Thursday, 5 April 2012
Harder times ahead-Rudi Flunger
Rudi Flunger, Member of the Group Management Board, Head of Regions & Specialty, Swiss Re Corporate Solutions, told Adrian Ladbury that he sees an overall hardening in the corporate insurance market on the horizon, that the market is not actually that bad at innovation and that there are still plenty of opportunities for growth in this competitive market space as the group seeks to raise its direct market profile.
Rudi Flunger, Member of the Group Management Board, Head of Regions & Specialty, Swiss Re Corporate Solutions
Adrian Ladbury: How do you see the state of the market currently?
Rudi Flunger: “It is an interesting market with many different forces at play but for us, as ever, there is only one strong focus and that is technical results. Our focus, as well as other corporate insurance players, on technical results will lead to a hardening of the market in a lot of areas. Some areas are already hardening, some are at the end of the softening, while others are lingering. Therefore, overall, it is still quite a mixed market. A change in the market will be driven by four main factors. First, claims. I recall in 2004 when I was in charge of the aviation insurance one broker said to me that this business is all about claims, claims and claims! Just consider the large catastrophe losses that happened during 2011—there is definitely no shortage of large claims being paid. Second, there is currently low investment yield. This will lead to a stronger focus on technical profit, a heightened attention to casualty business and longer tail lines. Investment yields are expected to stay low; US Treasury bond yields, in particular, are currently close to zero. Third, changes to exposures are occurring, not least those driven by changes to models such as RMS11 for windstorm and flood surge. At Swiss Re Corporate Solutions we are using our own proprietary models and we see RMS moving closer to our models. And fourth, the capital situation which is driven by asset management. Last year’s claims mainly impact earnings but they did not necessarily impact capital. The European crisis is putting stress on the balance sheet of several insurers, which is also expressed by downgrades from rating agencies. Taking all four drivers together, this will translate into a hardening of the market.
AL: Where specifically are you seeing movement in markets?
RF: In US property, the market is pulling capacity where there are natural catastrophe exposures and there is currently some hardening in US casualty. All markets which are currently faced with losses, such as Asia, Australia and New Zealand, will experience increases. The Latin American property market is still quite hard, especially in Chile. Also the energy market is quite prone to losses. We see an interesting market situation there. The aviation market was quite soft in the last quarter but generally, even the softest of markets are gradually stabilising.
AL: Do you think it is time for the market to harden overall and not just in pockets given the multiple pressures and particularly since reserves must be running dry?
RF: The recent large losses and low investment yields make it clear that reserve releases cannot continue at the level seen to date. Additionally, RMS has its new model, which is leading to higher perceived exposures. These are all drips, which will, at some time soon, surely lead to an overflow, and no longer represent a pure drop in the ocean.
AL: The corporate insurance market has been highly competitive in recent times with a number of new entrants in the mature European market. Why is Swiss Re Corporate Solutions making a push into this market?
RF: We have a robust plan and a long-term strategy that makes sense for Swiss Re Corporate Solutions and our customers, and we intend to leverage our competitive advantages, such as our broad technical insurance capabilities, innovative offerings and some of the largest capacity currently available in the marketplace.
AL: What is your view of Solvency II and the impact that this will have on the market? Will it clear out fringe players to leave more space for bigger insurers like Swiss Re Corporate Solutions?
RF: It will have a significant impact on the reinsurance side and this will have a knock-on effect on commercial insurance. Everyone is preparing now, so the impact is already being felt, but overall it will probably not be a single big game changer for corporate business. For risk managers with captives, it will be more important and is currently a moving target.
AL: What about emerging risk such as contingent business interruption? Have you been as surprised by the breadth and depth of the impact of the events in Japan and Thailand and what will be your reaction?
RF: Obviously we are aware of the attention created in the market by these matters and we are aware of the rising claims. In many property policies in the US, the real difficulty is flood exposure and flooding which follows an event such as earthquakes and tsunamis. We are looking closely at this issue in the context of business interruption. Customers say there is not really sufficient cover today, particularly for CBI. We are addressing CBI quite cautiously, offering customised solutions to each client.
AL: There have been suggestions that parametric covers are the answer for such risks. What is your view on this?
RF: Innovation is a big topic for us and parametric covers offer a lot of advantages for customers. Swiss Re Corporate Solutions is quite advanced when it comes to parametric solutions. Parametric covers are easy to understand, easy to administer and the main benefit for the customer is that they pay out much faster than traditional insurance policies.
The downside, however, is that you need an independent index to determine when the cover is triggered. In Japan we offer a business continuity expense product that provides for extra costs after an event. This is triggered by the intensity of an earthquake event. We also have a lot of experience in parametric solutions for weather and agricultural risks. Examples include, cover for the Dutch builders’ association which pays out when the weather is too cold for outdoor work during the winter and a crop shortfall cover for agricultural corporations.
AL: This makes a lot of sense. Why has it not happened before?
RF: Catastrophe bonds have been traded for years and Swiss Re has been very active in this market, so the technology and experience exists for us to build upon. You obviously need a very strong knowledge and experience of the index and very clear policy wordings so the client feels comfortable. The deals are sometimes done in the form of a derivative or in the form of an indemnity cover. For example, in Japan our Business Continuity Expense product is fully endorsed by the FSA as an insurance product.
AL: I presume that you do not agree that the insurance market is as bad at innovation as many customers claim?
RF: That’s simply not true. The insurance business is innovating, though in an incremental and not exponential way. Remember that the world becomes more complex all the time. No risks are static, they are constantly evolving. This is a challenge for everyone. The renewable energy sector is a good example. Investment into renewable energy projects was higher last year than into the fossil fuel industry. Investment in this growing sector creates a huge number of financial risks for projects, new technology and partnerships. For instance for wind farms, weather risk is important since it has a direct link to the financial risk. This is an area where we want to be stronger positioned and it ties nicely with our capabilities around parametric solutions. We want to collaborate more with industry experts to develop the right solutions. In this market there is a very diverse stakeholder base, including utilities and manufacturers. And we must not forget that it’s not just the western world that is interested in this area. One of the largest investors in this market is China. This is an emerging industry in an emerging market which definitely needs innovative risk management solutions.
AL: How can you compete in such a risky business when so many other insurers are keen to break into this growth area?
RF: You have to appreciate how important this area will be in the future and recognise that innovation is needed. We have a dedicated Environmental & Commodity Markets team led by Juerg Trueb which includes engineering and parametric experts. You really have to invest in the technical know-how and into product innovation.
AL: Cyber risk is another area of major concern to risk managers currently. What are you doing about this critical area?
RF: This is also another evolving and emerging topic in an ever more complex and digitised world. But there are not a lot of solutions available at the moment, nor are many deals transacted. For specific clients, we have dedicated account managers who are highly knowledgeable in technology and we regularly enter into intense dialogue with them. In a few cases we have been able to close deals that are highly customised to client needs and the degree of tailoring cannot be easily replicated for others. Solutions for cyber risk are still in an early stage. There are no big limits on offer, but it has started and is developing every year.
AL: How does Swiss Re Corporate Solutions differentiate itself in the market? What makes you different and why should an insurance buyer use you instead of the competition?
RF: We have a very clear client value proposition. We offer top financial strength. We were upgraded to AA- rating despite the latest downward rating trend. We also offer large net capacity based on our capital strength. Furthermore, innovation is grounded in our technical expertise and a wide range of solutions. With that set of offerings, we can meet the needs of large corporate clients from the upper middle market. Swiss Re Corporate Solutions is transforming from a very Zürich-based commercial insurance company to become a lean global player with regional offices. We are spreading out and de-centralising the decision-making to where it makes sense. We have now 42 offices in key locations. In 2011 we were granted an insurance license in Japan, established a presence in Brazil, and we opened offices in Copenhagen and Paris. This year, we plan to open offices in Amsterdam, Genoa and Dubai.
AL: What is your distribution strategy for this market?
RF: We are in a fortunate position; many large fortune 500 companies know Swiss Re already very well and we already do business with most of them. At Swiss Re Corporate Solutions, we are trying to develop our reputation and make ourselves better known to the upper middle market and corporate clients with typically more than $750m revenue. In order to do that, we need to position ourselves closer to these clients and brokers, that’s why we are expanding our office network. There is a lot of interesting business in Europe, North America, Latin America and Asia that cannot be accessed from a global hub. We see ourselves working in a triangle—brokers, clients and Swiss Re Corporate Solutions. The brokers are particularly important business partners for the upper middle market, which is not necessarily risk managed. We put a lot of efforts into building our reputation as a global commercial insurance company.