Hot seat: Wolfgang Boffo, Munich Re Corporate Insurance Partner

Innovation and patience key to success in Asian corporate market: Boffo Wolfgang Boffo, head of Asia for Munich Re’s Corporate Insurance Partner (CIP) operation, which serves the primary large corporate segment, believes the Asian risk and insurance management community is at a “tipping point” and about to embrace the kind of innovative and bespoke risk solutions that it has to offer. There is no doubt that strategic insurance management and risk management remains in its infancy in Asia, compared to Europe and North America. As discussed at the recent Pan-Asia Risk Management Association (Parima) conference in Singapore, far too many Asian companies still regard insurance as a necessary burden, with no real commercial or strategic value, and leave it up to local managers or the procurement department to sort out.hideNot surprisingly, the ‘profession’ of risk management is equally undervalued and is currently carried out by a whole host of different job functions in a somewhat haphazard manner, as Parima has also identified. Opportune time But Singapore-based Mr Boffo, who took on the role as head of Asia for CIP last August, believes that change is in the air and it is a good time for the business to spread its wings in the region. “I know that Asia is not necessarily known as a first mover in this field but it is a big and fast-growing market for commercial insurance and risk services. The risk management community and culture may be at a tipping point and it is a positive way to develop if risk managers are to be real risk managers and not just procurement people,” he told Commercial Risk Asia during an interview in Singapore. Another sign of increased maturity in attitudes towards risk transfer in the region is possibly shown by the rising interest in solutions for new types of risk such as cyber, according to Mr Boffo. “Companies in Asia may not be using those new cyber solutions quite yet but it is being discussed and looked at, and maybe it will happen in course of the year. Brokers may say there has not been a policy placed in the market yet but we do sense a real interest. I do believe a few clients will seriously look into this maybe during the next six to 12 months,” he said. The reason why the cyber market has not taken off in Asia as it has in the US and, to a lesser extent, Europe, could simply be because those responsible for buying insurance did not have the motivation to explore the potential—or are simply not challenged with a regulatory framework as given in the US. The latter could be the reason why brokers in the region do not have the same level of expertise in the field as their peers elsewhere, said Mr Boffo. But as experience of this new risk area grows worldwide, then inevitably Asian corporations will seek to buy and CIP will be ready to talk, he added. And, as Munich Re’s recent survey of Asian insurers found, while a relatively small sample of them actually offer cyber coverage at the moment, this is set to change. Munich Re estimates that this market will be worth $500m–$1.5bn by 2020, particularly as data protection laws are introduced across the region. Special enterprise risks Mr Boffo, a banker by education and an operational risk management consultant for a decade, originally joined Munich Re in 2008. He was one of the first Munich Re employees to build up the reinsurer’s Special Enterprise Risks (SER) unit, which provides innovative risk transfer solutions and is a part of CIP. Before heading for Singapore, he was head of client management for CIP at head office in Munich. Now that he is in Singapore, Mr Boffo is responsible for Munich Re’s CIP experts, who underwrite traditional insurance products and innovative risk transfer solutions for major industrial clients out of Singapore, Hong Kong and Tokyo. Mr Boffo explained that, capacity, security and distribution aside, expertise and innovation are the key qualities needed to deliver the goods for customers, critically on a bespoke not commoditised basis. “Overcapacity and therefore continuing soft market conditions do not support broad growth strategies in the traditional lines. We want to retain profitable business and maintain well established direct client and broker relationships. We are certainly prepared to take up opportunities if they arise and if they are profitable,” Mr Boffo said. “Our clear focus is to offer risk managers our insurance intelligence, whether from the traditional lines or others, to help them identify and assess risk, in particular new types of risk such as cyber, reputation and non-property damage business interruption (NDBI). When offering such individual solutions, we believe that close collaboration with selected risk managers is the key to success, whereas mass placing is not because corporate risk mitigation needs are too heterogeneous,” he continued. This is not a scattergun approach in Asia or anywhere else in the world, explained Mr Boffo. ”We have a small but committed team in the region that splits 50:50 looking at traditional business as well as new risk solutions. We are very much focused on delivering the right risk transfer solutions for clients here in the Asian market,” he said. But Mr Boffo said that such efforts on new risk solutions only work if the customer is prepared to be transparent. This is one of the biggest challenges facing Munich Re and its rivals as they attempt to deliver serious bespoke and cross-class solutions. “This works best with risk managers who are also committed to contributing information and/or even experts from their own corporation to generate transparency on the risk scenarios they wish to cover. Needless to say, for such new types of risk, there are no established processes or standardised information packages that would allow historic information to be modelled using traditional modelling. We are only able to model and price adequately if the aforementioned collaboration works. However, we remain patient and committed to ensuring it does,” he said. There are good examples of how the more holistic view can work in the client’s favour and such examples need to be communicated to the wider business community, said Mr Boffo. For example, in June 2012 a landslide hit railway lines near Gurtnellen in Switzerland. The property damage was limited but the business interruption caused Swiss Federal Railways (SBB) additional costs of almost 20 million francs. The entire financial loss was indemnified through SBB’s property insurance, only because of the property damage caused to the tracks. Mr Boffo explained that the risk managers at SBB realised that, without the property damage, the rockslide would not have triggered an insurance payout, even though major extra costs would have still arisen. Risks that do not involve property damage can be very diverse in nature, with IT and increasing digitalisation being the main sources of risk for NDBI losses. Mr Boffo explained that, as the leading mobility service provider in Switzerland, SBB runs one of the densest and most heavily-used rail networks in the world. The company can only achieve further growth by further intensifying its operations, which is only possible through the consistent changeover to digitalised train control systems. If these were to fail, individual high traffic sections or even the entire country could be brought to a standstill for quite a long period of time, explained Mr Boffo. Thankfully for the SBB risk management team, the railway firm’s chief financial officer (CFO) understood the problem and the need for a proper solution. Besides the risks from IT, SBB therefore decided to look for an insurance solution that would cover all the losses that could arise from any NDBI, irrespective of the cause. CIP pulled together a ‘deal team’ that worked with SBB to identify and evaluate possible loss scenarios, as well as their likelihood of occurrence and their financial impact. Following an international tender, Munich Re and two other risk carriers were awarded the contract. Mr Boffo said he is drawing on the experience gained from this project to develop comparable solutions for his Asian clients, especially within the transportation industry. “This was a divine opportunity for us to enable the risk manager to show that he could provide real value to the company,” explained Mr Boffo. While the CIP team in Asia is currently focused on the Singapore and Hong Kong marketplaces because this is where the international business tends to arrive, Mr Boffo certainly does not rule out expansion to other important Asian markets such as the Philippines, Korea and Taiwan. But Mr Boffo is more than aware the group needs to be patient in Asia just as it needs to be elsewhere. It needs to adapt its offering to local customs and buying habits and help foster a broader awareness of the real value that risk transfer can bring in potentially important new areas, such as reputational risk and cyber. “CFOs understand options pricing formulae such as Black-Scholes, foreign exchange hedging and the like but to them insurance is just a product. CIP’s reputational risk solution has a double trigger and you may as well call it an option that needs to be understood,” he concludes. CIP looking to capitalise on growing demand for cyber cover Munich Re’s Corporate Insurance Partner (CIP) operation provides standard and non-standard cyber-related covers to large corporate and industrial clients. The majority of CIP’s cyber business to date originates from the US, where there is already an established market due in most part to the data protection regulations in place. In recent years, there has been a surge of interest from European clients for cyber protection and early signs of a market developing in Asia. CIP is able to offer a broad range of first- and third-party cyber and cyber-related coverages. In the past, most interest was concentrated on third-party related coverages, particularly in jurisdictions where notification for loss of data is mandatory. Recently, however, the unit has observed significantly more demand for first-party related coverages, particularly business interruption, outsourcing and suppliers’ coverage. A driver in this trend is that many industries beyond retail, finance and healthcare now recognise the possible threat to their operations when it comes to cyber. This is also reflected in the business CIP is writing, where it has seen an increase in business from manufacturing and industrial sectors. In addition to participating in standard programmes, CIP also offers bespoke cyber solutions. For such solutions it has worked closely with clients to fully understand their specific cyber risk and to together develop a custom-made policy to adequately transfer the unique exposure of the enterprise. In such cases where CIP works in close partnership with clients and attains a high level of transparency and commitment to closely collaborate, it can offer substantial capacity for individual solutions. Corporate and specialty risks on the up as reinsurer rebalances portfolio The traditional international reinsurance market is currently undergoing a period of dramatic change as billions of dollars-worth of fresh capital has flooded the market in search of returns in recent times. Investment returns are however much lower than they used to be, which is forcing traditional reinsurers to focus more on underwriting discipline and risk management than they perhaps did in the past. Growth is not easily found in saturated and mature reinsurance markets. But there is great growth potential in emerging regions such as Southeast Asia. At the same time, there is serious potential in the large corporate segment as rising numbers of multinational corporations seek innovative new solutions to complex emerging risks that need serious levels of capacity and high levels of expertise to deal with them. Munich Re spotted this opportunity back in 2007 when it created its Special Enterprise Risks (SER) operation, which offers non-standard bespoke solutions to customers using a variety of risk transfer and management tools. SER is part of Munich Re’s Corporate Insurance Partner unit, which offers medium-sized and large corporations traditional and innovative risk-transfer solutions. The specialised B2B primary insurance solutions that Munich Re comprises under its Risk Solution Units has rapidly grown in significance to the German reinsurance group. As the traditional reinsurance business has struggled to deliver growth in such a competitive market, the special risks operations have grown at an impressive rate. Group chief executive officer, Dr Nikolaus von Bomhard, spelled out the big picture very clearly at the group’s year-end analyst conference last March as he discussed how Munich Re was “balancing [the] reinsurance and insurance book in a competitive environment”. Dr von Bomhard explained that, because of the ongoing decline in interest rates in recent times and subsequent imbalance in supply and demand for reinsurance (traditional capacity and alternative capital is up, retentions up and demand down), a “prudent” investment strategy and underwriting discipline are clearly the “order of the day”. But this tactical response is not enough to satisfy growth-hungry investors. Dr von Bomhard therefore explained that a more “balanced” business portfolio would pave the way for really sustainable profitability. This is exactly why Munich Re’s business mix has gone through a pretty dramatic transformation in recent years. Dr von Bomhard explained that in 2008 Munich Re took total gross written premiums of €16.6bn. This comprised traditional property and casualty reinsurance business of €14.7bn and risk solutions business of €1.9bn. By 2014, the total was €16.7bn. Traditional reinsurance business had fallen to €12.5bn after a prolonged soft and competitive market while the risk solutions business had leapt up to €4.2bn, more than double the level from only six years previously and a rise of almost exactly the amount needed to compensate for falling volumes of traditional reinsurance business. It is likely that the full-year 2015 results set to be published on 16 March 16 will show a further shift in the reinsurer’s book of business. Dr von Bomhard explained last year that Munich Re has been able to make this shift by “leveraging” on its leading market position. He said the group was actively shaping its business model, seizing opportunities for profitable growth and taking advantage of underinsured markets, risks and demographic challenges. Dr von Bomhard said the group had experienced continued growth in “attractive” risk solutions specialty business, which mitigates the competitive pressure and decline of the traditional reinsurance book. While carrying out “rigorous” cycle management in the traditional reinsurance business, Munich Re would continue to expand its tailor-made solutions and “innovative” concepts for new and emerging risks, he added. Group chief financial officer Jorg Schneider subsequently explained at Morgan Stanley’s European Financials conference later that month that Munich Re was “looking ahead [to a] world of opportunities for innovative business solutions”. He said the group was busy creating solutions for new and emerging risks in areas such as technology, cyber, energy, supply chain and non-property damage business interruption. Mr Schneider also said there is a host of social risks that need innovative new solutions, such as contentious diseases, the rising cost of medical treatment and reputational risks. Then there is the environment, climate change, weather events and the impending water crisis, alongside regulatory changes and global governance failure. To tap these opportunities, Munich Re—along with its leading rivals Swiss Re and SCOR—is taking a more flexible approach to the business of reinsurance and insurance. The traditional demarcation lines between primary insurance and reinsurance are blurring as the capital markets play a more direct role in the risk transfer business, the big reinsurers seek to balance their books and increasingly complex multinational corporations look for new solutions to emerging risks, often via their captives, in an uncertain regulatory environment. The rising demand for bespoke solutions to highly complex risk transfer needs from increasingly global corporations offers a big opportunity to a reinsurer such as Munich Re with its global brand, reach, financial strength and expertise. But the big international primary insurers that have invested heavily in this market in recent times, such as Munich Re’s hometown neighbour Allianz Global Corporate & Specialty, are not going to give up the business without a big fight. This can only be good news for corporate risk managers in Asia and worldwide. Profitability not volume remains key for Munich Re in Asia Munich Re has conducted business in Asia since 1912. But it was not until 1962 that it set up its first regional office, in Hong Kong. This was followed by Tokyo in 1967, Singapore in 1975, Kuala Lumpur and Taipei in 1981, Seoul in 1989, Beijing and Shanghai in 1997 and Mumbai in 2014. These nine offices are staffed by more than 400 people. The group held an Asia—Investors Day in London last August, during which senior executives explained that it sees big opportunities for growth in the Asian markets particularly in the field of “tailored solutions” as offered by its Corporate Insurance Partner (CIP) operation. The highly competitive Asian insurance and reinsurance market in recent times has, however, meant that the business volume generated overall by the group in the region has been in steady decline since 2011 for both life and non-life lines. As elsewhere in the world, Munich Re has had to tread carefully in the stubbornly soft global market and resist the temptation to threaten profitability by chasing volume. In 2011, Munich Re reported gross written premiums for its Asian business of 1bn in life and 2.3bn in non-life. By 2014, the life business had fallen back to 900m and non-life to 1.7bn. During the same period, however, the group managed a big turnaround in profits. In 2011, the Thai floods and Japanese earthquake and tsunami meant Munich Re’s combined ratio for Asian business was a staggering 190.4% and the group reported a whopping loss of 1.82bn alone for this part of its global portfolio. By 2014, the total non-life gross written premium may have fallen by some 600m—from 2.3bn to 1.7bn—but that year the combined ratio was 86.8% and the underwriting profit reported for the Asian business was 258m. The Special and Financial Risks business generated some 168m in gross written premiums in 2014. Of this, 55% was credit business, CIP generated 27%, agricultural business accounted for 13% and aviation and space 5%. China accounted for 54% of the total, Australia 15%, Thailand and India 5% and ‘other’ 21%. For the credit business, Munich Re said that China is the target market. This is largely because of the recent market opening for export-credit business. For CIP, the group said it sees traditional and innovative solutions across all business lines, with footprints in various countries. For agriculture, China and India are the key strategic markets and rural affinity business is the leading franchise in Australia. For aviation and space, the group will continue to lead satellite launch and in-orbit re/insurance programmes and support satellite operators and launch vehicle manufacturers. Marine is another potential growth area as the group has a strong footprint in Asia-Pacific. Its Lloyd’s-based Munich Re syndicate is expanding with Lloyd’s in the region, the group added. Within the group’s Asian property and casualty (P&C) business, China has been the main growth driver to date. The group explained during the investor day that it expects “significant” business expansion in emerging Asia. At the same time, it will continue to see “cycle-management-driven” premium decline in Japan. Just as elsewhere in the world, the outlook for the traditional reinsurance P&C business in Asia is decidedly conservative. The group said the main focus would be to manage volatility and achieve sufficient profits over time to compensate for single large-loss events, such as those suffered in 2011. Investors were told that the growth potential is more expected for innovative solutions and new distribution channels, as identified by group chief executive Dr Nikolaus von Bomhard during his 2014 year-end results presentation. But even on this side of the business Munich Re would seek to balance growth and risk, it promised. It reported that many markets still offer good opportunities but rates are tending to deteriorate. This means that the group will even in this growth area adopt a “selective” and “cautious” underwriting strategy to safeguard profitability.

Hot seat: Wolfgang Boffo, Munich Re Corporate Insurance Partner

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