has remained stable, with no major changes in rate, retentions or the limits purchased, according to Paul Kim,

co-chief broking officer at Aon Risk Solutions accounts,” said Mr Pritchard. Almost all lines of business and industry US Retail. Marsh also noted the favourable, yet sectors have seen intense competition and ample capacity, he explained. There relatively unchanged market condare, however, a small number of itions for corporate risks. Property risks, such as the waste sector rates were down by an average of 6% and for social housing, where in 2015 and 3.5% lower for casualty, competition is lower, he said. said Tim Pritchard, head of corporate Some sectors meanwhile, placement at Marsh UK & Ireland. such as aviation and energy, saw “For the majority of clients, greater reductions at renewal as renewals were flat. However, there insurers fought to maintain their were still some big reductions for accounts that had not been re- Fredrik Rosencrantz share of a shrinking premium pool. Despite loss-making years marketed, and for big premium accounts with natural catastrophe exposures, for aviation insurers in 2014 and 2015, major which insurers are finding attractive in the renewals in December saw aviation hull and liability rates fall by 25% compared with the benign catastrophe environment,” he said. “Going forward, there is unlikely to be any same period of 2014, according to the latest change in rates. I would expect to see rates flat, with reductions of up to 10% for the right RENEWALS: Turn to p20

Ferma steps up global programme compliance campaign Stuart Collins news@commercialriskeurope.com

[BRUSSELS]—THE FEDERATION of European Risk Management Associations (Ferma) is pushing ahead with its campaign to find a solution to global insurance programme compliance. In recent months, the federation has made progress with its bid to create a coalition to tackle the issue and discuss the complexity of insurance rules with regulators. Differences in national insurance laws add cost and complexities to global insurance programmes used by multinational companies, and make compliance difficult, if not impossible. Ferma’s campaign has now gained the support of other risk management associations—namely the Risk and Insurance Management Society (Rims) in the US and the Pan-Asia Risk and Insurance Management Association (Parima). GLOBAL INITIATIVE “Ferma asked Rims and Parima to join us in establishing an industry-wide initiative so that it would comprise the global risk manager community, as well as eventually including globally active commercial insurers and insurance brokers,” said Dirk Wegener, vice-president of Ferma and global head of corporate insurance at Deutsche Bank Group. “It is important to note that we aim to build an industry-wide initiative, and insurers and brokers have not yet had their say on what they believe the reform objectives should be,” he said. At the end of January, Ferma completed a survey of risk managers FERMA: Turn to p22

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NEWS Euroforum D&O

D&O policies under scrutiny as German managers fear growing risk Friederike Krieger news@commercialriskeurope.com

[HAMBURG]—SCANDALS SUCH AS the Volkswagen (VW) emissions case are having a detrimental effect on German managers from all industries and increasing their liability risks, according to a survey carried out by Cologne-based directors’ and officers’ (D&O) underwriting agency VOV for the Euroforum Liability Insurance Conference in Hamburg. Expert speakers at the event debated how D&O policies can therefore better address the needs of individual managers and board members. Some called for private or separate company policies for executive and supervisory board members because all-in-one solutions do not provide sufficient protection. The VOV survey, conducted by pollster Faktenkontor, questioned 200 managing directors at German companies not led by their owners with a balance sheet of at least €50m. In all, 85% of respondents believe their public image has suffered long-term damage because of recent scandals. As a consequence, managers are increasingly concerned about their own personal liability; 47% of respondents believe they face higher liability risk than at the same time last year. This compares to a similar survey conducted in 2015, to which 38% of participants said they were facing growing risk. Six out of ten managers said that public pressure caused by criticism of managers will be a catalyst for liability risks. The threat of insolvency caused by scandals or other factors is a big concern for German managing directors. Insolvency administrators often blame managers for reporting insolvencies too late and thus neglecting to carry out their duties—51% of those polled by VOV cited this threat as the main cause of D&O cases. However, only 48% of respondents have an insolvency emergency plan at their disposal. “I think liability risks will continue to rise if we see more company insolvencies,” said VOV’s managing director Diederik Sutorius. “Having an emergency plan is really one of the basic principles of good management,” he told the Euroforum Liability Insurance Conference late last month. Around 68% of managing directors surveyed by VOV said they have a D&O insurance policy in place. 52% are insured by their companies, whereas 18% have taken out personal cover. Meanwhile, 30% said they have both types of protection in place. “There seems to be a greater need for personal cover,” argued Mr Sutorius. Many experts now urge managers to take out individual policies because company schemes do not offer sufficient coverage. However, many German

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managers polled by VOV do not seem aware of this potential risk, with 93% of survey participants that have not taken out a private policy admitting they believe the cover supplied by their company is sufficient. Mr Sutorius said that many managers simply do not pay enough attention to D&O policies. The fact that policies may not meet their expectations often only comes to light when it is too late and a claim hits, he said.

EXTENT OF COVER The survey also suggests that many board members are unaware that D&O policies are designed to protect them as well as their company. The survey showed that 61% of respondents believe that D&O policies are designed solely to Martin Winterkorn, former Chairman of Volkswagen

hedge their companies’ risks rather than protect their own private assets. “It’s here that we really have to sit down and explain what this is all about,” said Mr Sutorius. The majority of D&O policies taken out by companies insure all kinds of managers—executives, supervisory board members and other senior managers—under one policy. Christian Armbrüster, professor at the Free University of Berlin, said the sums inured under these policies may not be large enough to cover all of these managers’ D&O exposures. This is particularly the case for supervisory board members because they are typically sued later than executive board members. Therefore, a separate D&O policy for supervisory board members

make a lot of sense, he argued. In addition to insufficient sums insured, conflicts of interest can arise when all managers are insured under one policy, he warned. This often occurs when an executive board member, who has been sued by his company due to neglect of duties, files a third-party notice against supervisory board members. “For example if they [an executive board member] accuse a supervisory board member of knowing about the executive’s neglect of duties, but did not do anything about it,” explained Mr Armbrüster. The D&O insurer covering both parties under one policy then faces a difficult situation because it has to defend both the executive and the supervisory board member.

Several concepts are under discussion to solve this problem. One solution could be individual policies for every manager. Another is insuring all supervisory and executive board members under two separate group policies with different insurers. A further solution recently developed by the German D&O insurance broker Hendricks, sees a separate policy for supervisory board members taken out with a different insurer, in addition to the group policy. This policy kicks in if the insured sum under the group policy is breached or an executive board member files a third-party notice. However, other brokers and insurers at the Euroforum event criticised any move towards individual policies. “Instead of spending R&D expenditure on additional policies we should better ask ourselves how to improve the existing products,” said Harald Köberich, managing director of Cologne-based broker Köberich Financial Lines. In his view, additional layers added to the main policy can solve the problem. “It is dangerous to separate the insured persons from the outset,” he said. “One needs a uniform defence ring.” Markus Both, head of financial lines corporate at Zurich Germany, supports this view. “With individual policies there would be more thirdparty notices,” he said. In addition, there may not be enough capacity for all managers to get individual coverage, said Michael Rieger-Goroncy of broker Marsh, using the VW case as an example. The insured sum of VW’s D&O policy is said to be €500m. “If you would like to get this €500m limit for, say, 100 senior managers you end up with a total insured sum of €50bn,” he said. He also pointed out that it is only possible to get €50m to €100m for a single insured on the market. Furthermore, the total premium cost of covering mangers individually would be much higher than a group policy, he added.

COST OF D&O COVER Premiums for D&O policies in Germany have been coming down for years due to high competition among insurers. According to estimates from Euroforum Liability Insurance Conference participants, rates fell again in 2015. But just over half of respondents to the VOV survey expect pricing to stabilise in the German D&O market, which has an estimated premium level of between €500m and €700m However, not all market participants share this view. “We see tough competition, new insurers entering the market and price-sensitive clients,” said Daniel Messmer of Swiss Re. “The pressure on prices and margins will continue.” He also expects D&O insurers to continue to offer more generous conditions and additional services to clients.

27/1/16 14:47:30

Insurance regulation under the spotlight

NEWS ANALYSIS

Protectionism vs liberalisation: where next for insurance regulation? Stuart Collins news@commercialriskeurope.com

[LONDON]—RISK MANAGERS OFTEN BEMOAN THE STATE of insurance regulation. They are concerned that the global web of complex and differing rules makes for inefficient risk transfer and turns global insurance programmes into a compliance nightmare. Insurers, too, are often frustrated. A deluge of new rules and regulations, some in response to the 2008 global financial crisis, has caused many market leaders to publically criticise the state of insurance supervision. Regulation is burdensome, costly and stifling innovation, so the argument goes. Two notable targets of critics are the recently implemented Solvency II regime in Europe and plans to hit insurers and reinsurers deemed as a systemic risk with additional rules (See boxes below).

SEA-CHANGE Since the financial crisis, Europe’s insurers have faced an increasing burden of regulation and a tightening of capital requirements, said Andrew Holderness, global head of corporate insurance at Clyde & Co. “There has been a sea-change for the insurance industry in terms of regulatory compliance in recent years. Now, with Solvency II in force, the cost of compliance in the insurance market has grown exponentially compared with five or ten years ago,” he said. Regulators responded to the 2008 banking crisis with increasingly complex and prescriptive rules for the financial services sector, including insurers. There is little prospect of regulators rowing-back in the foreseeable future, said Mr Holderness. The trend towards a higher regulatory burden is not limited to Europe. Emerging markets have also introduced regulations, including some that make life more difficult for foreign reinsurers to do business in those countries, explained Mr Holderness. For example, China’s C-ROSS regulations, which implement a risk-based capital regime, put domestic cedents placing risks with foreign reinsurers at a capital disadvantage compared to placing risks with a domestic reinsurer. “It is not just capital differentials, we have also seen jurisdictions such as Ecuador putting greater restrictions in place on the amount of outwards reinsurance that domestic insurers can cede in an effort to retain premium income onshore,” said Mr Holderness.

TWO TRIBES The international regulatory environment is currently seeing two conflicting trends, explained Nick Lowe of the International Underwriting Association.

SOLVENCY II AND BROKER REGULATION DECADES IN THE MAKING, EUROPE’S NEW INSURANCE CAPITAL and risk management rules known as Solvency II were finally implemented at the turn of this year. The new regime is the first major overhaul of Europe-wide solvency rules since the 1970s. It was hailed as both a modernising triumph and regulation gone too far. “Solvency II has improved risk management governance but has proved costly and, compared with the industry’s initial expectations, it is burdensome,” said Cristina Mihai, head of international affairs and investments at Insurance Europe. “What started as a principle-based regulatory framework ended with more than 3,250 pages of regulation,” she added. There was last minute ‘gold plating’ of Solvency II by national regulators, according to Insurance Europe. Overall, 68% of its members believe that Solvency II has been gold plated in their market, according to a survey carried out in November. “This trend is worrying because it is contrary to the aim of harmonisation. And if there are two regulators with differing views, it is usually the more restrictive view that wins the day,” said Ms Mihai. Given the scope of Solvency II, financial services regulation on such a scale is unlikely to be repeated anytime soon, believes Ms Mihai. There are signs that the European authorities may be listening to insurers’ complaints about the onslaught of regulatory change during the past decade. In September, the European Commission launched the ‘Call for evidence: EU regulatory framework for financial services’ to assess the state of European financial services rules. Recognising years of

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On the one hand there is a desire for market liberalisation and regulatory harmonisation, but on the other a move by national regulators to protect consumers and nurture domestic markets, he said. “The world is opening up. There has been growth in new markets and renewed trade talks. Meanwhile, we also see a general convergence of insurance supervisors and the development of core international regulatory standards,” added Mr Lowe. “At the same, however, we see more regulation. While the Bric countries have opened up, they have also introduced new forms of regulation that act as barriers. Some countries are working on the belief that they need to keep capital and foster reinsurance markets within their own borders,” he said. China, India and Brazil have made positive steps towards opening their insurance markets, however they have also made “unhelpful” regulatory changes, said Mr Lowe. Regulatory barriers are not just the preserve of emerging markets. For example, the US continues to apply collateral requirements on foreign reinsurers. The “antidote” to such regulatory barriers is likely to come from a combination of international regulatory standards and international trade negotiations, believes Mr Lowe. “If we can get a system of recognition of equivalence between insurance jurisdictions and regulatory systems then I believe we could remove many of these barriers,” he said. Further development of international regulatory standards, if implemented harmoniously, could help resolve the perceived issue of overregulation, according to Mr Lowe. He believes that much of the regulatory burden facing insurers is caused by differences in national regimes and requirements. Solvency II could also be a harmonising factor for

“intense rulemaking”, the project will look to identify unnecessary regulatory burdens. “Based on the recent call for evidence launched by the Commission, the industry hopes that regulators will soon look into how these regulations developed over recent years interact and if there are any elements that lead to unintended consequence,” said Ms Mihai. Until insurers start reporting to regulators under Solvency II, it is too early to gauge their experience under the new rules, according to Ms Mihai. However, insurers and regulators will have the opportunity to iron out any issues with Solvency II when the regime undergoes a review, which is due before the end of 2018. “It will take time to digest the new rules, but we expect the Solvency II review process to be finalised by the end of 2018, and discussions with the Commission and EIOPA should start early enough to allow for appropriate consideration of all the points that need to be reviewed,” hoped Ms Mihai. While not on the scale of Solvency II, the Insurance Distribution Directive is the next big regulatory change on the agenda in Europe. According to Mathew Rutter, partner at DAC Beachcroft, the proposed rules will have different implications for individual member states, but will result in a greater focus on disclosure and conflicts of interest. Even in the UK, which has already applied conduct rules for both insurers and insurance brokers, the new regime will put additional obligations on insurers and brokers to identify conflicts of interest and take steps to prevent harm to customers, he said.

international insurance regulation, according to Mr Lowe. Under the concept of ‘equivalence’, European Union (EU) authorities can recognise supervision of a foreign insurer or reinsurer by their home regulator. The agreement would in practice be reciprocal. Such agreements have already been reached with Switzerland, Bermuda, and Japan (for reinsurance only). Other countries are expected to be added to the list over time. “There are a number of countries that have already been deemed equivalent and we would expect to see more discussions in the coming months,” said Cristina Mihai, head of international affairs and investments at European insurer trade body, Insurance Europe. “For example, insurance markets like China have been modernising their supervisory regime and could seek equivalence with the EU in the future,” she said.

LEVEL PLAYING FIELD? One encouraging area is the ongoing effort to level the playing field between two of the world’s largest insurance markets— the US and Europe. The EU is currently engaged in trade talks with the US—known as the Transatlantic Trade and Investment Partnership—which could eventually include financial services and insurance, said Mr Lowe. London market and EU representative bodies have been lobbying US regulators for decades to remove collateral requirements. These efforts now look like bearing fruit as they have converged with bilateral trade talks and efforts to achieve EU/US agreement on regulatory equivalence and group supervision under Solvency II. “It is hoped that EU/US dialogue will result in an end to collateral requirements and agreement on group supervision. The US now has a federal mandate to negotiate with the EU and it is possible that we could see an agreement this year,” said Mr Lowe.

THE QUESTION OF SYSTEMIC RISK

Systemic risk regulation was back in the headlines in January after AIG investors renewed calls for restructuring to avoid the unwelcome gaze of regulators. Billionaire investor Carl Icahn has urged AIG to split up in a bid to avoid systemic risk regulation. US life insurer MetLife recently announced plans to shed part of its life business to avoid the Systemically Important Financial Institution (SIFI) designation. The International Association of Insurance Supervisors (IAIS) is currently consulting on new capital rules for insurers designated as globally and systemically important. Insurers are against the new rules, arguing that insurance does not pose a systemic risk to the financial system and that the proposals were crafted with banks in mind. “We understand the need of regulators to address systemic risk in general, especially in a post-crisis environment, but [we] ask that any measures and requirements are tailored to the business models of insurers,” said Cristina Mihai, head of international affairs and investments at Insurance Europe. “The proposals of three years ago were inspired by the needs of banks, but the IAIS has since accepted that traditional insurance business does not have potential for systemic risk. So it is now focusing its attention on investigating if and to what extent the nontraditional business has potential to transmit systemic risk,” she said.

27/1/16 14:47:20

ACE and Chubb are now one. On January 14, 2016, ACE Limited acquired The Chubb Corporation, creating a global insurance leader operating in 54 countries under the renowned Chubb name. The new company combines Chubb’s 130 years of underwriting insights and devotion to customer service with ACE’s three decades of technical underwriting excellence, broad risk appetite and global presence. Our goal is to provide the very best insurance coverage and service to individuals and families and businesses of all sizes — from small and mediumsized companies to the largest multinational corporations — all across the globe. As the world’s largest publicly traded property and casualty insurer, the new Chubb has the balance sheet strength and financial security of an AA rating from Standard & Poor’s and an A++ rating from A.M. Best. As craftsmen of insurance, we are devoted to meticulously conceiving, crafting and delivering extraordinary coverage to meet the needs of the modern world — a world that is epic in scale but by nature both personal and connected. To find out more, go to new.chubb.com.

Chubb. Insured.

© 2016 Chubb. Coverages underwritten by one or more subsidiary companies. Not all coverages available in all jurisdictions. ACE®, Chubb®, their respective logos, and Chubb. Insured.SM are registered trademarks.

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27/1/16 13:53:20

COMMENT

NEWS Association News

All eyes on AIG, again

ORPORATE RISK MANAGERS IN EUROPE

and the rest of the world will be nervously watching developments at AIG as the key multinational carrier appears to be up against the wall. There are not many insurers able to offer a truly global service to risk and insurance managers at multinational companies, but AIG is one. Yes, there is lots of capacity out there currently, market conditions are soft and there is little or no sign of a turn. But while a number of ‘second-tier’ insurers and reinsurers have recently revealed plans to aggressively expand into the corporate insurance market, they have a long way still to go. There really are very few insurers that offer the capacity, global distribution and local servicing that AIG can. There must therefore be serious concern in the corporate risk and insurance management community that the intense pressure placed on AIG’s management to make more money out of the assets it holds, while spending less, will seriously reduce the quality of service on offer. Risk managers and insurance professionals will be worried about the measures laid out by AIG it in its strategic review at the end of January (see related article on page one). How can a group such as this hand back $25bn to investors over a two-year period, simultaneously cut operating costs by $1.6bn and slash its combined ratio by six points without denigrating the offering to customers? Well the answer to that is, in reality, it can’t. Service to customers will inevitably suffer. Like its main rivals, AIG is investing a lot in technology and innovation, but the benefits will not come fast enough to compensate for ‘efficiencies’ and ‘streamlining’ planned by the insurer. The good news for readers of Commercial Risk Europe is it appears that if AIG is going to invest anywhere it is in the multinational space. Only a week before the strategic update was announced, AIG said that it had significantly raised available global commercial property limits to $2.5bn per occurrence from $1.5bn per occurrence.

The insurer said the move responds to the growing demand for capacity and service from clients managing more complex global risks and increasing property values. “It also reflects AIG’s greater appetite for property risk, based on its ongoing expansion of risk engineering and data analytics capabilities,” explained the company. This announcement, made just seven days before its strategic review, reads like an assurance from AIG that while it may need to take some tough decisions about its overall shape and strategy, this market remains a top priority. AIG explained that during the past four years, it has continued to invest in its risk engineering capabilities and has hired more than 500 engineers to provide clients with risk mitigation services. Recently, the insurer made a strategic investment with Clemson University to set up a risk engineering and systems analytics centre to deepen the skillset and capabilities of its risk engineers. The investment will enable AIG to “enhance its efforts to transform data analytics into actionable insight for the company and its clients”. George Stratts, global head of property at AIG, said: “We are committed to providing the capacity our clients need and to using a data-driven approach to help them manage the complexity of their global risks. We want to be a strategic partner for our clients to help them improve their businesses and lower their cost of risk.” During my last couple of interviews with AIG president and chief executive officer Peter Hancock, it certainly did not sound like the group was about to abandon the large corporate sector in favour of personal lines, mortgage guarantee or credit derivatives business. So if AIG is going to sell off any of its new ‘modular’ businesses, it does not seem as though it will be the segment that serves large corporate business on an international basis. So keep a close eye on what AIG is up to and what activist shareholder Carl Icahn is demanding. However, it does not look like corporate risk managers need to panic about losing AIG as a serious player in this market, at least as long as recent reserve additions are finally completed.

EDITORIAL DIRECTOR Adrian Ladbury aladbury@commercialriskeurope.com

ART DIRECTOR Alan Booth—www.calixa.biz Tel: +44 (0)20 8123 3271[W] +44 (0)7817 671 973[M] abooth@commercialriskeurope.com

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WEB EDITOR /DEPUTY EDITOR Ben Norris Tel: +44 (0)7749 496 612 [M] bnorris@commercialriskeurope.com

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Climate change in focus at Rencontres de l’Amrae Rodrigo Amaral

news@commercialriskeurope.com

[PARIS]



CLIMATE CHANGE TOPS THE AGENDA AT THE RENCONTRES DE

l’Amrae this month as the French risk management association tackles a range of weather-related issues affecting companies’ activities. The Association pour le Management des Risques et des Assurances de l’Entreprise (Amrae) hosts its 24th annual conference in the northern France town of Lille at the beginning of February. The theme of the event is “A climate of high risks”. This reflects the pressing need to tackle climate change and related risks, as well as the heightened threat landscape more broadly faced by French companies and their counterparts around the world. During its conference, Amrae will discuss the environmental effects of climate change and the challenges they create for business and society alike. “Perhaps companies can do more to help tackle issues such as climate change,” Bénédicte Huot de Luze, Amrae’s secretary general, said in an interview with Commercial Risk Europe. Chief executives of large companies, such as Scor’s Denis Kessler and Suez’ JeanLouis Chaussade, will give their take on the issue at the Rencontres. The role that the insurance and reinsurance markets can play in helping to mitigate and adapt to climate change risk will also be discussed during the three-day event. According to Ms de Luze, many of the issues faced by French firms today can be traced back to environmental issues. “The Rencontres will start from the topic of climate change and discuss other subjects that are related to it,” said Ms De Luze. “Governments have to face difficult crises all the time. New business models need to be developed. Many of these problems are linked to climate change.” The challenges of dealing with climate change were highlighted in Paris last December during the COP21 conference. It saw government and business leaders from around the world seek an agreement to reduce carbon emissions. To the surprise of many observers, some kind of consensus has been reached. The agreement will create new duties, as well as plenty of opportunities, for companies. The concerns of Amrae go beyond the weather, as technological developments and other emerging risks change the business landscape. “Companies are working in a climate of high risks right now,” said Ms de Luze. French firms were reminded during 2015 that the challenges they face extend far beyond climate and weather risks. One such threat is terrorism. Paris was targeted by two terror attacks in January and December of last year, dramatically raising the attention on terror risk. “It was very hard, because for about 20 years we had not suffered terror attacks in France,” Ms De Luze noted. Terrorism is a social phenomenon often fuelled by the harsh economic realities faced by millions of people around the world. Therefore, Amrae believes it is necessary to look at the interconnections between risks. For example, Amrae stresses that climate change has the potential to place a further burden on populations around the world and create more recruitment opportunities for radical groups. Among other topics, plenary sessions at this year’s Rencontres de l’Amrae will debate the consequences of geopolitical risks and the global governance required to deal with these challenges. Ms De Luze also flagged up several initiatives being developed by Amrae this year. One is a new regional branch in Lille. It will serve the needs of the association’s northern members. Amrae is also creating a framework of the skills and expertise needed by risk managers. It will act as a reference for the ever-growing number of risk management courses being launched in France.

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HOT SEAT Brigitte Bouquot, Amrae

Increasingly interconnected threats offer profession risk and reward: AMRAE president Rodrigo Amaral news@commercialriskeurope.com

[PARIS]

ISK MANAGERS MUST prepare themselves for a world in which extreme risks are increasingly interconnected, warns Association pour le Management des Risques et des Assurances de l’Entreprise (Amrae) president Brigitte Bouquot. This trend will create new challenges for the risk management industry but, if handled correctly, will also strengthen the profession, she told Commercial Risk Europe. Speaking to CRE ahead of the annual Amrae meeting in Lille this month, Ms Bouquot said risk managers must be ready to influence decision-makers in a world that gets riskier by the day.

INTERLINKED “The world is entering an era of interlinked big risks. There are new technologies, geopolitical risks, financial crises. The future will be fascinating, but also a little frightening,” she said. “There will be big challenges for risk managers. To succeed we have to make sure that risk management is not only a function, but also a job. We have to make this job recognised by decision-makers, in order to influence

and support our businesses,” she added. Ms Bouquot noted that risk managers will need to be increasingly focused in the future. “We will have to keep doing our current jobs but on top of that—in this new environment of large, interlinked systemic risks—we have to advise decision-makers by providing scenarios, models and recommendations for good risk management practices,” she advised. The interconnection of extreme risks is the main theme underlying the 24th edition of the annual Rencontres de l’Amrae this month, with climate change topping the list as the root cause of many threats faced by companies today. “Companies all around the world need to be concerned about climate change,” said Ms Bouquot. “Natural catastrophes are happening at a higher frequency than in the past.” French companies have had plenty of reminders recently about the effects of climate change and extreme weather on their business. A number of windstorms and floods, most recently around the Mediterranean coast, have caused significant losses for many French firms. “In France we have seen a big increase in natural events in the past two years, with an important impact particularly on mid-sized businesses,” Ms Bouquot pointed out. These events have made clear the importance of risk management in

mitigating such threats. Ms Bouquot noted that in addition to protecting themselves from natural events, companies have a vital role to play in the wider effort to put a brake on carbon emissions and help meet the targets set out in the historic climate change agreement signed in Paris at the COP21 conference.

CARBON COSTS “Reducing their carbon footprint is a challenge for companies, and there will be costs involved. But the business sector will provide added value to sustain this change,” Ms Bouquot said. “It is not only about being compliant to the rules; it means being more ambitious than that. We have to change our mindset, change our behaviour. We need to leverage all that we can in terms of technologies, finance and human resources to fight against carbon increases.” Climate change is not, however, the only extreme risk on AMRAE’s agenda, with terrorism a big issue. Last year Paris was hit twice by terrorist attacks, raising awareness of the potential terror threat. Risk managers are increasingly trying to ensure the safety of staff and premises, as well as arranging insurance coverages to limit any damage. This process is not just confined to France. French multinationals and their peers across the world are attempting to address the global terrorist threat.

Brigitte Bouquot But, as Ms Bouquot pointed out, international terrorism insurance programmes are complicated to set up. “There is not a global answer for terrorism risks. There is a French answer, a global answer, mainly around the London market, and an American one as well,” she said. “Sometimes it is very difficult for business to merge all the solutions. As a risk manager of a global company, you have to make sure that you have the same level of coverage all over the world. Because of the different systems today it is difficult to achieve that,” she said. French companies enjoy the benefits of Gestion de L’assurance

et de la Réassurance des Risques Attentats et Actes de Terrorisme (Gareat), France’s catastrophe pool that covers terrorism, among other risks. The system, which was created after the 2001 terror attacks in the US, has worked well. However, Ms Bouquot said that it needs to evolve to keep up with an ever-changing threat. “We believe the system should be renewed in terms of coverages, for example for non-material damages, BI and so forth,” she said. “There is the need to enlarge the cover provided by Gareat and review its costs. We hope that a collective effort continues to be made to improve Gareat.”

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07x-CRE-Y7-01-Hot-Seat.indd 7

28/1/16 00:27:29

COP21, Paris

BEHIND THE NEWS

COP21 agreement delivers upside & downside risks for business

Rodrigo Amaral news@commercialriskeurope.com

[PARIS]

HE HISTORIC AGREEMENT TO FIGHT

climate change signed last December in Paris at the United Nations Conference on Climate Change, known as COP21, will increase pressure on companies to adopt clean technologies and environmentfriendly business practices. But it will also generate opportunities because huge investments are needed as the world moves to a less carbon-reliant economy. Businesses and their risk managers will need to respond to the agreements obtained at COP21, which commits governments around the world to restrict global warming to 2.7o C by the end of this century. This will see global warming reduced from an estimated 4.8o C if no action is taken. Experts say the agreement will trigger regulatory changes in many of the 189 signatory countries. Trade associations in regions such as the European Union (EU) have already raised fears about a regulatory onslaught.

STEP CHANGE

Large companies will also find themselves under pressure to change their procurement policies in order to meet the demands of investors and public opinion. In addition, they will need to keep an eye on their supply chains. In response to the COP21 agreement, many suppliers will need to adapt their production and put a premium on sustainability. Speaking to Commercial Risk Europe, Edward Cameron, the New York-based managing director at non-governmental organisation Business for Social Responsibility, said: “[The agreement] represents a very different regulatory environment for companies around the world. This new regulatory environment is set to be very complicated for groups with very large and diverse value chains.” Each one of the country signatories will implement its own national action plan to meet the goals of the agreement. The emphasis will vary from country to country. But it appears that companies will have a voice in this process. According to Mr Cameron, the fact that the private sector will be involved in discussions is one of the key developments agreed at COP21. President of the Association pour le Management des Risques et des Assurances de l’Entreprise (AMRAE), Brigitte Bouquot, believes this is a positive step. State action alone will not be enough to meet the goals of the agreement, she said. “I do not believe that the key to meeting COP21 commitments will be more regulation driven by state

08-CRE-Y7-01-COP21.indd 8

policies,” said Ms Bouquot. “If we succeed with the energy transition, it will be thanks to civil society and to innovation brought about by companies.” Ms Bouquot urged companies to keep climate change risk high on their agendas. “Because of the COP21 agreement, we will avoid the big catastrophic scenario of a 4.8o increase in temperatures by the end of the century,” she said. “But whatever the scenario, companies have to be aware of natural events, improve their risk management processes and try to be better insured.” It is abundantly clear that companies will have to adapt to the changing energy mix demanded by the COP21 agreement. They will, for example, have to listen to activist investors that are already calling for the use of renewable energies. Companies that do not respond could deny themselves access to important sources of funding. In mid-January, a group of investors led by the pension fund of the Church of England and the New York State Common Retirement Fund urged oil giant Exxon Mobil to clarify the extent to which it is prepared to meet the requirements of COP21. “The unprecedented Paris agreement to rein in global warming may significantly affect Exxon’s operations,” said Thomas DiNapoli, the New York State Comptroller, in a statement. “As shareholders, we want to know that Exxon is doing what is needed to prepare for a future with lower carbon emissions. The future success of the company, and its investors, requires Exxon to assess how it will perform as the world changes.” Pressure will also mount on companies as they compete for government contracts and are likely forced to ensure global supply chains are environmentally friendly. A growing number of governments may put sustainability requirements higher on their procurement priority list. As a result, large swathes of the economy could be affected, particularly in some parts of the world. Mr Cameron noted, for instance, that in the EU and China around 19% of gross domestic product is delivered from public procurements. “We should see, in the course of the coming years, governments make use of their public procurement options to drive low carbon development,” he said. “Similarly, corporate procurement is enormous in terms of the distribution of large-scale financial support for this [energy] transition. Major multinationals have substantial supply chains, with suppliers spread all around the world, which they can influence with their buying decisions.” So while there is clearly downside risk for companies as a result of the COP21 agreement, the commitments made should offer opportunities for those that position themselves as part of the solution. First, many investors are likely to favour environmentally friendly

companies. And second, the agreement’s signatories have pledged to raise $100bn of finance each year to develop renewable energies, with particular focus on emerging economies. According to Mr Cameron: “We’ve seen in Paris the beginnings of a thriving, clean global economy. The money pledged in Paris represents seed capital for this. It will help direct investments, particularly from financial services, away from high carbon development and towards non-carbon development.” “A whole new global economy has been created in the space between 4.8o and 2.7o [of global warming]. It represents trillions of dollars of investments,” he added. The insurance industry is one sector of the global economy that has been specifically asked to help reduce global warming and mitigate its threats. The COP21 agreement stresses the need to develop mechanisms to mitigate damage caused by climate change, especially in emerging economies. Article 8 lists “risk insurance facilities, climate risk pooling and other insurance solutions” as areas in which cooperation between the signatories can focus. “COP21 opened up a lot of doors to bring insurance [in] as part of the solution for climate change,” said Peter Höppe, head of geo risks research at Munich Re. Mr Höppe noted that even before the conclusion of COP21, the G7 group of countries had announced $420m of additional funding for Insuresilience, a UN-sponsored programme that aims to provide insurance against climate risks in poor economies. “The Paris agreement has taken this commitment one level higher,” he said.

INSURANCE ROLE

The insurance industry can play a key role in helping companies tackle the challenges thrown down by the COP21 agreement by developing new products, he continued. “Several years ago we started developing new insurance policies for investors in clean energy,” Mr Höppe pointed out. “Renewable energies are key to solving the problem, and if we can take some of the risks from investors we can incentivise wind farms and solar parks.” He added: “We have some delivery guarantee policies, for example, that make sure that investors get some money if there is not as much wind or sunshine as projected for a period of time. There is also insurance against the premature ageing of the equipment in renewable energy production.” Demand for this kind of coverage is set to grow as more investors strive to put their money in projects that comply with COP21. Munich Re itself is targeting €8bn of investments in infrastructure and renewable energy in the forthcoming years. “Investors have perceived that in the second half of the century it will be harder to make money with carbon, oil or gas,” concluded Mr Höppe.

27/1/16 14:48:07

IN FOCUS WEF’s Global Risk Report 2016

Environmental risks rise to the top in 2016 WEF report The World Economic Forum (WEF) released its latest Global Risks Report last month and the annual publication once again provides valuable insight and food for thought for risk and insurance managers. It finds that global risks are becoming increasingly imminent and materialising in new and sometimes unexpected ways. The WEF concludes that it is now time to move beyond mitigation to adaptation and building resilience. Across the next few pages Commercial Risk Europe’s BEN NORRIS takes a look at the key findings and recommendations of the report

HERE IS A GROWING FEAR OVER THE LIKELIHOOD

of risks tracked by the World Economic Forum’s (WEF) Global Risks Report impacting society and business, according to the latest version of the publication, released last month. The 2016 edition of the report also reveals an unprecedentedly broad risk landscape. For the first time in its 11-year history, four out of five risk categories—environmental, geopolitical, societal and economic—feature among the top five most impactful risks. The 2016 report finds that the risk of failing to mitigate and adapt to climate change has the greatest potential to impact during the next 10 years, with large-scale involuntary migration ranked the most likely to cause instability. The WEF once again flagged up the interconnectivity of global risks. The annual WEF Global Risks Report takes a 10-year view on the potential impact of global risks grouped into five categories—economic, environmental, geopolitical, societal and technological—based on a survey of worldwide experts from business, academia, civil society and the public sector. Almost 750 experts took part in the WEF’s latest Global Risks Perception Survey. They were asked to rank 29 separate global risks for both impact and likelihood across a 10-year horizon. Data from the survey suggests an increased likelihood of risks across the board. All 24 of the risks continuously measured since 2014 have increased their likelihood scores during the past three years. The risk rated most likely to cause global instability in the 2016 report is large-scale involuntary migration. Environmental risks caused by extreme weather events and failure of climate change mitigation and adaptation ranked second and third. Interstate conflict—which topped the likelihood list in 2015— ranks fourth, with major natural catastrophes fifth. Failure of climate change mitigation and adaptation is now perceived as the risk with the greatest potential impact for the years to come. It is the first time since the report was published in 2006 that an environmental risk has topped the ranking. It is ahead of weapons of mass destruction, which rank second, and water crises in third position. Large-scale involuntary migration was rated the fourth most impactful risk, with severe energy price shock fifth. Large-scale involuntary migration is the fastest rising risk both in terms of impact and likelihood. Respondents to the Global Risks Perception Survey were also asked to select the five risks of highest concern during the next 18 months. Large-scale involuntary migration came out top, followed by state collapse or crisis, interstate conflict, unemployment or underemployment and failure of national governance. The Global Risks Report also examines the interconnectivity of risks. It finds that interconnections between risks are becoming stronger, often with major and unpredictable impacts. This year’s two most interconnected risks—profound social instability and structural unemployment or under-employment— account for 5% of all interconnections. “We know climate change is exacerbating other risks such as migration and security, but these are by no means the only interconnections that are rapidly evolving to impact societies, often in unpredictable ways. Mitigation measures against such risks are important, but adaptation is vital,” said Margareta Drzeniek-Hanouz, head of global competitiveness and risks at the WEF.

09-CRE-Y7-01-WEF.indd 9

Speaking at the report’s launch, Espen Barth Eide, head of geopolitical affairs at the WEF, said he sees three key takeaways from this year’s report: risks are increasingly interconnected and imminent; anxieties are rising; and there is a need to systematically improve resilience to the growing risk landscape. “We are seeing that risks are increasingly interconnected and increasingly imminent. The risk perspective is ten years, but risks we have seen emerging are now perceived to be more imminent, in real time and more tangible,” he said. “Secondly, anxieties are rising. More of the fundamental risks that people are worried about are concentrating in the upper right corner [of the risk landscape graph], meaning high likelihood and high impact,” he continued. He added: “The aim is not to scare people. It is to have a realistic outlook on ongoing trends in order to shape a call for action to deal with and improve systemic resilience in an increasingly complicated world.” Cecilia Reyes, chief risk officer at Zurich Insurance, stressed the risk connectivity aspect at the report’s launch. She pointed out how climate change can lead to water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risk. “Meanwhile, geopolitical instability is exposing businesses to cancelled projects, revoked licences, interrupted production, damaged assets and restricted movement of funds across borders,” said Ms Reyes. Joining her on stage, John Drzik, president, global risk and specialties at Marsh, said that growing social instability is at the

centre of risk interconnectivity. “Social unrest connects to other threats in the economic and business sphere. The EU refugee crisis is creating tensions between EU member states that could in turn affect policy, which may drag on economic activity,” he noted. Ms Drzeniek-Hanouz stressed that no risk can be seen in isolation. She noted three clusters of risks that the WEF believes are particularly important and require action. “One is climate change, which is likely to exacerbate the water crisis. A lot of progress was achieved at COP21 but we also need to adapt as well as mitigate. The effects of a warmer climate are going to spill over into societies and affect the security situation,” she said. She explained that the rise in involuntary migration is linked to the international security situation. “In 2014 about 60 million people were displaced. It is crucial that we start thinking about long-term and sustainable solutions to the worldwide refugee crisis. Europe is just one small share of the problem. It is a global issue,” she said. She also stressed the link between economic growth and the fourth Industrial Revolution. “Economic growth is on the agenda for the coming year. There are many predictions of slower economic growth,” she said. “For the fourth Industrial Revolution to have a positive effect and offer a solution we need to understand the risks associated with [it] and [we] must manage those risks for it and related technologies to bring a positive effect on societies and economies.”

27/1/16 15:15:43

WEF’s Global Risk Report 2016

IN FOCUS

Failure of national governance Interstate conflict State collapse or crisis T rorist attacks Ter

Note: In addition to the risk indicated on the map, the following countries have another risk as the risk of highest concern: Haiti: Unemployment or underemployment; Oman: Energy price shock; Peru: Profound social instability; Paraguay: Failure of financial mechanism or institution; Senegal: Energy price shock; Tunisia: Profound social instability; Venezuela: Unmanageable inflation; Vietnam: Man-made environmental catastrophes.

Cyberattacks

Source: Executive Opinion Survey 2015, World Economic Forum.

The business perspective: a difference of opinion OCIOECONOMIC RISKS TOP THE LIST FOR

business leaders polled by the World Economic Forum (WEF), revealing a marked difference from its wider survey findings. Part of the WEF’s Global Risks Report specifically focuses on the impact of global risks on the business community, providing country-level data on how companies perceive threats in their countries. It reveals a marked difference between the concerns of business leaders—who predominantly focused on socioeconomic risks—and the broader WEF stakeholder group. The business-specific findings are based on the views of 13,000 executives in 140 economies polled for the WEF’s Executive Opinion Survey. The latest Executive Opinion Survey, conducted between February and June last year, asked respondents to select the top five global risks that most concern them about doing business in their country within the next 10 years. According to the Executive Opinion Survey’s findings, the risks of greatest concern to business leaders differ considerably from country to country. However, some patterns can be gleaned. Socioeconomic risks dominate business leaders’ top 10 areas of concern, above cyber/data loss, terrorism and climate changerelated risks. Unemployment and underemployment is rated the risk of highest concern for doing business in more than a fourth of the 140 economies covered. It is identified as the risk of highest concern in 41 economies—more than a quarter of the economies surveyed. Energy price shock is the next most widespread risk for business leaders, featuring in the top five risks for doing business in 93 economies. These two risks are followed by the failure of national governance, asset bubbles and fiscal crises. In developed economies, economic risks such as asset bubbles and fiscal crises are high on the business agenda. There is also concern about technological risks, such as cyber attacks and data theft. In emerging and developing economies, the top concern is unemployment and underemployment. It rates particularly highly in the Sub Saharan Africa, Middle East and north Africa regions. Potential energy price shocks also feature highly in emerging economies. The WEF describes the relative absence of environmental risks, and long-term risk more generally, as leading concerns of business leaders as a “striking finding” from the Executive Opinion Survey. For example, no executive considers failure of climate

09-CRE-Y7-01-WEF.indd 10

TECHNOLOGICAL

Natural catastrophes Biodiversity loss and ecosystem collapse Extreme weather events Environmental catastrophes

GEOPOLITICAL

Failure of urban planning Food crises Large-scale involuntary migration Profound social instability Spread of infectious diseases Water crises

ENVIRONMENTAL

Asset bubble Deflation Energy price shock Failure of financial mechanism or institution Fiscal crises Unemployment or underemployment Unmanageable inflation

SOCIETAL

ECONOMIC

Global Risk of Highest Concern for Doing Business, by Country

mitigation and adaptation as the number one risk for doing business in his or her country. This stands in contrast to the priorities of the WEF’s multistakeholder group that took part in its Global Risk Perception Survey. These individuals rated climate mitigation and adaptation as the most impactful and third most likely risk on a global scale. “This finding highlights the divergence between national and global interests when it comes to some global risks, such as climate change. It also calls for continued alignment across stakeholders whose actions are based on different time horizons,” said the WEF.

ECONOMIC RISKS DOMINATE IN EUROPE Economic risks—including fiscal crises, unemployment, asset bubbles and energy prices—dominate the concerns of business leaders in Europe. Unemployment or underemployment is the risk of highest concern for doing business in 12 European countries and is among the top five risks in 25 countries. The WEF says that unemployment “threatens to de-skill an entire generation in parts of Europe, further aggravating businesses’ search for employees with the right type of skills to compete in today’s fast-paced global economy”. Concerns are not limited to the crisis-hit southern European economies—such as Cyprus, Greece, Italy, Portugal and Spain— where unemployment remains well into the double digits eight years after the financial crisis. Fear is also prevalent in countries such as Austria, Finland and France, where unemployment rates are considerably lower, although still historically high. Unemployment or underemployment is also a big concern for business leaders in Poland and Macedonia, where more than half of the youth is unemployed, as well as the Balkans, where unemployment is skyrocketing in Serbia and Bosnia and Herzegovina. Along with challenges related to involuntary migration, high unemployment rates may help to explain why the risk of profound social instability also features as a top concern for business leaders in southern and eastern Europe, says the WEF. The risk of an asset bubble is the top business concern in the UK, Norway, Sweden, Iceland and Luxembourg. Fiscal crises are a related economic risk causing concern across Europe. They are of highest concern in four countries and among the top five risks in 26 European countries. Cyber attacks feature in the top five risks in 12 European countries, ranking particularly highly in Germany, the Netherlands, Estonia and Switzerland.

“Given the cross-border nature of cyberspace, there is obvious potential for cyber attacks to have ramifications well beyond the countries in which they occur,” noted the WEF. John Drzik, president, global risk and specialties at Marsh, noted that low oil prices, a slowdown of the Chinese economy, fiscal crises and structural unemployment are growing concerns for the global business community and wider WEF stakeholder group. Such developments create a very difficult environment for business to navigate and are why economic risks come to the fore within the business community, he said. “There is this top-level economic risk with the instability underneath, which creates concern and uncertainty in the business community. This could play out—and is already to some degree— in less foreign investment in developing markets and movement of investment to safe havens, which could exacerbate some of the risks we are seeing,” he added.

CYBER RISK UNDERESTIMATED? He is also concerned that many stakeholders, including the business community, are underestimating the threat of cyber risk. “There is significant disparity geographically [over cyber risk] both in the Global Risk Perception Survey, where it is the number one risk in the US and not in the top ten of many other regions, and in the Executive Opinion Survey where it reached near the top in several rankings—in Europe, the US and Japan—but was not even on the list in many others,” said Mr Drzik. “I think the risk is being underestimated where it’s low on the lists. This is a boundary-less risk, it’s not going away. There is a continual arms race between the security industry and the hackers. It is going to spread—90% of cyber insurance is bought in the US environment, but clearly 90% of the risk is not in the US, it is clearly a much broader issue than that. So I think this risk needs more attention in many markets and is going to be with us for many years,” he warned. Cecilia Reyes, chief risk officer at Zurich Insurance Group, said that with geopolitical tensions at their highest since the Cold War and the number of deaths caused by terrorism in 2014 up 80%, political risk is a big topic for multinational companies. She believes companies can do more to protect themselves from related threats. “Some organisations are improving the way they assess and the importance they put on political risk, but quite frankly a lot more needs to be done in terms of understanding the political risks that they face in their day-to-day operations around the world,” she said.

27/1/16 15:15:51

IN FOCUS WEF’s Global Risk Report 2016

The role of business in responding to and managing global risks HILE THE World Economic Forum

(WEF) recognises that no stakeholder can deliver solutions alone, companies are being urged to play a greater role in building resilience to global risks for the good of society and their own self-interest. The WEF’s Global Risks Report 2016 has put the need to build resilience—described as the resilience imperative—at the heart of its response message. It notes an urgent need to find new avenues and more opportunities to mitigate, adapt to and build resilience against global risks. “Collaboration across countries, areas of expertise and stakeholder groups is necessary to effectively address global risks and deliver on the resilience imperative,” writes Klaus Schwab, founder and executive chairman of the WEF, in the report’s preface. But this is not easily achieved, adds the report.

STRUGGLE “Across every sector of society, decision-makers are struggling to find common ground as they are faced with heightened volatility, uncertainty, interconnectedness and pace of change,” continues Mr Schwab. The WEF points out that addressing global risks lies beyond the capacity of individual businesses. However, in its Global Risks Report 2016 the WEF says that individuals and organisations must recognise the imperative to contribute to resilience and know what and how they can contribute. The solution requires collaboration between the public and private sectors, expert speakers at the launch of the report agreed. While business is working hard to do its bit, more can be done, they suggested. More public-private partnerships are one route to likely success, they added. And, as the WEF notes, businesses themselves must address the issues flagged up in its latest report to ensure their own survival. No single entity—public or private— possesses all of the necessary authority, resources or expertise to ensure its resilience against catastrophic events, says the Global Risk Report 2016. Instead, resilience necessitates collaborative approaches. Public-private partnerships are a crucial part of the solution, states the WEF. “Public-private partnerships that harness the core competencies of each sector have a critical role to play in strengthening resilience capacity and maximising the benefits of investment in risk monitoring, business continuity planning and disaster preparedness. Instilling a culture of collaboration will enable effective partnerships before, during and after disasters,” it stresses. Beyond the global good, it is in the key interest of businesses and multinationals to find new ways to partner with governments to address global risks, says the WEF. “Many risks, ranging from energy security to unemployment, can only be addressed through diverse stakeholders recognising the need for joint action. Such collaboration requires the identification of key risks and related interests and strong alignment and robust agreement among business and other stakeholders on the need to address them,” it says. Businesses must also strengthen their own resilience to “ensure continued operation and survival in the face of risks”, adds the WEF. Increasingly, businesses need to strengthen their scenario and emergency planning capacity to analyse complex and often uncertain interdependencies if they are to build resilience to global risks, it notes. Furthermore, the resilience of any individual business depends heavily on the resilience of its suppliers and purchasers, whose supply chains can span many countries, it adds. “The need for business leaders to consider the implications of these risks on their firms’ footprint, reputation and supply chain has

09-CRE-Y7-01-WEF.indd 11

never been more pressing,” noted John Drzik, president, global risk and specialties at Marsh. “There are areas for public and private cooperation in managing some of these risks,” he added. “There is scope for that kind of collaboration. One of the things we have highlighted through the years in this report is the forum to bring together government and business leaders to try and encourage that kind of dialogue,” said Mr Drzik. “We would like to see more, but there has been increasing public-private collaboration on

some of the key risk issues. I do think however if you look at the broader risk landscape most risks are rising… I do think it is a riskier world right now,” he continued. Espen Barth Eide, head of geopolitical affairs at the WEF, is “heartened” by the number of chief executive officers who “take a real concern about the state of the world”.

CORRUPTION “They are telling us and everybody else who will listen that they see they have a role to play,” he

added, citing the fight against corruption as an example. “It is extremely important that we think outside the box,” he said. Politicians and other stakeholders from the private sector, nongovernmental organisations and academia need to come together to have a broad debate about the long-term threats and long-term responses, he continued. “There needs to be a focus on collective responsibility at a higher level. You need genuine leadership and trust to focus on those longerterm solutions,” he said.

Cecilia Reyes, chief risk officer at Zurich Insurance Group, specifically called for action from business and government to adapt to climate change risks. “We have to adapt. We have to take actions today to adapt to the impact of climate change. That is the call for resilience that is being highlighted in the report. Specifically for multinational companies, the consequences of climate change pose huge challenges—whether it’s natural catastrophes and how they disrupt our operation, damage to infrastructure, increasing price or volatility of commodities,” she said.

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27/1/16 15:15:58

WEF’s Global Risk Report 2016

IN FOCUS

The WEF’s resilience imperative: a call to arms for risk managers

HE RESILIENCE IMPERATIVE LAID OUT IN

the World Economic Forum’s (WEF) Global Risks Report 2016 calls for the global community to do more in order to prevent or mitigate the adverse effects of catastrophic events in an increasingly complex and quickly evolving environment. As outlined in the WEF report, the Forum’s Global Agenda Council (GAC) on Risk and Resilience advocates four key activities for companies, organisations and governments to build resilience at national and global levels. One of the challenges thrown down to business and other stakeholders is to create a culture of integrated risk management and multi-stakeholder partnerships. According to the WEF, a culture of risk management— the beliefs, norms and values that underpin daily actions— must span the whole organisation, including its supply chains. “Entities can no longer afford to have different types of risk managed by different policies and operating procedures and by different officials, executives and agencies. All parts of an organisation must collaborate transparently on risk management through integrated planning because of the potential for risks to have cascading consequences, including spillovers between the virtual and physical realms,” says the WEF in its latest report.

CULTURE SHIFT

The Federation of European Risk Management Associations (Ferma) said it strongly supports the WEF’s call for a culture of integrated risk management to build resilience. It agrees that such a risk culture must span the whole organisation, including its supply chains. An organisation cannot afford to have different policies, operating procedures and managers for different types of risk, Ferma added. All parts of an organisation must work collaboratively on risk management through integrated planning, it stressed. Ferma president Jo Willaert said: “As risk managers, one of our principle roles is to see that risks are managed across the organisation and [to] support the board and senior management in embedding and maintaining a transparent risk culture. We therefore welcome the conclusions of the

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Global Risk Report 2016, which underlines the need for companies, organisations and governments to follow a holistic approach to risk management so as to build resilience at national and global levels.” Likewise, Airmic, the UK risk and insurance manager association, has backed the need to build increased resilience to global risks. Resilience will be increasingly important for business going forward, it said. “The risk priorities identified by the WEF are in line with the work Airmic has carried out in recent years to identify the causes of corporate failure and the conditions needed to achieve resilience,” said Airmic technical director Julia Graham. “Resilience will be even more of an imperative for businesses going forward as things can move with alarming speed, driven by the ease of communication, flat business models and unprecedented levels of interconnectivity and interdependence. Our members’ role will be to help organisations harness the power of the new digital economy by providing strong enterprise risk management support,” she added. According to Cecilia Reyes, chief risk officer at Zurich Insurance Group, the global risks identified by the WEF need to be taken seriously at the highest echelons of an organisation and owned by the board. “It is very difficult for companies to mitigate these risks and they have to adapt to them. They need to have very good discussions at the top level of the company, especially at the board level. The board [members] should own these risks in the same way they own strategic risk. The interconnectedness of risk and strategy is vital,” she said. A second important step in building resilience is clarifying the roles and responsibilities of key personnel, says the WEF in its Global Risk Report 2016. According to the GAC, it is critical to have clearly delineated and understood senior official and c-suite executive roles and responsibilities for risk and incident management in order to respond to a crisis. Confusion around who is in charge or who has authority wastes crucial time and resources, and makes response and recovery less efficient and effective, notes the GAC. The successful management of complex crises also requires a capacity for adaptability and flexibility. Crisis

managers must be able to adjust pre-established plans as needed given the unique characteristics of each crisis, says the WEF. Thirdly, the WEF’s GAC says it is important to develop crisis leadership skills in order to achieve resilience. “Organisations that successfully position for, respond to and recover from major events also consistently have effective leadership—the qualities and actions of those with authority and influence can empower their entities to be resilient,” says the WEF in its report.

PREVENTION

“Such leaders are steady and decisive in the face of uncertainty and pressure. They make decisions in a timely and prioritised way, and communicate them transparently. Recognising that they cannot address risks alone, they galvanise others and are clear about what assistance they require. They understand when a disaster requires them to cut through policies that may prevent or delay action. “Leaders who are effective during and after a crisis are those who have earned trust through their demonstration of openness, transparency, responsiveness and accountability. They are seen as honest and standing up against corruption,” it adds. Resilience also requires companies and governments to leverage expertise, says the WEF. It concludes that strategic crisis managers must be able to quickly identify and mobilise the most relevant and trustworthy expertise to help understand and respond to a crisis. Knowledge management systems and expert networks need to be set up in advance and across multiple sectoral, professional and disciplinary boundaries, it adds. n The Global Risks Report 2016 was developed with the support of strategic partners Zurich Insurance Group and Marsh & McLennan Companies. The report also benefited from collaboration with its academic advisers: the Oxford Martin School (University of Oxford), the National University of Singapore, the Wharton Risk Management and Decision Processes Center (University of Pennsylvania) and the advisory board of the Global Risks Report 2016.

27/1/16 15:16:04

BEHIND THE NEWS Allianz Risk Barometer

BI remains top concern but cyber and market volatility rising fast: AGCS Barometer Adrian Ladbury aladbury@commercialriskeurope.com

[LONDON]

HE SHIFT IN FOCUS FROM

tangible to non-tangible threats facing risk managers that was clearly identified in Commercial Risk Europe’s annual Risk Frontiers survey was confirmed last month as Allianz Global Corporate & Specialty (AGCS) published its Allianz Risk Barometer 2016. “The risk landscape for businesses is substantially changing in 2016. While businesses are less concerned about the impact of traditional industrial risks such as natural catastrophes or fire, they are increasingly worried about the impact of other disruptive events, fierce competition in their markets and cyber incidents,” stated AGCS, based on its survey of more than 800 risk managers and insurance experts from 40-plus countries. Business and supply chain interruption (BI) remains the top risk for businesses globally for the fourth year in a row, finds the Risk Barometer. “However, many companies are concerned that BI losses, which usually result from property damage, will increasingly be driven by cyber attacks, technical failure or geopolitical instability as new ‘non-physical damage’ causes of disruption,” stated AGCS. This shift in priorities reflects heightened concern over non-physical damage, added the insurer. Based on the insurer’s recently published claims analysis, BI losses are increasing and typically account for a much higher proportion of the overall loss than a decade ago. BI losses often “substantially” exceed the direct property loss, added the insurer.

CATASTROPHES

According to responses to the latest Allianz Barometer, natural catastrophes (51%), closely followed by fire/explosion (46%), are the causes of BI feared most by companies. The survey found, however, that multinational companies are also increasingly worried about the disruptive impact of geopolitical instability. Two of the major climbers in this year’s Barometer feature in the top three corporate risks for the first time, with market developments ranking second and cyber incidents third. Cyber incidents are also cited as the most important long-term risk for companies during the next ten years. Natural catastrophes dropped two positions to fourth year-on-year. This partly reflects the fact that in 2015 losses from natural disasters reached their lowest level since 2009, said AGCS. The top ten risk list is completed by changes in legislation and regulation ranked fifth, macroeconomic developments ranked sixth, loss of reputation or brand value ranked seventh, fire/explosion ranked eighth, political risk ranked ninth and finally theft, fraud and corruption. “The corporate risk landscape is changing as many industrial sectors are undergoing a fundamental transformation,” explained AGCS’ chief executive CONTINUED ON NEXT PAGE

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Allianz Risk Barometer

BEHIND THE NEWS

Chris Fischer Hirs CONTINUED FROM PREVIOUS PAGE officer (CEO) Chris Fischer Hirs. “New technologies, increasing digitalisation and the Internet of Things are changing customer behaviour, industrial operations and business models, bringing a wealth of opportunities but also raising awareness of the need for an enterprise-wide response to new challenges. As insurers, we need to work together with our corporate clients to help them address these new realities in a comprehensive manner,” he added. AGCS reported that more than a third of respondents (34%) identified market developments, such as intensified competition or market volatility/stagnation, as one of the three most important business risks in 2016, ranking this new survey category as the second top peril. Market developments are a particular concern in the engineering, financial services, manufacturing, marine and shipping, pharmaceutical and transportation sectors. This risk ranks as a top-two concern in Europe, Asia Pacific, and Africa and the Middle East. “Businesses constantly have to be on their toes, turning out new products, services or solutions in order to stay relevant to the customer and to thrive in this rapidly changing and globally competitive environment,” explained Bettina Stoob, head of innovation at AGCS. “Innovation cycles are becoming rapidly shorter, market entry barriers are coming down and increasing digitalisation and new ‘disruptive’ technologies have to be quickly adopted, [all] while potentially more agile startups are entering the game,” she added. At the same time, businesses also have to comply with changing or enforced regulation, increasing safety requirements and import/export restrictions, added AGCS. Cyber attacks are clearly an increasing concern for businesses globally. This includes cybercrime or data breaches, but also technical IT failures. AGCS said that cyber incidents, cited by 28% of respondents, gained 11 percentage points year-on-year to move from fifth position into the top three global risks. AGCS said that loss of reputation (69%) is the main cause of economic loss for businesses after a cyber incident, followed by BI (60%) and liability claims after a data breach (52%). “Attacks by hackers are becoming more target-oriented, lasting for longer and can trigger a continuous penetration,” said Jens Krickhahn, cyber insurance expert at AGCS. Cyber attacks are increasing both in frequency and severity, but companies should not underestimate the impact of less exotic operational failure in today’s highly digital and connected industries, said AGCS. “A simple technical failure or user error can result in a major IT system outage disrupting supply chains or production,” said Volker Muench, AGCS expert for property underwriting. As Axel Theis, member of the board of management, Allianz SE and former CEO of AGCS, summed up: “Businesses need to prepare for a wider range of disruptive forces in 2016 and beyond. The increasing impacts of globalisation, digitalisation and technological innovation pose fundamental challenges.”

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27/1/16 16:34:58

INTERNATIONAL PROGRAMME NEWS

» THE BEST OF IPN

Günter Dröse

Commercial Risk Europe’s International Programme News (IPN) is a monthly web-based service that delivers news and analysis on risk transfer and financing developments at international level. It examines initiatives from insurers, brokers and captive managers to help risk and insurance managers improve the way they manage and transfer their cross-border risks. Below is a leading article from last month’s edition. You can access the full IPN newsletter at http://www.commercialriskeurope.com/ipn-home/ipn and sign up to receive the monthly email alert at http:// www.commercialriskeurope.com/ipn-signup.

» TIME TO ENGAGE WITH IAIS OVER GLOBAL PROGRAMMES AS THE EUROPEAN CAPTIVE Insurance and Reinsurance Owners’ Association (ECIROA) and the Federation of European Risk Management Associations (Ferma) step up pressure on the International Association of Insurance Supervisors (IAIS) over the treatment of global programmes by supervisors, two leading global insurers have explained what the industry can do to support their campaigns. Multinational risk managers will be pleased that at last there appears to be some traction in the moves to gain acceptance of excess difference in conditions/difference in limits (DIC/DIL) covers by the IAIS; or at least to have some sort of specific regulatory framework in place for global programmes. But it is clear that this will be a long process involving all the various stakeholders in extensive discussions and negotiation. Both ECIROA and Ferma have now successfully engaged with the IAIS. Günter Dröse, chairman of ECIROA, told International Programme News: “Our campaign is on track, which means we have the impression that the IAIS is dealing with our description of the actual situation, our proposals and, internally, discussing how to proceed.” He said he was hoping to receive positive feedback shortly. He added that almost all insurance companies he has contacted are supporting the initiative and that this is also recognised by the IAIS. One of those companies is AIG, which said it fully supports the efforts of ECIROA and Ferma. Indeed, AIG said it has accepted a request from ECIROA to join a working group to develop recommendations for the IAIS. David Halperin of AIG Property Casualty said: “We think it is critically important work because, ultimately, it will bring more effective solutions to multinational companies around the world.” He went on: “Insurers are ultimately responsible for the nuts and bolts of how multinational insurance programmes

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are constructed. AIG has been doing this for a long time, as have some of our competitors, so we as an industry need to provide leadership to the IAIS in this area.” He said that collaboration with groups like ECIROA and Ferma can help bring all stakeholders together. “We should—and will—be able to come up with solutions that work for everyone, and are committed to doing so. The recommendations ultimately made to the IAIS will be the starting point for an open dialogue with respect to compliance, legal, regulatory and tax questions surrounding multinational programmes,” he told IPN.

» REMOVING OBSTACLES

ANOTHER OF THE COMPANIES supporting the moves by ECIROA and Ferma is Zurich. Petra Riga, head of international sales and distribution at Zurich Global Corporate, explained that in 2013 Zurich initiated discussions with the IAIS, key industry associations, global customers and brokers to draw attention to this growing issue and offer pragmatic solutions. She said Zurich’s efforts are aimed at supporting regulatory reforms that remove obstacles to effective structuring and delivery of global programmes. To take these discussions further, all key stakeholders in the insurance industry must work together to gain the attention of supervisors and trade negotiators, she added. Ms Riga said that insurers must play a role in this campaign, while noting the complexities of this complex and multifaceted issue. “It is important to keep in mind that while the IAIS is a key stakeholder, it is just one of many. The industry can help advance the issue in various ways. First, it is important to develop an understanding from the regulatory and supervisory perspective, otherwise we risk entering into a dialogue of the deaf. On the one hand you have global insurers offering international programme solutions that operate crossborder by definition. On the other hand, insurance regulation and supervision is ingrained at the local, national or jurisdictional level, reflecting the

longstanding mindset of policyholder protection,” she explained. She stressed that while the local perspective may serve local, private household policyholders, the fragmented insurance landscape comes at significant cost in many other areas. “For example, there is a clear discord between global business needs and jurisdictional regulation. While companies are becoming more global, localised insurance regulations and tax regimes have not kept pace with the demands of multinational insurance buyers and remain ‘multi-local’,” she said. It is important to understand the challenging position this presents to the insurance industry, said Ms Riga. “Currently, there are factual inconsistencies and conflicts of law across jurisdictional regulatory and supervisory authorities. At present there are more than 200 IAIS members who oppose ComFrame, largely because it does not adequately meet the requirements of multinational customers. Once we have developed our understanding of these two perspectives it is the insurance industry’s responsibility to articulate this challenge to the IAIS and its members for their consideration and for them to begin the change process.” She explained that a number of stakeholders will need to join the discussion for this to be successful. These include ministries of finance or commerce in local jurisdictions, the World Trade Organization, global insurers, brokers and multinational insurance buyers.

» ACCEPTING DIC /DIL COVERS

ONCE THE IAIS IS FULLY engaged in the discussion, the question will be whether regulators will accept DIC/DIL covers. AIG’s Mr Halperin believes the IAIS will be receptive to all suggestions that make cross-border insurance business easier and more efficient. He said that while DIC/DIL is certainly a key issue, there are also other critical compliance, legal, regulatory and tax questions as well. “We need to get to a point where there is a level of agreement on these

points—at the solicitation/negotiation stage as well as at the claims stage. Regulators, insurers and brokers need to be on the same page when it comes to taxes, claims payments and other compliance—related questions—and we are committed to demonstrating thought leadership in this area. If we can reach a level of certainty on these points, the beneficiaries will be the multinational companies in need of these programmes,” he said. Zurich’s Ms Riga said the IAIS will need convincing to promote a global view of regulation and supervision of insurers and their cross-border business. “It will be important to show the IAIS that there is more value in providing an internationally accepted framework for the conduct of international programmes, for example with DIC/ DIL, than by leaving inconsistencies in the insurance system with the known consequences such as costs to policyholders/global corporates, costs to insurers and brokers and, in the end, the potential loss of investment in the local economy,” she told IPN. “If the IAIS is on board, it—and the industry associations—will need to think of ways in which to promote DIC/DIL or reduce the existing impediments to international programmes. This may be covered by the Insurance Core Principles or in the ComFrame. Once that step is taken, it will be up to jurisdictions to effect the necessary changes in local legislation. This can take time. This is why, once more, all stakeholders are equally relevant,” Ms Riga said. An IAIS decision would not be legally binding, but it would be deeply influential and set the tone for future insurance regulation, said Ms Riga. The IAIS would be obliged to work closely with its members to implement any decision reached. Mr Halperin agreed, pointing out that while regulators are generally not bound by IAIS guidance, the expectation is that the majority would support solutions if they work for everyone. But it is likely to be a long process. “With the number of regulators and interested parties involved, realistically this is a long-term campaign,” said Mr Halperin. “But we think that important strides can be made this year.” —Tony Dowding

27/1/16 14:48:43

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26/01/2016 17:03 27/1/16 13:52:52

E-NEWSLETTER

» THE BEST OF THE WEB Commercial Risk Europe reports the leading news stories of relevance to Europe’s risk and insurance managers every week in its electronic newsletter. Below is a round-up of the most popular articles published last month. To sign up for the free CRE weekly newsletter please go to http://www.commercialriskeurope.com/ more-information/newsletter/sign-up-here

» AXA CORPORATE SOLUTIONS NAMES ROB BROWN AS CEO

supporting businesses in high growth markets. I wish him every success in his next role within the AXA group,” said Mr Evans. —Ben Norris

[PARIS]—AXA Corporate Solutions has announced that former Aon man Rob Brown will become its new chief executive officer (CEO) on 1 March 2016. The appointment, which is subject to regulatory approval, will see Mr Brown take over at AXA Corporate Solutions from Philippe Rocard. Having joined Aon in 2001, Mr Brown was previously CEO of Aon Risk Solutions for the Europe Middle East and Africa region. He was replaced in this role by John Cullen last October. He has more than 30 years of experience in multinational insurance and risk management, including time spent in Europe, the US, Asia and the UK. During his career he has worked for a number of insurance groups. Mr Rocard spent seven years as CEO of AXA Corporate Solutions. He has now been appointed chairman and chief executive officer of AXA Assurance Maroc (Morocco) and head of the insurer’s Sub Sahara Africa operations. AXA Assurances Maroc is a property and casualty (P&C), life insurance and credit company. It is active in retail and commercial lines. Mr Rocard will also lead the AXA Senegal, AXA Gabon, AXA Cameroun and AXA Ivory Coast P&C entities for retail and commercial lines. He will be based in Casablanca. Paul Evans, chairman of AXA Corporate Solutions, said: “I am delighted to announce the appointment of Rob Brown as chief executive officer of AXA Corporate Solutions. I believe the AXA group, through AXA Corporate Solutions, is in a unique position to become a global leader in the large risks and specialty markets by bringing innovative, scalable and efficient solutions to our partners and clients worldwide. “I am convinced that Rob’s experience and deep knowledge of the market, his ability to understand and address the expectations of his clients and his recognised leadership make him the ideal person to lead AXA Corporate Solutions in this next stage of development.” He moved to “warmly thank” Mr Rocard for his “enormous contribution to the development of AXA Corporate Solutions since 2009”. “Under his leadership, AXA Corporate Solutions has successfully leveraged the strength of its French and European foundations to build a global platform

» LIABILITY INSURERS NOT MEETING CUSTOMER NEEDS SAYS LEADING GERMAN BUYER

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[HAMBURG]—Liability insurers are not prepared to meet the future needs of customers, must offer more consultancy services and must end the strict separation between policies covering either firstparty or third-party risks. So said Dagmar Wittnebel, the individual responsible for buying liability insurance at aircraft manufacturer Airbus, at last month’s Euroforum Liability Insurance Conference in Hamburg. Speaking at the event, Ms Wittnebel criticised the approach of liability insurers. “At the moment, they still put too much focus on the transfer of risks and the offset of losses,” she said. Responding to a survey conducted at the conference, 67% of customers and brokers said liability insurers are not prepared for the future needs of customers. The majority of insurers and reinsurers shared this opinion—55% agreed that more needs to be done. Large industrial companies, such as Airbus, are facing major challenges driven by economic instability and the expanse of regulatory requirements alongside Industry 4.0 and ongoing digital transformation, explained Ms Wittnebel. For example, Airbus uses 1,000 parts produced by 3D printers in its Airbus A53. Furthermore, the company invested €3.4bn last year in research and development alone. “Our industry has to be able to manage a balancing act,” she said. “It has to keep sight of its operational targets but at the same time we have to be on top of innovations and digital transformations. We expect insurers to be able to keep up with this too.” It is therefore imperative that liability insurers offer their customers more support, continued the insurance buyer. “They [insurers] have to accompany customers through the whole value chain,” she said. Insurers must help companies to identify, quantify and minimise new risks, she stressed. Companies would be willing to pay extra money for such services, said Ms Wittnebel. “Companies cannot rely on their own

competences,” she said. “They know they need help with this.” Carsten Krieglstein, responsible for liability insurance in central and eastern Europe for Allianz Global Corporate & Specialty, agrees. “If we want to be successful in the future, we have to be ready to not only transfer risks but we also need to be able to offer our know-how,” he said. Airbus’s Ms Wittnebel called for new insurance solutions in the future. “One has to rethink how insurance works,” she said. She specifically asked insurers why they so vehemently separate first-party and third-party risks. “Why can’t someone insure against these risks cross-divisionally like with cyber coverage?” asked Ms Wittnebel. Ms Wittnebel also said she would welcome new insurance solutions that companies such as Airbus could offer its customers alongside new products. “That way, the question of liability is no longer there,” she said. She also called for more transparency and clarity over the liability policies currently on offer. “Right now there is still a large [degree of] complexity and different triggers,” she said. “Insurers should ask themselves: Is this really necessary? Do we still need this?” Helmut Hecker, head of liability insurance for corporate clients at Gothaer, noted that the German Insurers’ Association is working on reforming the terms and conditions for liability insurance with the aim of making them easier to understand. “However, we will never be able to get D&O insurance conditions onto half a sheet of A4 paper,” he said. —Friederike Krieger

» HDI-GERLING REBRANDS AS HDI GLOBAL SE Talanx Group’s industrial lines insurer HDI-Gerling Industrie Versicherung AG has changed its name to HDI Global SE, primarily to better reflect its growing international profile. The company is now operating worldwide under the new HDI Global brand. The conversion to an SE—Societas Europaea or European joint-stock company—from the German limited company form known as AG (Aktiengesellschaft) had previously been approved by the competent supervisory authority.

HDI says the name change reflects its increasingly global business, is easier for non-German customers to understand and is a major step in its global growth strategy. “The renaming is an important milestone in our more than 100-year history,” said Dr Christian Hinsch, deputy chairman of the board of management of Talanx AG and chief executive officer of HDI Global SE. “Our new name reflects the increasingly international profile of our business.” He added: “Today we are already generating almost 60% of our premium in foreign markets—and the trend is rising.” HDI recently announced that it intends to draw two thirds of its gross premium income from outside of Germany by 2019. Dr Hinsch told CRE late last year that the conversion to SE status will “strengthen the profile of our company with the supranational legal status of the European joint-stock company”. “Our intention is to use this European legal status to emphasise the international alignment of our company and consolidate our uniform profile in our core market, Europe. The promotional impact of the European label SE will also enhance the effectiveness of our international competitive edge. This is an important step on our path towards globalisation,” Dr Hinsch said in December. “HDI-Gerling Industrie Versicherung AG is really long and difficult for nonGermans to understand, let alone pronounce. We are already a global company with over 50% of our business from non-German territories so it is time to move to a more ‘normal’ name that reflects our position and our international profile,” he explained. Richard Taylor, managing director of HDI in the UK and Ireland, said the rebranding will help his company to broaden its scope in local markets. He also said the legal SE status better reflects the company’s international profile than its previous listing as a German public limited company. “We are therefore very pleased about this rebranding,” he said. As part of the rebrand, HDI Global SE has comprehensively updated its corporate website and all international microsites. The new web address of HDI Global SE is www.hdi.global. The industrial lines insurer now trading as HDI Global SE placed roughly €4bn of premium in 2014. It employs more than 3,000 staff worldwide and handles in excess of 3,000 international insurance programmes. —Ben Norris

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Continued from Page One

NEWS

AIG: Icahn says firm has been “misleading” in its disclosures CONTINUED FROM PAGE ONE Mr Steenland, however, used the strategic update in January to support Mr Hancock’s latest batch of changes and his decision to further streamline and reorganise the group into nine new business units and a new legacy operation. He also stressed that that he does not agree with Mr Icahn’s proposal for a full breakup of the group because it does not offer all stakeholders best value. THE LONG GRASS “After careful consideration, AIG believes that a full breakup in the near term would detract from, not enhance, shareholder value,” said Mr Steenland. “A lack of diversification benefits would reduce capital available for distribution, and there would be a loss of tax benefits. Being a non-bank SIFI is not currently a binding constraint on return of capital,” he added. AIG said the latest series of strategic actions, organisational changes and “operating improvements” would create a “leaner, more profitable and focused insurer”. The return of $25bn of capital to shareholders during the next two

years, announced in its strategic review, will be carried out via buybacks and dividends. The capital return will be made possible by a combination of improved operating performance, divestitures, reinsurance transactions, a shift in asset allocation, a “modest” increase in leverage and the release of capital over time from low-earning legacy assets, said AIG. The insurer added that the approval by its board of an IPO of up to 19.9% of United Guaranty Corporation would be a first step towards full separation of the unit. The board also approved the sale of AIG Advisor Group to Lightyear Capital, a New York private equity firm focused on financial services, and PSP Investments, one of Canada’s largest pension investment managers. The transaction is expected to close in the second quarter of 2016. The AIG board also approved a number of organisational changes that could lead to future sell-offs of more core businesses. This includes the creation of nine “modular” business units that the insurer says will have greater “endto-end accountability”. Each unit will have its own specific financial metrics.

Within the commercial segment, the new units comprise liability and financial lines, property and special risks, US commercial and Europe commercial. Inside the consumer segment, the modular units will be US individual retirement, US group retirement, personal insurance (P&C), Japan, and life, health and disability. Significantly, AIG said the new structure will enable it to more effectively decide which businesses to keep and which to potentially offload, a decision Mr Icahn should find positive. AIG said the new structure will decentralise decision-making, provide more accountability to business leaders and allow for migration to a more ‘variable’ cost structure. FUTURE OPTIONS “The reorganisation will give AIG options to retain and grow the businesses, or take public or sell the units if they don’t adequately contribute to financial targets, or if it becomes apparent that they are worth more outside of AIG than within, or if they represent an efficient means of returning capital to shareholders,” stated the company. “The company could consider the separation of even the larger modular

units of its commercial and consumer segments over time with utilisation of the DTA, contingent on improvements in the credit risk profile and operating performance,” added the group. In addition, the company will also create a new legacy portfolio to hold non-strategic assets. Charlie Shamieh has been appointed legacy CEO. This portfolio will comprise nonstrategic assets and businesses that AIG intends to exit or run off. AIG said the portfolio will be managed to monetise assets in a “timely” manner to return capital to shareholders. The company said it will introduce new disclosures later in 2016 to clarify sources of financial returns and “enhance focus” on a goal of releasing $9bn of capital by 2017. The targeted expense reduction of $1.6bn within two years represents 14% of 2015 gross general operating expenses. As well as improving the commercial P&C accident year loss ratio by six percentage points, AIG has a consolidated return on equity target of 9% by 2017. “With these actions, AIG has taken another major step in simplifying our organisation to be a leaner, more profitable insurer, while continuing

to return capital to shareholders and improve shareholder returns,” said Mr Hancock. “The creation of more nimble, standalone business units that can grow within AIG or be spun out or sold allows us to do what is in our shareholders’ best interests,” he added. Mr Steenland reiterated his support for Mr Hancock and his management team. BOARD’S SUPPORT “The board’s actions reflect its full support for the plans that Peter Hancock and his management team have put forward, and we are aligned that these steps will deliver strong results while creating more options for shareholder value creation in subsequent years,” he said. “AIG is committed to serving all its stakeholders by delivering first quartile total shareholder returns to its shareholders; providing risk expertise and dependable long-term balance sheet strength for its customers; having a culture of strict adherence to both the letter and spirit of regulatory requirements; and maintaining an environment that attracts and retains world-class employees,” added Mr Steenland.

ZURICH: Future leadership

RENEWALS: Soft conditions remain

CONTINUED FROM PAGE ONE

by its future leader. Swiss newspaper SonntagsZeitung reported in mid-January that Mr Greco would move across the divide and join Zurich. Citing an industry insider, SonntagsZeitung wrote that in the end Mr Greco was the only person on Zurich’s shortlist. “At the end, three names were shortlisted: Mario Greco, Mario Greco and Mario Greco,” the insider told the newspaper. Mr Greco’s decision to leave Generali will come as a blow to the Italian insurer where he spearheaded a three-year turnaround programme to boost profitability and strengthen the company’s balance sheet. Mr Greco rejoins Zurich, having left the insurer to head up Generali. He previously joined Zurich in 2007 as the designated CEO of global life and a member of the Group Executive Committee. He was appointed full CEO of Global Life in April 2008. In 2010 he was appointed Zurich’s CEO of general insurance, a role he held until he left the company in 2012. “We are delighted to welcome Mario Greco to Zurich after his successful tenure as CEO of Generali,” said Mr De Swaan. “Mario offers the rare combination of entrepreneurial spirit, deep industry knowledge and proven CEO experience that anchored our search for Zurich’s next leader. His intimate understanding of our company and industry, and his track record as a leader, make him a unique candidate for the role.” Mr Greco said he is honoured to be asked to join Zurich at this critical juncture for the insurance industry. “Like many global players, the company has faced market challenges in recent times but I know that Zurich’s strong global franchise, the breadth of talent and the powerful brand provide all of the ingredients for

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future success,” he said. It appears Mr Greco has a tough job on his hands at Zurich. The opening at the company follows Mr Senn stepping down partly because of poor results at the insurer’s global corporate business and the failure of its RSA takeover bid. Zurich’s 2015 third quarter results were hit by $275m of losses from the Tianjin explosion in China, as well as reserve additions of $300m for current and prior year US auto liability and “certain other lines” of business. Zurich’s general insurance business therefore reported an operating loss of around $200m for the third quarter. In September, Zurich also called off its potential bid for RSA. Last week, Zurich said it expects its general insurance operations to record a business operating loss of around $100m in the fourth quarter of 2015 as natural catastrophe and significant large losses take their toll. The insurance group said it anticipates losses of approximately $275m within its soon to be released 2015 results from storms Desmond, Eva and Frank in the UK and Ireland. These estimates are net of reinsurance and before tax. The group’s full results will be released on 11 February. In addition to the UK and Ireland floods, Zurich said there have been a number of other natural catastrophe events in the fourth quarter, including a tornado in Australia. Furthermore, Zurich said it continued to experience a “very high level” of large current accident year losses in the fourth quarter. These significant losses mainly relate to a large credit and surety loss, as well as several substantial property claims, principally impacting its global corporate business and certain European countries. The profitability of business underwritten in 2015 continues to impact results, said Zurich.

figures from JLT Aerospace. During the year, combined hull and liability rates reduced by 18%, while total premiums were down 12.5% to $1.3bn in 2015. Despite increased exposures—with higher fleet values and greater passenger numbers—total market premium has fallen from around $2bn in 2010, JLT said. Competition for primary business has been most intense in sectors hit by sliding commodity prices, explained Brian Kirwan, chief executive officer (CEO) UK at Allianz Global Corporate & Specialty (AGCS). With fewer largescale projects and plenty of capacity, competitive pressures have increased in sectors like energy and mining, he said. “The message from all lines has been consistent. The market remains highly competitive, with significant capacity. There has been very little change in competitive pressure,” said Mr Kirwan. The reinsurance sector also continued to see prices decline at renewal but in many cases at a faster rate than primary corporate insurance business. According to risk and reinsurance business Guy Carpenter, reinsurance pricing at the January renewal declined for most lines of business and geographies. Globally, reinsurance rates fell by an average of 7% to 10%. However, rate reductions for US property catastrophe business moderated, while catastrophe bond pricing also flattened. Willis Towers Watson reported property rate reductions for loss-free reinsurance business in Europe of between 5% and 15%. Casualty rates were between 5% lower and 2.5% higher for pro-rata business, and flat for excess of loss. Loss-free property reinsurance rates in the US declined by 2.5% to 7.5% at the latest renewal, Willis Towers Watson reports. The availability of new forms and sources of reinsurance capital will continue to drive soft market conditions, according to Fredrik Rosencrantz, CEO of Zurich Global Corporate EMEA. This will have the greatest impact on global specialty markets, particularly within the aviation and energy sectors, he said. “The soft market conditions will drive further rate reductions in both direct and reinsurance in 2016 making market conditions challenging,” said Mr Rosencrantz. Zurich will focus on risk selection and profitability rather than volume, he added. Some corporates are using premium savings achieved at renewals to buy more cover, while others are happy to take the reductions, explained AGCS’ Mr Kirwan. The trend towards broadening buyer/insurer relationships and cross-selling has continued, he said. “We continue to see a move away from pure transactional relationships by large corporate clients, with more interest in forming partnerships to find innovative solutions to emerging risks,” said Mr Kirwan. “For example, there has been more interest in cross-class and alternative risk coverages—such as captives looking for protection across multiplelines—as larger corporate clients look for efficiencies and to leverage insurer relationships,” he added. Clients are looking to leverage relationships and seek efficiencies by placing more business with fewer carriers, according to Mr Pritchard. At the same time, insurers are keen to cross-sell, bundle products and write larger lines, he said. “For insurers, if they can’t get rate, this is an opportunity to focus on the

quality of the product and there is a willingness to enter a conversation with clients. Insurers are willing to improve wordings, rather than rate,” he added. This is evident in the implementation of the Insurance Act, the biggest change to UK insurance contract law in more than 110 years. As a default law, the Act will apply to contracts incepting after 12 August 2016, unless buyers and insurers agree to contract out. UK and international companies buying policies in London do not want differentiations in cover for policies that renew before the Act’s August implementation deadline, explained Mr Kirwan. As a result, some buyers are making sure they are ready for the Act now and looking to move to the new legislation early, he said. “The Insurance Act is very much on customers’ minds and has been a significant part of renewal conversations and will feature in renewals over the course of this year,” he added. Some clients have been looking to follow the Act as they renew policies, but have found some insurers are better prepared for the new rules than others, according to Marsh’s Mr Pritchard. Some carriers are giving clients clarity on disclosure while others are not, he said. “Most insurers are willing to start the conversation and get an agreement on fair presentation of the risk, although some carriers are still working on this and negotiations have had to continue after renewal,” he added. Another notable market trend has been the number of large mergers and acquisitions, including the recently completed combination of ACE and Chubb, which followed the merger of XL and Catlin in 2015. “There have been a number of large mergers and acquisitions in the US, while several large property/casualty insurers have been undergoing internal transformation,” said Mr Kim. “We are keeping a close eye on changes to carriers and the effect on clients’ programmes,” he said. New capital continues to be attracted to the insurance sector by the relative healthy returns delivered by the industry, said Mr Rosencrantz. “Asiansourced capital in particular will continue to drive business valuations and encourage M&A [activity],” he said. “Last year saw continued consolidation in the insurance market, with both brokers and insurers completing a number of mergers and acquisitions. This trend is expected to continue in 2016,” Mr Rosencrantz added. Despite economic growth in the US, demand for insurance has not yet increased, according to Mr Kim. However, demand for certain coverages and solutions to emerging risks continues to grow, he said. “The standout area for insurers is cyber insurance and we continue to see new clients purchasing the cover,” said Aon’s Mr Kim. However, insurers are concerned about aggregate exposures and have witnessed a number of large data breaches in the retail and healthcare sectors. “There has been careful underwriting of clients in certain segments, and rates and retentions may be adjusted. Outside those segments we see attractive rates and abundant capacity,” said Mr Kim. While there is still appetite to grow, insurers are finding it increasingly challenging to do so profitably, according to Mr Pritchard. “There is a realisation that growing the top line is more difficult and we are starting to see some insurers focus more on the bottom line,” he said. Margins are such that insurers have less room to absorb large or catastrophic losses without impacting profits, noted Mr Pritchard.

27/1/16 16:43:55

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24.08.2015 27/1/16 13:31:01 14:06:43

Continued from Page One

NEWS

CHUBB: New firm is one of the world’s biggest P&C insurers CONTINUED FROM PAGE ONE The recent expansion of insurers from Asia and other emerging markets into the international space is set to continue, according to the 750 insurance executives surveyed for the report. The upbeat mood at the new Chubb is in stark contrast to the tumultuous change underway at the insurer’s big rival AIG as its current leadership struggles to deal with demands from high profile investor Carl Icahn to break up the group (see related article on page one). Another leading rival, Zurich, has also experienced a tough time recently that saw the departure of chief executive officer (CEO) Martin Senn and the arrival of Generali’s Mario Greco to get the business back on track (see related article on page one). Against this backdrop, Chubb’s CEO Evan Greenberg can be excused for feeling rather pleased with himself. The successful completion of the Chubb deal creates one of the world’s biggest property and casualty (P&C) insurers, with combined net premiums written in 2015 of some $28.35bn, a strong leadership position in the US and broad reach worldwide. STRONG FUNDAMENTALS The ACE part of the combined business reported an underwriting profit of $1.93bn for 2015 on the back of a record full-year combined ratio of 87.4%. The legacy ACE business delivered a net post-tax profit of $2.83bn in 2015 against $2.85bn in 2014. The Chubb legacy business reported an even better combined ratio of 87.2% for 2015 and net profit of a little more than $1bn. The combined net profit would have been $3.87bn in 2015 against $3.94bn in 2014. The Chubb deal is the largest insurance transaction in history. ACE also last year completed the acquisition of the Fireman’s Fund high net worth business and launched ABR Reinsurance (ABR Re) along with BlackRock, the world’s largest investment manager. As part of the deal, ACE became the sole source of reinsurance risks ceded to ABR Re. BlackRock will be ABR Re’s exclusive investment management service provider. To ensure that all this activity delivers what investors and customers want, however, the new Chubb needs

Evan Greenberg

ACE’s headquarters in Philadelphia to carry out a smooth transition of the various businesses. This requires clarity and leadership, so the latest raft of announcements about the management of its European and Asia Pacific businesses will be welcomed. In Europe, Andrew Kendrick has been appointed senior vice-president, Chubb Group, and regional president, Europe. Jalil Rehman is named executive vice-president and chief business operations officer, Europe; and

FERMA: Campaign CONTINUED FROM PAGE ONE intended to inform its work on global programmes. It specifically asks whether non-admitted difference in conditions/difference in limits (DIC/DIL) cover or financial interest clauses offer the best solution for compliance. “At this stage, we are waiting for the results of an online survey to reconfirm the importance of this issue within the risk manager profession. Preliminary results of the survey indicate that the availability of DIC/ DIL coverage is a critical issue,” said Mr Wegener. “After a review of the final survey results, we aim to approach

01-CRE-Y7-01-News.indd 22

what our new company stands for: superior underwriting, superior service and superior execution,” said Mr Kendrick. Paul McNamee is named deputy regional president and regional head of P&C, Asia Pacific at the new Chubb. The new report from Willis Towers Watson, produced in conjunction with Mergermarket, suggests that M&A activity will become even more frequent in the global insurance and reinsurance market during the coming years. Its survey of senior insurance executives concluded that competition for attractive assets will intensify in the next three years as the majority of insurers (82%) plan to acquire. Only one third intend to divest. The analysis found that top-line revenue growth was the main driver of M&A activity in the insurance sector. Some €111.4bn-worth of deals were completed in the first three quarters of 2015, nearly three times that recorded in 2014.

Matthew Shaw becomes executive vice-president, Europe, and division president, Chubb Global Markets. Jeff Moghrabi will serve as division president, continental Europe. Mr Moghrabi was formerly regional president, continental Europe at ACE, and will continue to hold responsibility for the company’s P&C, accident and health, and consumer lines operations across Chubb’s 16 countries in the region. He will report to Mr Kendrick. Steven Reiss will serve as chief

operating officer in continental Europe, reporting to Mr Moghrabi. Mark McCausland will serve as chief risk officer, Europe. “This is a group of true leaders; highly regarded insurance professionals with a wealth of experience and proven track records. Their knowledge and experience will be instrumental in ensuring the successful integration and ongoing success and growth of Chubb in Europe. Together, we will help bring to life for our brokers, partners and clients in Europe exactly

STRENGTH IN NUMBERS Almost half of the respondents made their last major acquisition to enhance their market position and increase customer numbers. Consolidation, particularly in the US and specialty lines, sparked a rise in the number of megadeals—worth more than €5bn—last year to four, compared to just one in 2014. According to the survey, this trend is expected to continue. It found that the vast majority (90%) of insurers in emerging Asia, central and eastern Europe, the Middle East, Latin America and Africa plan to complete deals during the next three years. In contrast, more than half of the firms in western Europe, north America, Australasia and Lloyd’s expect to make at least one divestment before 2018. This is mainly because of consolidation and efficiency drives, stated the report. Andy Staudt, Europe, Middle East and Africa P&C M&A leader at Willis Towers Watson, said: “Asian companies are looking to buy in Europe, not because it’s a high growth market, but because of the technology comparative advantage. There are systems in place, especially in the P&C space—such as IT structures, pricing algorithms and distribution tools—that European insurers can bring to the table and [which] are very attractive to certain foreign entities that can take these skills back home.”

has gained support of other RM associations

prospective initiative members to form this coalition and discuss objectives and approaches,” he said. Given the complexity of the issue, a solution will take time, according to Mr Wegener. “With regard to the timeframe, I am afraid we all need to be a little patient. The current rules have been existing for decades and will probably not change quickly,” he said. COMPLIANCE In recent years, the issue of global insurance programme compliance has risen up the agenda, with a number of insurers and associations showing interest. Ferma’s initiative builds on the

work of its member associations, as well as insurers. In 2014, UK risk management association Airmic unveiled Insight Risk Manager, a compliance database created in partnership with Axco and specifically designed for risk managers. Spanish association AGERS published a report on international programmes in the same year. A number of multinational insurers and the European Captive Insurance and Reinsurance Owners’ Association (Eciroa) have been working on this issue. (See related article on page 16). They have offered their support to Ferma. Günter Dröse, chairman of Eciroa, told CRE’s sister publication

International Programme News that Eciroa and Ferma have approached the International Association of Insurance Supervisors (IAIS), which establishes voluntary insurance regulatory standards and guidelines. He believes the IAIS is considering their comments and will respond shortly. ‘HUGE CHALLENGE’ Experts contacted by CRE recognised the huge challenge ahead for Ferma in trying to change national regulations in a bid to make global programmes more efficient and compliant. “Global programmes are a huge and complex issue but it would be in the interests of all to get an international agreement,” said Nick

Lowe, director, government affairs at the International Underwriting Association. Mr Lowe noted that a number of countries had introduced unhelpful regulatory changes in recent years. Such countries are limiting companies’ ability to cede risk to foreign insurers and reinsurers, as well as limiting the ability of international insurers to operate on a level playing field. However, there is also a genuine desire for market liberalisation and regulatory harmonisation, noted Mr Lowe. Trade talks, Solvency II and the work of the IAIS are glimmers of hope for internationally-minded risk managers and insurers.

27/1/16 16:44:05

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