Köhler bemoans lack of capacity for large risks

Despite this concern, Mr Köhler remains positive about the role that the insurance market can play in helping large companies transfer their risks and praised its development of cyber solutions. Speaking to Commercial Risk Europe ahead of the German risk and insurance managers’ association annual conference in Munich, he warns, however, that insurers should not expect rates to harden anytime soon and encouraged them to revamp their investment strategy. According to Mr Köhler, there is a lot of capacity for minor industrial risks, but for major risks ‘there is still not enough’. This is not only true for tricky risks—such as pharmaceutical product liability or car manufacturer product recall—but also for staple covers such as property cat.hide“There are the [property] fire and explosion risks, which are relatively easy to cover, and the natural catastrophes, which are not,” said Mr Köhler. “The sublimits provided for risks like earthquakes, storms and storm floods are not sufficient for many companies.” A company with a €1.5bn earthquake risk cannot rely on insurers providing sufficient capacity, continued Mr Köhler. The insurance industry has simply not increased capacities for natural catastrophe risks satisfactorily over recent years, he complained. “We are aware that catastrophe risks like storm floods and earthquakes require high capital charges for insurers,” he said. “However, insurers are well advised to enlarge those capacities nevertheless…The capacity problem is a task and a chance insurers have not fully solved yet.” Like some other risk managers Mr Köhler fears that the current industrial insurance market consolidation may worsen the capacity problem. “In most cases a merger strengthens the new company, and it has a bigger, stronger balance sheet afterwards…From an accounting point of view, the capacities should increase,” he said. However, there is concern that the capacity offered by combined entities does not always equal the sum of their parts. “In practice some insurers choose the formula one plus one is less than two,” explained Mr Köhler. In other words, the combined company may offer less capacity than the individual insurers before they merged. “I can only encourage merged companies to at least keep the status quo, and to consider if they can’t do more [on the capacity front],” said Mr Köhler. If this isn't the case an acquisition makes little sense for buyers and any insurer taking over a rival is effectively paying money to shrink its new business, he argued. “I would like the management board of a merged entity to focus on its new strength and act in the market accordingly,” said the DVS board member. “However, I see the danger that other decisions will be taken for business policy reasons. Unfortunately, we see this much too often.” The value proposition of industrial insurance for large companies is a frequently discussed topic in the German market. Some large companies ask why they should transfer risks to insurers that have a smaller balance sheet than themselves and lack the capacity for meaningful transfer. Mr Köhler takes a different view. “If you follow this thesis, Bayer should not buy insurance at all,” he said. He believes insurers still have much to offer as long as they keep an eye on the amount of capacity they supply. He pointed out that because big industrial risks are usually underwritten by a consortium of insurers the market is large enough to play its role. “When 25 to 30 insurers carry the risk and I add up their market capitalisation, I end up in the range of €250bn to €500bn,” said the DVS board member. Therefore industrial insurers deliver a meaningful value proposition to companies, including large groups like Bayer, he continued. “For us, insurance is a capital substitute,” he said. “If you do not insure risks, you have to pay claims by yourself and if you do not have the money at the moment of the claim you have to borrow it from a bank.” For many years German industrial insurers have been trying to raise premium levels, without much success. Bayer’s risk manager does not believe they will have much luck in achieving rate rises in the near future. “A certain status quo has established itself when it comes to prices,” he said. “There is not very much movement regarding the big industry segment, neither down nor up.” Industrial insurers always complain that premium rates are insufficient, particularly for property risks, Mr Köhler explained. But he does not share this view. “It is true that currently there might be one or two property insurers with combined ratios above 100%,” he said. “But if you take insurers at their word [that they need to raise rates], the whole market should be at a combined ratio of 130% to 150%.” Mr Köhler does not make light of the difficulties facing the risk transfer industry: “The market situation is certainly difficult,” he said. Reinsurers face growing competition from investors such as pension and hedge funds, putting rates under enormous pressure. “Reinsurers laughed at first about insurance-linked securities and cat bonds,” said Mr Köhler. “But this laughter has drained from their faces. Alternative capital is now a serious market force.” He thinks that alternative capital is here to stay. “The investors have recognised that they can make much money, despite the low premium rates from the insurers’ point of view.” In addition, insurers are suffering in the low interest rate environment. Property and casualty insurers have to be extremely solvent in order to be able to pay large claims and cannot invest long-term. “[Therefore] the only thing that remains is investing in liquid assets and here returns are indeed very low,” said Mr Köhler. “I can only encourage insurers to invest more in equity and to use the possibilities the legislator and the regulator are giving them,” he continued. “Then a higher return is possible.” Insurers are frequently criticised by risk managers for not being innovative. However, Mr Köhler thinks they have done a good job when it comes to cyber policies. “I welcome the fact that insurers, which are often scolded for not being innovative enough, have taken the step to offer cyber policies,” he said. Bayer is considering whether it should buy cyber insurance. “At the moment we are evaluating our cyber risk,” Mr Köhler explained. “Within this process we are also examining whether this is a risk we want to insure and, if yes, if premiums and conditions of the policies suit us.” The German cyber market is still in its infancy. Only a few companies have purchased cyber policies so far. Amongst other things, buyers complain about the small limits insurers are offering. “Compared to the risk-bearing ability of a balance sheet of a company like Bayer, the limits are indeed not very large,” said Mr Köhler. However, he stressed that capacities in this area have expanded in recent years. He appreciates this development. “To date limits in the low three-digit million euro range are possible,” he said. “I would call this an achievement.”

Köhler bemoans lack of capacity for large risks

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