Insurers and brokers must tackle cost base rather than shift problems onto customers: Mahnke

If the insurance market is going to continue to push for higher prices and more limited cover to cut exposure in key areas, while raising margins at the same time, it needs to take a very serious look at its cost base, according to Alexander Mahnke, president of the German insurance management association GVNW. In particular, the market needs to look at charges made by brokers if it wants to avoid facing very unhappy customers, he added. Insurers are under pressure from reinsurers and regulators to get a handle on their so-called silent cyber problem. At the same time, the German market, in particular, clearly had to tackle its industrial fire book after seven years of combined ratios in excess of 100%, based on German Insurance Association (GDV) figures. But, as Mr Mahnke pointed out to Commercial Risk Europe ahead of the association’s annual symposium in Munich today, combined ratios and solvency levels would look a lot healthier if insurers managed to cut their costs by adopting more efficient and standardised processes, ideally on an industry-wide basis. The costs would also be a lot easier to manage if the market stood firmer on commissions paid to brokers at numerous stages in the (re)insurance chain, and often to the same broking firm. “A big focus for us currently is the hardening of the market. This is not a surprise to us really but I do believe that the cost bases of the insurers are unbelievable. They may need to adjust prices but they also need to tackle their own costs. They cannot load it all onto the customer. Long-term relationships are still important in this business and investments made in risk management need to be recognised,” said Mr Mahnke. The GVNW president also advised insurers to take a more strategic look at their customers’ portfolios and not just blindly follow underwriting guidelines and price bands issued by headquarters, which will often be delivered on a siloed, line-of-business basis. “They have to look at the complete portfolio for each company. If an insurer comes to me and says, ‘my property premium is not high enough’, then I am willing to think about it. But if property only accounts for 5% of my portfolio and liability 35%, surely I remain an interesting customer. They need to take a more strategic perspective,” said Mr Mahnke. “This market is highly inefficient, particularly when it comes to IT systems. Then you have the distribution costs. Brokers take zero risk and can earn as high as 25% margin. Of course, the broker should be paid if there is value in its services. But this should be done in a transparent manner. At the end of the day, this is the customer’s premium and someone needs to tell me why this happens. This is a big question in a hardening market,” he added. “Cyber is another big concern. First, we have seen a reduction in capacity and now there is all the talk of silent cyber, taking it out of traditional lines and offering standalone cyber cover at an extra cost. Will the insurers offer a reduction in cost for the cover from which cyber has been excluded?” Mr Mahnke continued. Mr Mahnke said GVNW has published a position paper on cyber and is willing to talk to insurers about this topic. “This needs dialogue and collaboration. Consider that if you are a risk manager for a German auto supplier and your contact at the insurer tells you that their property underwriter has suddenly realised that they have cyber risk in the supply chain they had underwritten. I would be flabbergasted and ask them if they really understand their business and my business. Why did they not look before and why are they now pretending it’s a problem for the customers only?” he continued. Mr Mahnke said he is aware that insurance supervisors, including Germany’s BaFin, and credit rating agencies are becoming concerned about the potential accumulation risk posed by silent cyber, which could lead to unexpected losses and even threaten the solvency of carriers. He also recognises that leading reinsurers are putting pressure on insurers as they become more concerned about the potential for catastrophic losses from global cyber incidents such as NotPetya and WannaCry. But, as he pointed out, this is not new and it is not fair to suddenly try and remove all the risk that was previously happily underwritten. “Please do not suggest that we created this problem. We insurance managers are actually very good at providing the information requested, but this information is only as good as the questions asked. The reinsurers have asked insurers to be mindful of this accumulation risk, but continued to reinsure them,” said Mr Mahnke. A more collaborative and constructive approach would make sense for all, said the GVNW president. “The insurance market has been built on trust and collaboration – some people have risk and others seek to mitigate it, so there has to be a partnership. Also, the risk needs to be spread across the market to build capacity and avoid accumulation. When product liability risk became an issue more than 100 years ago, customers asked for something new and insurers were willing and able to find a solution. It starts with smaller capacity and higher deductibles, but over time the deductibles fall and the capacity rises. This is collaboration, not conflict,” said Mr Mahnke. Another area for collaboration is IT and the potential development of standards across the market to raise efficiency and reduce costs. The argument that such an industry-wide effort would cause antitrust problems is too easy an answer and not necessarily valid, argued Mr Mahnke. “We need solutions that serve the needs of everyone. The insurer will say – ‘but, if I talk to company A or B then I may be in breach of antitrust rules’ – but frankly, this is a very poor argument. The international banking market uses standard systems such as SWIFT and the Bank for International Settlements. Why doesn’t the insurance market? So long as it does not impact pricing or capacity, why not?” he continued. Mr Mahnke said there are some signs of progress. BiPRO – the neutral German association of insurers, brokers and IT providers that attempts to optimise and build cross-company business process standards – appears to be picking up momentum. He also said the GVNW could play a central role in such an effort. “The market has done a poor job in this important arena and something needs to be done,” concluded Mr Mahnke.

Insurers and brokers must tackle cost base rather than shift problems onto customers: Mahnke

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