On the ball-Malta Congress
The main topics of debate at the Malta International Risk and Insurance Congress in late November included Solvency II and its impact on captives and the price and availability of industrial insurance capacity, global programmes—how they should be best structured and how the industry can work together to find a better way of ensuring compliance—and the Environmental Liability Dir-ective and the latest options available for risk man-agers to manage and transfer such tricky new risks.
The congress was hosted by Commercial Risk Editor editor Adrian Ladbury whose goal was to generate a lively and challenging level of discussion and plenty of time was set aside for questions from the floor which came thick and fast.
The event attracted over 170 executives from around Europe and the growing Maltese insurance market turned out in strength. This ensured that the regulators, insurers, brokers and service providers on the stage had to tackle some tricky and big questions.
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The first session was a lively debate about the likely shape of Solvency II and its impact on insurers and captives. Flavia Mazzarella of the Italian insurance supervisor’s office and a member of the managing board of CEIOPS, said that a key challenge for the architects of Solvency II is to strike the right balance between security for policyholders and a healthy and competitive market.
Ms Mazzarella said that despite the huge workload and terrifying complexity of the project, CEIOPS would finish the job on time and deliver its final advice to the Commission by next June. The CEIOPS board member told delegates, however, that there is plenty of fine tuning to complete, particularly in the key area of non-life calibrations.
Next up in the opening session was the ever energetic Peter den Dekker, President of FERMA and Insurance Risk Manager for Stork Industries in the Netherlands. Mr Den Dekker took the opportunity to again remind the risk and insurance world and CEIOPS and the Commission in particular that it should not forget that the risk management community represents the ‘real economy’ and the creators of Solvency II should not forget that their new rulebook will be used in the ‘real world.’
Mr Den Dekker also said that there is still a concern that CEIOPS does not really appreciate the importance of captives and, despite assurances from the Commission and the parliament made to CRE in recent weeks that a proportional approach will be taken, the risk and insurance management community must continue to press its case at every opportunity.
A number of leading insurance and reinsurance companies have suggested in recent times that Solvency II will inevitably raise the cost of capital for the carriers and therefore prices. Mr Den Dekker said that FERMA members do worry about price of course but pointed out that there is a bigger concern about the potential loss of capacity as the big insurers may migrate capital away from higher risk industrial lines to safer havens with a lower cost of capital under Solvency II.
And Mr Den Dekker took the opportunity to remind the regulators and perhaps more importantly the politicians that ultimately call the shots that insurers are fundamentally different to banks and should not be regulated in the same way.
Lex Baugh, President of Chartis Europe, said that the insurers are already repositioning their portfolios to cope with the likely impact of Solvency II.
In response to customer fears about consolidation in the market Mr Baugh said that it is inevitable that there will be consolidation in the European insurance market but he is not sure that many of the target companies are ‘aware of the full challenges yet’.
Mr Baugh said that he believes that the costs of Solvency II have been underestimated and the cost of quarterly disclosure is no small thing in itself and it will affect the levels of combined ratios that companies will need to achieve.
Philip Whittingham, CRO for XL Europe, said that he believes Solvency II will have a positive impact on risk management standards.
He also said that he is not one of those who fears that the captive market will be wiped out by the new capital and reporting requirements of the regime, a topic that was hotly debated the following day. Captives have evolved over the last 40 years and will continue to evolve and survive, he said.
The second session of the first day saw a group of leading European risk managers discuss the changing face of the risk and insurance management profession as it evolves to cope with the crisis.
CRE editor Adrian Ladbury kicked off this discussion by presenting the key findings of the newspaper’s first Risk Frontiers Annual Survey of the profession that was carried out through nine roundtable discussions with national risk management associations and sponsored by XL during the summer and autumn.
He said that the survey had found a profession in flux. The crisis has certainly raised the profile of risk and insurance management within Europe’s corporations but those who took part in the survey had mixed feelings about this new-found fame.
Some are hopeful that the fresh focus on risk will finally give the boost needed to implement true and long-lasting enterprise risk management systems and thereby elevate the standing of the profession for the long term.
Others are worried that this is simply a management fad, that risk and insurance managers will be landed with loads of extra work by their board members with no extra resource and that it will all be forgotten about when the recovery gets underway.
The third session was an in-depth discussion about the state of the European corporate insurance market.
Peter den Dekker retook the stage and asked why CEIOPS had advised the Commission that the Insurance Mediation Directive, which is currently under review, should continue to exclude mass risks and reinsurance. Mr Den Dekker said that pricing is currently ‘very acceptable’ but warned insurers not to use Solvency II as an excuse to hike up rates as they did in 2001/2002.
The FERMA president also called for more innovation and creative minds from insurers on service levels. ‘Knee jerk exclusions are not answer,’ said Mr Den Dekker.
Philippe Gouraud of Chartis Europe singled out supply chain as one problem area that needs more thought. But Mr Gouraud did warn insurance buyers not to expect the impossible. “You can’t insure what you don’t understand,” said Mr Gouraud.
Werner Richter, Senior Underwriter of Munich Re, said that he understands why customers are becoming increasingly worried about the seemingly rising level of uninsurable risk, adding that he estimates that only about 10% of all risks are covered currently.
Mr Richter said that such risks can only really be successfully tackled if a true partnership between insurer, broker and customers can be constructed.
Marguerite Soeteman-Reijnen, Chief Broking Officer (Europe Middle East Africa) at Aon agreed that the complexity of risks are changing fast.
The broker agreed with most in the market that a significant turn in the market is not on the horizon and said that even a 115% combined ratio would not turn the market which would need a big event to turn. “I don’t see a market turn for two years,” she said.
Stuart Shipperlee, Managing Director at S&P Insurance Risk Solutions, focused on the findings of a recent survey of leading European insurance buyers that it has recently carried out in partnership with CRE. He said that the analysis confirmed that customers do not expect a radical change in terms any time soon.
The final session of the day was led by the irrepressible Praveen Sharma, Practice Leader—Insurance Regulation & Tax at Marsh, who ensured that the day ended in a lively fashion rather than petering out.
This session focused on global programmes, how they could and should be improved and how customers can be given greater comfort that they will work and be compliant.
Mr Sharma kicked of the debate with a call for an industry-wide effort to seek greater consistency, clarity and compliance that would involve all key players in the chain—insurance managers, brokers and insurers.
Alessandro De Felice, Group Risk Manager at Prysmian S.p.A in Italy and a board member of FERMA, agreed that something needs to be done to give customers more certainty, clarity and compliance. Mr De Felice said that the key problem is that there is currently no shared view among industrial insurers and no firm statement from regulators which leaves it all too unclear for most risk managers’ liking.
But Mr De Felice also pointed out that the insurance world is by no means alone in this quagmire of fiscal and legal uncertainty pointing to the factoring market which he said is even worse off.
Martin Strnad, Legal Counsel Europe at Zurich Financial Services, said that the insurance market is aware of its customers’ concerns and reminded delegates that Zurich in particular has invested heavily in recent times in this area on behalf of customers. But he agreed that there is potential for a wider market effort to deliver more certainty.
Luc Kegeleers, Senior Manager Global Tax Cosourcing, EMEA Accounting & Tax Compliance Solutions at Deloitte in Brussels, joined the discussion and reminded delegates that the time is ripe for real action as the authorities are starting to step up their interest in the market, particularly in the field of tax. “This is not theory anymore it is cash time,” he said.
Mr Den Dekker joined the debate from the floor and said that recent overtures to the IAIS to seek a joined up approach is worth a try but he fears that will take too long. The insurers cannot provide guarantees that programmes are compliant and so a market solution is needed, said the Dutchman.
The first session of day two was about the Environmental Liability Directive, the risks created and solutions on offer. The experts also discussed the latest solutions for emerging risks and the potential use of captive-style structures.
Valerie Fogleman, Consultant at law firm Stephens & Bolton, Professor of Law at Cardiff University and a respected expert in the field gave an in-depth analysis of what the ELD does and does not do, the existing and potential risks created for companies and the insurance options.
Ms Fogleman challenged the insurance industry to wake up to the opportunity presented by the ELD and come up with solutions for customers rather than try to dodge the question, otherwise mandatory security requirements may arrive.
Jorge Luzzi, Group Risk Manager for Italian company Pirelli and also a board member of ANRA and FERMA, also challenged the insurance market to come up with solutions for customers. “Mandatory security is a danger and the market needs to come up with ideas—it should not happen as the plane goes down,” said Mr Luzzi.
Maralyn Fichte of Grafton Europe discussed some of the solutions that are available to customers such as the use of captives to run off long tail and so-called legacy liabilities.
The role, future and health of captives was not surprisingly a big theme during the congress as Malta is home to a small but growing captive market and Solvency II has unwittingly shed a spotlight on this often overlooked corner of the risk management world.
Jonathan Groves, Captive Consulting Leader at Marsh, said that captive owners certainly face rising costs from the new capital adequacy regime and could be almost four times as high as the average.
Matthew Latham, Chairman of Captive Practice Group at Chartis Europe, agreed that there would be challenges but believes captives will survive. “There may be casualties along the way but healthy ongoing captives should be fine,” he said. Mr Latham also confirmed that the new regime will inevitably lead to higher fronting costs.
Evander Borg, Chairman of the Malta Insurance Management Association and Head of Operations at Heritage Insurance Management [Malta], said that Malta’s PCC legislation offers a ‘lifeline’ for cash- strapped captive owners because of the shared capital structure.
Clive James, Director of captive manager Kane Group, agreed with Mr Borg that PCCs offer a good option and believes the sector will cope with the challenges thrown up by Solvency II.
The congress was concluded with a lively debate about the Maltese market, what it has to offer European risk and insurance managers and the wider insurance market and its challenges and opportunities.
The market representatives said that Malta has everything needed to build a quality, onshore insurance market from its current position. All the leading captive managers are present on the island now, Malta boasts a thriving professional and financial services community and it has a strong and yet flexible and approachable regulator.
The panel and Professor Joe Bannister, Chairman of the Malta Financial Service Authority who contributed from the floor, stressed that there is good potential for third party writers in particular and innovative structures based on the island’s new PCC legislation, particularly as Solvency II takes effect.
