German buyers back new mutuals to cope with harsh market

Leading German multinationals have called for a market-wide effort to investigate the creation of new industry mutuals to deliver long-term solutions to the capacity crunch and raft of exclusions suffered during the last few insurance renewals.

Severe problems in finding fairly priced and adequate capacity in core lines such as cyber and D&O have left members of the German risk and insurance management association GVNW complaining loudly for some time.

High-profile members of the GVNW took part in a panel discussion on the potential of mutuals during the association’s annual Symposium in Munich today and agreed that it is time for action rather just complaining.

The barriers are high. Creating new mutuals would take a huge amount of effort in bringing competitor companies together with sufficient common interest. Convincing senior management of the need to finance and commit to mutuals that would basically pay the claims of rival firms may not be easy.

But risk managers on the panel representing leading German firms including BASF and Merck agreed that the scale of insurers’ recent retreat from risk demands a response.

“Absolutely now is the time to consider mutuals from my viewpoint,” said Udo Kappes, who works in Airbus’s risk and insurance management department.

“I see a lot of dissatisfaction with the insurance market currently and it is at times like this that mutuals are created. We found that two years ago the entire insurance market was unable and unwilling to communicate on D&O. Capacity was reduced and prices were increased in a very concerted way. Captives are useful but they are not the way to buffer this,” said Kappes.

“The same thing happened in cyber. If you go to your board members and say ‘next year you will pay double for half the capacity’, you have a problem and you have to think outside of the box. Maybe this is an opportunity to see if other companies are having similar problems and see if we can join forces,” he added.

“This is not about competing with the insurance market but evening out the market in the long run. I feel the need to carry out a survey to see if there is common interest and see if others have the same problems. There are extremely high hurdles of course – it takes a lot of capital and there are risks – but I would be open to an approach. We will see what happens,” continued Kappes.

Stephan Schröder of science and technology multinational Merck agreed with his GVNW colleague. “We are an industrial company first and foremost, investing in and holding shares in suitable companies and certainly not an insurance company, and this would be difficult to explain to management. But doing nothing does not make sense,” he said.

“The risk can be booked into the captive or held on the balance sheet but a mutual is certainly an option. You would need to talk to a lot of people – tax, legal, compliance etc. It would be very complex but management is asking for options so we have to look at it seriously,” he added.

Kappes said examples of successful mutuals in the past such as FM Global and Oil Casualty Insurance, now known as Everen, suggest the concept can work.

“You need to look at the long term. You cannot say the market will be soft in three years and it will be OK again. This is about generating plannability. Risk managers hate nothing more than agreeing terms and conditions with insurers and then having to revise it all the following year. We all hate this. You need a long-term view and the mutual may be the right way to do this… Mutuals don’t solve everything but I do think we will see more interest and it’s worth a shot,” said Kappes.