In search of transparency-Germany

Adrian Ladbury: There was much talk during this year’s DVS conference here in Munich about the topic of emerging risks and how to tackle them in greater partnership and with more transparency between buyers, brokers, insurers and reinsurers. Do you think this can be made to work to breach some of the uninsurability gap and tackle some difficult new risks? Hans Jürgen Allerdissen: At our level there is no choice but to find solutions for special and emerging risks for every firm in our line of business. When you use insurance it is a very involved approach and you need transparency. Decent talks would help us all to better understand and handle the risks. Harry Daugird: To say that only 9-10% of risks are insurable as some claim means that the insurance industry is not meeting demand, an impression that, if correct, cannot be in the interest of insurers and risk managers alike. Maybe this perception generally is a little misguided because there may indeed be risks that for a number of reasons do not lend themselves to insurance. Therefore the insurance industry may be entitled to some fairness. hideMichael Dehm: You can argue that insurers responding with flexible solutions, for instance, to changing regulation or individual requirements is innovation. When developing these products you need to deal with clients in a transparent way to gain a detailed understanding of their needs. But there is no easy answer to this. Sabine Prechtl: We have risks that we are trying to transfer as the risk analysis develops. The demand has to be made to the insurance industry to create new products. At the same time, more risk details have to be provided by the insured for emerging risks. For traditional insurable risks insurers can rely on their own basis of risk calculation. For new risks that are outside the well-known landscape of insurable risks, insureds have to be more transparent when they explain these risks. Yet the whole discussion about risk-related transparency only emphasises one overall important and existing issue: the fact that, in the first step, risk owners themselves need to analyse and understand their risks, regardless of insurability. In the next step they should share their knowledge and search for models of risk reduction or transfer, for example to the insurance industry. If the discussion about ‘transparency’ solely refers to a better exchange of information between involved parties this would not exactly meet the point. In my opinion, more transparency must rather be gained at a much earlier stage, when analysing risks. This may lead to the conclusion that there are some risks which are just not insurable because they are entrepreneurial risks. AL: What is the definition of an emerging risk? HD: I look at it from a legal perspective and ask: what are the various legal exclusions? For example the exclusion on contractual performance is a clause that is difficult to explain to someone who does not know the German legal mind and even in our own courts at times. Anglo-Saxon law does not recognise or define contract fulfilment. Therefore to expect easy solutions to this kind of problem is an intellectual challenge. HJA: These kind of problems also need to be recognised when carrying out acquisitions in Europe. For instance, the legal environment in Belgium is very different from that in Britain when you consider third party claims following a train accident. It is not really comparable. So you have to look for new solutions. HD: If we are now working in a global system then we need worldwide solutions that meet all demands and to think that this is immediately possible is a naive perception. We need brighter minds to find solutions to these complex problems and insurers need brighter minds. In the past the insurance industry has gone in the wrong direction. In some areas I see a lack of progress and even in some areas I feel a lot more could be done by insurers when it comes to developing the skills and experience of their employees. HJA: I have a question for insurers: when did you last hire a new naval captain, chemist or engineer? Because insurers conceded that they lack understanding of new developments in industry and there are experts who have been with insurers for over 20 years. But insurers can fill the gap if they use any new expertise properly. HD: Are insurers losing experienced people and knowledge? Yes. MD: People with over 20 years experience are incredibly valuable to our industry, however, perhaps there is too little new blood coming into [industrial] insurance from other industries to better manage the future challenges. Günter Schlicht: Why would this be so? Is the industry not attractive enough? HJA: I think the attraction and commitment to the business is decreasing. HD: Remember it was not too long ago that it was questioned whether one of the very big insurers would maintain its industrial insurance business at all. There have certainly been talks on the boards of major industrial insurance companies where board members have asked whether the capital would be better employed elsewhere, in other lines. AL: What about the position of the risk manager? There has been much debate during this series of roundtables about the evolution of the role of risk and insurance manager and whether the recent crisis and higher focus on risk management gives the profession a chance to establish a higher profile role. Is this the case in Germany or is the profession perhaps more clearly defined here because of the existence of in-house brokers and perhaps a more formalised insurance buying function? GS: I do not think that there is too much of a debate about the role of the risk and insurance manager in Germany as a result of the financial crisis. HJA: You always have to be aware of who internally is to be involved and what can really be achieved in this area and who is a qualified partner in the business. HD: I do not share the idea that the status of the insurance manager is holding back the position. AL: What about the idea expressed by Torsten Jeworrek, board member of Munich Re, during this conference that, in order to progress the profession and tackle some of these newer and emerging risks more effectively, you need to involve more people within organisations from different disciplines? GS: I do not think that we need ‘higher minds’ to make progress in this way as somebody suggested, but, of course, people from different disciplines are necessary. SP: The insurance managers need a good interdisciplinary network anyway within their organisation. At Hugo Boss we have incorporated corporate risk management into one team with insurance within our finance organisation. This is helpful because many risks cannot be insured and here you need the input of other disciplines for finding mitigation measures. AL: Outgoing DVS President Stefan Sigulla called for a new ‘pact of transparency’ during his speech to help improve the relationship and deliver innovation and new solutions. Do you feel this is needed and if so how? GS: This is a message to insurers, but it is also a message to all members of the DVS. Buyers have to ensure that they are well positioned to talk to insurers about their risks and about their needs. This also means that they need to be more transparent about their exposures or the insurers will be less open. It is also about how insurers are organised so that they can react to the needs of their customers and are able to talk about newer risks as well as about the services they render for the clients’ money. HD: The only complexity here is about how you define the limits of transparency. This is not an absolute. This is relative. MD: I would say that insurance companies could also become more transparent. Just look at international property programmes. If you separate the price for capacity from the service element the buyers get a much better idea of what service they receive and value the expertise they are paying for. GS: For the buyer it is important to know who is doing exactly what and at what cost. SP: On the other hand this could raise a discussion whether to buy just insurance cover and not all the extra services. Therefore this must be thought about carefully. Coming back to the initial question of whether a ‘pact of transparency’ is needed I am of the opinion that this is an elementary requirement anyway, at least if you see insurance as a partnership with insurers and not only as a procurement process. There may be some adjustments required here or there, but if insurers and insurance buyers would need to set up a complete new process of transparency, wouldn’t we need to ask ourselves if we have done everything right in the past? AL: One area that it seems would benefit from far more transparency and constructive dialogue would be global programmes. Günter Dröse, DVS board member and President of the European Captive Insurance and Reinsurance Owners’ Association [ECIROA], says that he has opened talks with the International Association of Insurance Supervisors [IAIS] to try and finally achieve some greater clarity and consistency to assure risk managers that they are compliant. Do you think there is a problem that needs to be fixed here and is this the best way forward? HD: Based on my experience in this area I do not think there is such a problem. HJA: It depends upon the line of business. D&O can be a problematical area for example. If we have to explain to the insurer the legal rules in country X or D&O rules have changed and cover subsequently is not arranged in the right way, this causes a problem to me. But in some other lines I see less problems. AL: The insurers that I interview currently are all talking about expansion into new territories and lines to try and boost income in this soft to stable part of the cycle. Are you happy with the level of competition or does this competition worry you from a security perspective? HD: The insurers are talking about new business opportunities and have done for a long time. I remember when Ralf Oelssner was president of the DVS he talked about the new competition and a perceived lack of a more long-term approach to the industrial insurance business, which is needed. GS: Torsten Jeworrek said yesterday that one answer is to start with individual solutions and make the investment in tackling such risks and then see if it is fit for standardisation and can be offered more broadly. If this was done I would think that a fair proportion of difficult risks could be tried. HD: Ingo Zimmerman, head of corporate risk management at EADS, hosted a session during the conference which was a well thought out and thorough concept of the underlying issues. The panel dealt specifically with business interruption insurance without physical damage which is a big debate currently. GS: The business interruption debate is one element. It was useful to discuss this during the conference and now it can be taken to the insurers and further discussions held to follow up. You have to gather a group of people like this so that the issues can be discussed properly and not just leave it to the insurers. All parties have to sit down together. It is part of our role as an association to act as a facilitator. MD: I agree that this needs all stakeholders across the industry to work together to come up with solutions. This is a key differentiator in this soft market between the few lead carriers and pure capacity providers and also a way to generate new business. AL: What are the prospects for a change in market conditions? Will the market finally harden this year as has been predicted for so long? HJA: Only if there is a really big catastrophe. GS: What does hardening mean? Does it mean that the insurers clean out their books and refuse to write the less profitable business unless rates increase significantly or a few increases in more troublesome lines? We do not expect a general movement by all competitors at the same time and in the same manner and we would fight such a move. These kind of collective movements in the market are a thing of the past I believe. The market has changed. HJA: Also as long as the major reinsurers approach this market directly in competition to primary insurers there will be no danger of cartel. This is a significant difference to the past. HD: It is clear to me that the reason why the reinsurers are actively seeking more primary business is because self insured retentions have increased and the reinsurers have therefore taken less premiums. GS: For these reasons it is difficult to say what will happen and when and in which way the market would harden. AL: What are the main goals and objectives for the DVS currently? What will the association focus on in coming months? GS: There is no major change to our lobbying activities which will continue as before – in the interest of large companies as well as SMEs which form an important part of DVS membership. All year around we have dealt with the question of obligatory self-retention in the Directors & Officers insurance. Risk managers have been heavily involved with this question. There has been much discussion about D&O and we have held a number of special meetings and carried out a lot of work on behalf of the membership. HJA: On the D&O question we have kept the market informed as to the exact changes. When it was first discussed for example most insurance managers thought that the new requirements would need to be implemented by January 1 but following investigation we found out that it was actually needed at mid-year. GS: We have also been dealing with the questions around Solvency II and trying to come to some firm conclusions on this. And we have been working at a political level on the European level with FERMA to try and make some progress. SP: I think that this is a very valuable service for members of the DVS and risk managers throughout Europe at the FERMA level. It is not always easy for individuals to appreciate the impact of such high level European initiatives but they do impact all of us and need to be dealt with. AL: What is the current thinking on Solvency II? How will it impact German risk and insurance managers and what needs to be done about it? There does seem to be a growing level of Solvency II fatigue among European risk managers that could lead to apathy. GS: To start with your last question: yes, we see that this may happen and if it happens it is quite understandable. We are talking about something that will not come up for another two to three years. As with any such legislative project you talk to people about the possible impact and, as Sabine said, it is sometimes difficult to get them interested because they are just not close enough to it and they are focused on dealing with their day to day business. It is our job then to do what is necessary. HJA: Solvency II does bother me and there are some significant questions that need to be answered. For me the biggest questions surround the potential impact on captives. How captives may be treated under this regime makes no sense to me currently. AL: Another big issue that was discussed during the DVS conference was transparency in relation to brokers. Are you happy with the current levels of transparency and service offered by the brokers? HJA: My broker would have to sign a letter that states he does not receive an additional commission for placing the business with certain insurers. If the broker is not honest with me or cannot provide this assurance then he will be kicked out. SP: In respect of transparency of broker’s fees, contingent commissions and the independence of brokers in general I definitely do see the need for more transparency and dialogue. From the various ongoing discussions it became clear that it is important for brokers to provide more details on the commissions involved, in order to find support for their pooling concepts, especially amongst insurance buyers of corporate clients. MD: In our experience pooling of this nature is more focused upon SMEs, that is companies that have a turnover of 200m or less. They work with standard policy, wordings usually which are above industry norm. As far as we understand these companies receive full transparency from their brokers as to the placement strategy and markets used, but this area obviously remains a work in progress. For larger clients looking for individual cover and capacity, transparency about their risks is key, and of course this is treated very confidentially. HD: If contingent commissions were banned outright then it would make it difficult for smaller brokers. The Participants Commercial Risk Europe would like to thank the following individuals who took part in the German roundtable at the end of a busy and, at times, dramatic DVS conference in Munich in early September. Stefan Sigulla, President of the DVS was unable to attend as he announced his departure from Siemens to join the board of HDI-Gerling in the new year. The participants spoke in their capacity as association members rather than on behalf of their companies. Harry Daugird, Chairman of the Insurance Committee of BDI [Association of German Industry] and board member of DVS Sabine Prechtl, board member of DVS and Head of Risk & Insurance Management at HUGO BOSS AG Hans-Jürgen Allerdissen, board member of DVS and Managing Director at Deutsche Verkehrs-Assekuranz-Vermittlungs. Günter Schlicht, outgoing Executive Director of DVS and board member of FERMA. Michael Dehm, Country Manager at XL Insurance, Germany

In search of transparency-Germany

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