Insurers must focus on discipline and innovation as soft market drags on: Kendrick

But there is rising and increasingly convincing evidence from some of the leading carriers that they cannot allow the market to soften any further and must be prepared to walk away if terms are not adequate. As noted in the above story, Zurich is talking a tough game as it seeks to return its Global Corporate business to profitability. AIG, meanwhile, is under intense pressure from investor Carl Icahn to cut costs and raise profitability or face another effort to break up the group. The new Chubb—recently created by ACE’s $29.5bn acquisition of Chubb—is in a much more upbeat mood than its two big rivals on the back of a successful deal and record combined ratio of 87.4% for 2015. But the management team at Chubb is also talking a tough game and says the company is more than happy to walk away from business if the terms are not adequate, whether it be in Asia, Europe, the US or elsewhere.hideIndeed, Andrew Kendrick, senior vice-president and European regional president at Chubb, bluntly told a recent gathering of senior risk managers in Amsterdam, Netherlands, that the days of easy underwriting profit are long gone and insurers should assume that the current soft rating environment will be “as good as it gets”. In response, risk managers can expect Chubb to focus on improving customer service and innovation rather than simply cost control and growth, he added. Speaking at Chubb’s annual Benelux Risk Forum, Mr Kendrick told Dutch and Belgian risk managers that the group has already hit its annual targets in a number of key lines, just a quarter of the way through the year. He said the soft market appears to be here for the long term. Insurers such as Chubb need to get used to aiming for 90% combined ratios in order to achieve profit targets in the persistently low interest rate environment, he continued. To retain and gain the most attractive accounts and deliver promised returns to shareholders, insurers need to focus on innovation, service and efficiency, said Mr Kendrick. “I honestly can’t remember another time in my career when the rating environment has been so challenging, and over the past 12 months it has only got tougher and tougher...particularly in the large account space,” Mr Kendrick told risk managers at the end of the conference. “The days of easy profit are long gone. As an industry, we now likely need to target a combined ratio of around 90% just to meet our cost of capital. And our assumption has to be that, in terms of pricing, this is as good as it gets. We simply have to build our plans for the future on the assumption that things will not get any better,” he warned fellow insurers. Mr Kendrick said record low interest rates in the developed world mean it has simply become harder for insurers to make money from their investments. He added that all the latest indications suggest this situation is not going to change. “We even have negative policy rates now in some markets. Several of Europe’s central banks have cut key interest rates below zero and kept them there for more than a year. Now Japan is trying it too,” said Mr Kendrick. “So make no mistake, it is a challenging outlook for any insurer,” he added. Only those insurers that are willing and able to focus on disciplined underwriting will survive in this environment, he continued. According to Mr Kendrick, himself a former Lloyd’s underwriter, this is one of the reasons why the combination of ACE and Chubb made so much sense. “Both our legacy companies were renowned for their strong underwriting cultures. At our core, we are underwriters—we share a passion for the art and science of underwriting. And I hope you will agree we are pretty clear about our risk appetite,” said Mr Kendrick. “So we share a lot in common when it comes to our underwriting approach and our focus on discipline. I believe we are a good fit and that we will all enormously benefit from being together. Together, we are even better positioned to face the challenging market conditions,” he continued. The theme of discipline applies to costs too. A high cost base in competitive market conditions is clearly a problem for any commercial insurer. It is one of the key reasons why there is so much merger and acquisition activity occurring currently, noted Mr Kendrick. “XL-Catlin, Mitsui-Amlin and nearly Zurich-RSA. I can’t remember a time quite like it. And I don’t think it’s finished yet because of the market environment we are facing,” he said. “In the non-life sector, competition remains intense. Companies are under pressure to diversify, encouraging them to look towards acquisition. As a general rule, the softer the insurance market, then the more incentive there is to acquire,” he said. The drive for greater efficiency was one of the reasons for the Chubb acquisition, said Mr Kendrick. He said the acquisition will enable the group to realise real “synergies” that will in turn allow it to invest in areas that matter to its clients, most notably enhanced service. ACE carried out research last year with European risk managers that explored the changing role of the risk manager. Mr Kendrick explained that 79% of European risk managers polled believe they will need to think and behave as innovators and futurists. But, Mr Kendrick said, risk managers cannot be experts on everything. Some 22% of those who took part in the survey conceded that they did not understand all emerging risks. For this reason, it will be increasingly important for tomorrow’s risk leaders to build the right relationships and partnerships inside and outside the business, said Mr Kendrick. “How then do we respond as an insurance industry? Encouragingly for us, our research suggests that risk managers regard the insurance industry as a key part of the solution when it comes to managing change and this new wave of emerging risks. In fact, some 78% of respondents agree this will be very important,” explained Mr Kendrick. The former underwriter said he has heard the calls for more innovation from the corporate insurance community loud and clear. “Well, I believe that the industry will simply have to innovate to provide the service clients and brokers need in the future. If we don’t, they will find other solutions, elsewhere,” he said. “But today sometimes I think, as an insurance market, we don’t always pull together our skills and experience in a way that really works best for our clients. There is often too little energy going into making things easy to understand, through clear wordings and definitions. Many emerging risks—already complex—are being further complicated by a patchwork of mismatching approaches across the market,” continued Mr Kendrick. He said the insurance market needs to broaden its solutions to remain relevant for clients. He conceded that there is often too much emphasis from insurers on “pushing product” and inflexible solutions that do not meet individual needs. Mr Kendrick argued that the sector needs to go beyond financial compensation and deeper into risk management expertise, loss control services and hands-on incident response throughout the “whole relationship”. “Innovation is rarely easy. But the insurance market wasn’t invented to do the easy things and we don’t become leaders by sticking in our comfort zones. Tackling complex risk problems is what we’re here for,” said Mr Kendrick. The creation of a bigger and better capitalised company through the new Chubb will help in this effort, he said. “I am not going to pretend that at Chubb we have all the answers. But in bringing the two companies together we now have a greater pool of talent, expertise and ideas…we will continue to invest in bringing…added-value services to market across a range of lines, in order to innovate beyond the wordings of the insurance policy,” Mr Kendrick promised risk managers.

Insurers must focus on discipline and innovation as soft market drags on: Kendrick

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