Thursday, 2 August 2012
A structured solution
Risk and insurance managers from across Europe who have taken part in this year's Risk Frontiers survey have expressed frustration about the apparent inability of insurance companies to deliver innovative solutions to meet their fast changing needs. One regular comment is that the structure of insurance companies typically does not help and this needs to be re-thought. Given that earlier this year the insurance segment of XL Group announced that it has restructured its international primary casualty business, Commercial Risk Europe Editor Adrian Ladbury asked Thomas Stamm, the unit's Chief Underwriting Officer, what the company is doing to meet evolving customer needs, as part of a series of interviews with leading international industrial insurance groups.
Thomas Stamm, Chief Underwriting Officer International Primary Casualty at XL Group
XL Group’s International Primary Casualty business serves large corporations in Europe, Asia, Australia and Latin America in over 100 territories. The business opted for a new structure based upon four teams built around underwriting tasks and account type in a move that it said ‘underscored a true client focus’.
Thomas Stamm, Chief Underwriting Officer International Primary Casualty at XL Group, told CRE that the structural changes were made to achieve two main goals.
“On the one hand, while we have strong market positions in many markets, we took a careful look at our business, analysed the market and found opportunities for primary casualty to achieve further profitable growth with a new client focus, new products and new territories,” he explained.
On the other hand, he said the new setup also ‘aims to respond to the ongoing process of globalisation and ever-changing legislation that together pose increasing and similar risks to many of their clients—and results in a great demand for innovation from insurers.”
“Our new structure has changed from a focus on geography to a focus on risk type and this lets us be more nimble and innovative. By working closer together with our clients and brokers it will make it easier for us to find answers to their needs,” he explained in April, when the move was originally announced.
Mr Stamm added in the subsequent interview with CRE that this is not a defensive move to simply protect turf, but rather a positive reaction to changing client demand.
Specifically to achieve this, Mr Stamm’s operation now has three teams that he says are focused ‘exclusively’ on clients’ needs.
These are Underwriting Large Corporates, led by Reto Arrigoni, Underwriting Complex Accounts, led by Joachim Walch and Underwriting Environmental Liability, led by Simon White.
A central team that looks after common elements such as strategy, current and new products and also runs the numbers that back up the business decisions supports these units. This is labelled Underwriting Management and is led by Michael Rüsch.
Risk managers, however, always naturally look sceptically at such corporate reshuffles assuming that they have only really been carried out to save costs and improve the margin of the insurer.
Mr Stamm was therefore challenged to explain the main benefits of his company’s restructure for the buyer.
“It is a simple fact that globalisation, the evolving national, regional and international legislation coupled with the speed with which information can spread around the world, pose new complex risks for our clients’ business activities,” said Mr Stamm.
“The main innovation in our structure is the creation of a unit dedicated to finding answers to risks that are particularly complex because of the nature of the client’s business or the projects they participate in”, he added. The insurance market does not currently cover most of these risks, he conceded.
A big complaint voiced by many risk managers who have taken part in the Risk Frontiers survey, sponsored by XL Group and broker Willis this year, is the fact that insurers tend to be organised along outmoded lines of business and territory that, in themselves, create a barrier to innovative thinking and action.
Many argue that the structure of the risk transfer industry no longer matches the risk environment that its customers operate within.
Continuing to explain their new focus on innovation, Mr Stamm said, “All of our accounts are by definition complex. But we have defined complex risks as those where a traditional solution is not appropriate. These are accounts which need a solution that is bespoke and in most cases one that no other insurer is looking to develop.”
Echoing perfectly another common complaint voiced in this year’s Risk Frontiers survey, Mr Stamm explained that insurers all too often reject complex risks based on key words such as ‘pure financial losses’ or ‘contractual liability’. This is commonly done without an effort to understand the risks and how they might be covered, he added.
“There are lots of different aspects to complex risks. We spend time with clients, bringing in a range of specialists and using modelling to help us understand the risks before we provide a solution that up till now has not been offered in the market,” he said.
“We have written several such accounts, where we needed to spend a lot of time with the clients—including not only our underwriters, but also our engineers, to understand and break-down a risk into manageable pieces so it could be insured,” continued Mr Stamm.
The insurer asserted that XL Group is ‘different’ from most insurers because it holds a bigger volume of similar complex risks and so can manage this in a larger portfolio.
As an example, Mr Stamm said that one unnamed company had talked to underwriters about its product and the potential for an open coverage for pure financial losses. This was no simple task because open coverage for pure financial losses is just the type of broad definition that insurance companies avoid as they do not generally know what they are going to cover.
“The insurance community rejected the opportunity. Even we were initially sceptical, until our teams reviewed it and decided that an opportunity existed,” he said.
The key to unlocking this risk was a group of specialists that believed in the idea and were prepared to discuss the problem with the client over a very long period of time, explained Mr Stamm.
“We used security analysis, risk management and risk engineering, ran simulations with the client and understood related legal issues. This gave us the security of knowing the risk we were to cover and so could price it accurately,” added Mr Stamm.
The insurer said that all too often insurers see these types of risk as ‘threats’ rather than opportunities. This was particularly stressed during the UK Risk Frontiers interviews that were published in the July/August issue of CRE.
The risk managers pointed out that insurers tend to look for exclusion wordings and pay significant legal fees to avoid certain types of exposure rather than look for solutions. “XL Group does exactly the opposite. We look to provide solutions where others can’t,” claimed Mr Stamm.
This sounds like just the sort of approach that Europe’s risk managers are screaming out for currently. Investment allowing, it does seem to be the only long-term viable strategy in this increasingly complex and global marketplace. Silo produced, exclusion-driven and commoditised products simply will not wash in the future.
But the obvious problem for the insurers is that they are in general currently not set up to operate in this bespoke way and have to invest in the people, systems and relationships needed with customers and brokers to make it work.
But Mr Stamm said that the key is not just to find the perfect structure. It is also important to find the right people, another key finding of this year’s Risk Frontiers survey.
“This was also about having the right people—with an entrepreneurial spirit and innovative thinking as well as strong underwriting expertise. We also put the right processes in place. We had to make sure we had not only the right underwriters, but also the right service capabilities. This is a better setup because clients will have teams dedicated to the type of risks they face,” he said.
In short, he said that a key aspect of the change is to make sure that the insurer has the ‘right experience, capabilities and approach’ to handle complex risks in what XL Group tags an ‘innovative solution-driven approach’ to complex risks.
Insurers that are prepared to invest in innovation to take them where customers really want them to go, also need to be able to charge a price that reflects the extra effort. So pricing is important.
Mr Stamm pointed out that ultimately insurers are also part of a supply chain. He said that generally clients see the quality that is delivered, want their risks covered and ‘understand’ the price that needs to be paid for this.
As with all good business transactions therefore the key is for both parties to clearly understand what is needed to make the deal work for both sides.
“We believe that, as insurers, we are our clients’ partners and they need us to be there for the long term. They need insurers that are financially solid and who will be there when claims need to be paid. This is why we believe in fair pricing and will walk away from a risk that cannot be priced appropriately,” he added.
“However, if pricing isn’t right for a client, then the product needs to change to fit the price. We cannot offer the same coverage for a lower price, but need to adjust the wording to change the cover,” he continued.
As to the overall market, Mr Stamm sees a healthy outlook for liability business. “The ubiquity of technology and its increasing use in all types of industries and products has the potential to create as yet unknown liabilities for manufacturers. The liability landscape is changing. Governments, regulators and consumer protection agencies are driving development of new laws and guidelines which are creating new liabilities,” he explained.
Mr Stamm said that one obvious example of this is the clear trend to introduce the established concept of punitive and exemplary damages from the US over to Europe.
The European Commission’s ongoing debate with itself and the European business and consumer lobby about the potential for introducing class action style rules into the European Union could lead to a rapid acceleration of this trend according to many experts.
“We call this the industrialisation of additional risk. XL Group understands these risks because working closely with our clients and brokers gives us deep insights into what is going on in the market,” explained Mr Stamm.
“Our clients need to innovate in response to the changing needs of their customers. And customer demand for new products in emerging markets increases the risk for European companies doing business there. New products mean new risks and consequently new threats and opportunities,” continued Mr Stamm, echoing again a common point made by many risk managers in this year’s Risk Frontiers survey.
Despite a cautious attitude among many European risk managers, XL Group sees demand for casualty products such as environmental, product recall and life science solutions as growing. “In response to this we are innovating and building a deeper understanding of new risks. We see good potential, for example, in the area of environmental liabilities,” he said.
Mr Stamm pointed out that the development of the Environmental Liability Directive (ELD) should serve as a spark for demand for cover in this area.
“The ELD was designed to protect the environment and establish responsibility for damages to the environment to ‘somebody’. Out of this the ‘polluter pays’ principle has evolved, which in most cases means a company is liable,” he said.
As has been covered in depth in CRE, the adoption of the ELD was slow as it took time to translate into national law and knowledge of the law remained low. “But this is now changing,” argued Mr Stamm.
“High profile cases are driving awareness of corporate responsibility under the ELD and companies are realising that they are responsible for more than their general liability policies might cover. And they are also realising that there is a large element of reputational risk in this area,” he added.
Mr Stamm pointed out that science is also changing the nature of claims. This is because the degree of damage can be better established and evaluated and so claims tend to become more focused and concrete.
Another example of this, according to Mr Stamm, is the changing needs of the life science industry.
Mr Stamm said that changing demographics and customer needs, as well as challenging legal frameworks, create opportunities for the life science companies. But, at the same time, this can result in a highly litigious environment. Coverage for the resultant risks are not always easy to find, he said.
XL Group last year consequently launched a suite of products to respond to the needs of the industry that included general liability, product liability, domestic and foreign clinical trial liability, environmental liability and property coverage. The products are aimed at companies in the fields of biotech, cosmetics and medical devices in general.
Another area where the insurer sees rising demand for innovative coverage is food and beverage product contamination cover.
Mr Stamm said that in his area XL Group offers product recall in combination with general and product liability. The group also now has a business dedicated especially to product recall.
Corporate restructures at insurers will never, of course, offer a magic solution to such a deep and wide conundrum as the need for greater innovation in the complex international industrial risk business.
But moves such as this taken by XL Group suggest that the market is at least aware of the problems identified by their customers and is prepared to take the right steps in the direction needed.
The winners in this evolutionary process will surely be those insurers that wake up to the problems in the first place, and are prepared to make speedy and real investment to address them.