Open your mind to a brave new world of risk

Commercial Risk Europe editorial director Adrian Ladbury helped host HDI Global’s bi-annual customer conference towards the end of last year in Frankfurt, which was organised under the banner of ‘yourmind’. The event focused on the core themes of risk management, international programmes, cyber risk and the brave new world of digitalisation. The underlying theme running through the whole event was the need for open, honest and direct communication between all parties in the risk management and transfer chain, hence HDI’s decision to change the format of the gathering to make it more interactive based on a series of ‘MindHub’ dicsussions, rather than a list of speeches given from the podium ‘at’ the customers. HDI is keen to listen to its customers more than ever before as it manages its transformation into a global insurer fit for the digital age. The evidence provided by this event suggests that the German insurer is on the right track.

Communication is all in the modern business world and not least in the risk and insurance sector. The global economy is now based on data rather than nuts and bolts.

Even the most heavy and traditional industrial companies are now reliant upon data and communication to make their businesses work, to actually produce and distribute their products.

This is why cyber risk, non-damage business interruption and supply chain risk have become so important to risk managers, and why business leaders are so concerned with political risk, economic volatility and trade relations. These are the parameters in which all multinational businesses have to operate.

The job of international insurers such as HDI Global is to help their customers identify, measure, manage and of course transfer those risks that can be accurately measured, modelled and therefore economically priced.

This is not an easy job. The rapid shift from the local and tangible risk to the global and increasingly intangible risk poses a range of significant challenges for insurers.

The good old days of predictable fire tables are long gone. Insurers are being asked to carry emerging risks for which there is minimal historical loss data and experience and, as we all know, insurers do not like underwriting in the dark. The good news is that the fundamental reason why the global economy has changed so rapidly – the emergence of exciting and challenging new technology (the so-called digital age) – also offers the tools needed to carry out the predictive analysis needed to overcome the lack of historical data.

The bottom line is that those insurers that gather and hold more data (and ever richer data) and are willing and able to invest in the latest tools, methodologies and people needed to accurately model that data so that their risk capital can be most effectively put to work, will be the winners.

Risk manager challenges

Exactly the same can be said for the corporate risk and insurance managers who the insurers serve. They face an equally big challenge as they grapple with the rapid transformation in the risk profile of their fast-evolving companies, not least in cyber and supply chain.

If the risk and insurance managers cannot effectively identify, measure and manage their own risks, then how can they expect their insurers to ‘take a punt’ and accept it on their balance sheets?

This rapidly shifting shape and nature of the global economy, further complicated by wider political uncertainty and volatility, represents a huge challenge for all in the risk and insurance management community.

This challenge demands a joined-up and united response by all members of the risk management and transfer chain and, perhaps, above all it demands a new level of transparency and open, honest and effective communication. As noted above, these risks cannot be managed and transferred in the dark.

Customer dialogue

This is why leading companies including HDI Global hold meetings directly with their customers such as its recent event in Frankfurt, which was attended by more than 100 risk and insurance managers from around the world.

HDI, as with most other international insurers, has realised that it needs to up its game on the communication front if it wishes to continue its impressive growth path achieved in recent times. The insurer also needs to engage in honest and open dialogue with its customers and dig deeper into their risks if it is at the same time going meet the profitability targets of its parent group Talanx.

It is no secret that the company has experienced some serious challenges of late, not least in its fire and property book of business and notably, business interruption. Rest assured that HDI is not alone in facing up to some tough decisions and serious conversations with long-term customers. Such challenges are a direct and inevitable result of the fast-changing dynamics and global risk profile, as described above.

These challenges are also not necessarily that new. The German fire insurance sector has suffered a long-term unacceptable level of losses, as the industry-wide combined ratio for the past 15 years produced by the German insurance association GDV shows. The 2017 combined ratio was an awful 115%.

The impressive thing to this observer at least is the open, direct and transparent manner in which the Hanover-based insurer has responded to this challenge. It has not tried to shove the problem under the carpet, stick to the same-old strategy and hope for a market turn. HDI Global CEO Christian Hinsch and his team have openly discussed the problems and explained how the company is dealing with it, in clear and concise terms.

Dr Hinsch has repeatedly stressed that the book has to be re-underwritten to return to profitability but at no point has he said HDI would back away from loyal customers’ risks. “Such a one-size-fits-all strategy would be suicidal madness,” he told Commercial Risk Europe during our last interview at the GVNW conference in Munich, a month before the customer meeting in Frankfurt.

Given this background, risk managers attending the customer event will have been forgiven for not looking forward to what could have been a deadly serious, negative and dreary two-day event, during which they were repeatedly told why they would have to expect stern faces and sharp underwriting pens during the looming year-end renewals.

Instead, they will have been nicely surprised by what was delivered by Dr Hinsch and his management team. Yes, they were reminded of the reasons for and nature of the re-underwriting process in Dr Hinsch’s typcially succinct, direct and open manner. But the event was overall a very positive and thought-provoking couple of days in which customers took part in discussions based on four key themes that really do need to be openly discussed in this market for the benefit of all.

The themes discussed during these MindHubs were:

• Risk management and what it means in the context of complex value chains
• Cyber risk
• International programmes and how to most effectively run a global network
• Digitalisation

It was interesting to see HDI really make an effort to open up ‘warts and all’. Some in the market may perceive this historic insurer – which started life as a mutual for German industrial companies – to be a rather traditional, bland and inward-looking organisation. Those risk managers who attended this event will have come away with a ‘somewhat different’ impression, to borrow the tag line of HDI’s sister company Hannover Re.

Stefan Sigulla, board member at HDI Global and himself a former risk manager with Siemens and ex-president of the GVNW (then the DVS), summed it up neatly as he said: “The event was carried out under the theme ‘yourmind’ and I think we achieved what we wanted to achieve: interaction with the audience, with you our clients. We also felt the new format was a success. It really brought our operative parts to the surface and showed how exciting our business, the business of industrial insurance, actually is.”

Dr Sigulla explained the new spirit of openness as he continued: “We wanted to give you a better idea of our company and our people, open the engine room quite a bit and show to you how it is done and who does it. You have heard HDI experienced tough times and we are still on a very rocky road – we know that.

“Re-underwriting is not a simple exercise. In theory everybody nods and agrees…but when we ask you often hear: ‘I see your problem. But I’m not part of it.’ However, it is a must that we bring the property portfolio in order. It is a must to be a strong and sustainable industrial insurer now and into the future,” added Dr Sigulla.

“Digitalisation opens new possibilities for industrial insurance. We want to use them actively. Therefore, we are allocating a good amount of people and resources to modernising our IT and developing new ways of collaborating and interacting with our client base,” continued Dr Sigulla.

Cyber focus

Cyber is clearly top of the corporate agenda currently and risk and insurance managers are working frantically to make sure that they are fully engaged with this risk, working with colleagues to identify, measure and manage this risk, and of course with their brokers and insurers to transfer the risk that they do not want to hold.

As discussed during the cyber MindHub, however, this is no easy task and as with all such emerging risks, it really does require a new spirit of partnership, collaboration and transparency – the consistent themes of this event. HDI is not shying away from this challenge as one prominent risk manager with a leading Dutch multinational explained during a conversation after the cyber MindHub. “I have just completed a major overhaul of our cyber programme on a global basis and HDI led this. Very impressive,” he said off the record.

Dr Sigulla wrapped up the company’s approach to cyber neatly as he said: “As difficult as cyber exposure is, we are willing to take the challenge of providing a sufficient coverage for the needs of customers. Cyber is one of the biggest new exposures for which the industry has developed a coverage solution – so it is up to all of us to make the risk transfer in the area meaningful for both sides of the market.”

MindHubs – digging deep into the detail

On the first day of the conference, HDI Global hosted four MindHubs that ran consecutively and enabled delegates to attend each one throughout the afternoon. The graphics below neatly sum up the key topics that were discussed and the feedback received from the risk managers present during these lively and interactive sessions.

International programmes

Peter Näegle, Peter Schlumpf and Michael Salzmann hosted this fascinating session on what HDI Global has to offer customers in the critical field of international programmes. The trio explained how HDI Global provides cross-risk-class insurance cover through its international insurance programmes.

During the session, they stressed that global solutions require truly global action and HDI is up to this increasingly complex and onerous task. HDI has invested heavily in its global capability in recent times and is well equipped to deal with the requirements of multinational customers.

The insurer currently has operations in more than 150 countries through foreign branch offices, subsidiary and peer companies, and network partners.

“Our aim is to provide insurance cover for corporations internationally that is as risk-adjusted and consistent as possible. Our international insurance programmes primarily consist of a master contract. This master policy provides consistent global insurance cover. In parallel, local cover is provided by local policies in line with local business requirements. Country specifics such as statutory regulations and tax law requirements are complied with. This puts companies in the best possible position, especially with regard to increasingly stringent compliance requirements,” explained Mr Naegle.

Risk management

This MindHub was hosted by Dr Verena Brenner and Dr Jörg Ohlson. Risk management has always been one of the core capabilities of an industrial insurer but, as made clear during this session, the complexity of the modern, global economy means that risk and insurance managers need more than just a risk transfer partner. They need a partner that can help them identify their core risks, work out how to effectively measure and manage them, and then work out what to transfer.

As explained during this session, the relatively rapid evolution from a local manufacturer that sourced and produced all its goods ‘at home’ and predominantly sold regionally, to one that effectively outsources and manages the supply chain on a global basis, has huge implications from a risk management and insurance perspective.

Cyber risk

This MindHub was presented by Alexander Waltz, Christian Reimann and Johannes Steffel and tackled the huge topic of cyber risk: What is it, where is it headed and how can companies of all shapes and sizes protect themselves against, and prepare for, this risk?

As agreed during this lively, sometimes scary and thought-provoking session, this is not a risk to be taken lightly and stuffed into an insurance box and forgotten about until next year’s renewal.

This risk is fundamental to all modern businesses that nowadays depend upon technology of all forms for their existence. Finding the right insurance cover is vital, particularly given the introduction of General Data Protection Rules (GDPR) by the European Union, but above all this risk needs to be properly managed on an enterprise-wide basis. Insurers such as HDI need to be willing and able to provide the business continuity and crisis management services that risk managers need in this area as well as the latest, most effective and responsive risk transfer solutions.

The trio of presenters who hosted this fascinating session explained exactly what HDI is doing to respond to customer demand in this challenging area.

Digitalisation

Stefan Mühlenbruch and Dr Jens Ole Rauh hosted this stimulating discussion about the impact of big data and digitalisation on the insurance sector, and what companies such as HDI are doing to work with partners and customers to develop the kind of solutions needed in the digital age.

The discussion with customers found that most companies are ‘on the way’, with 50%-60% stating that they are not quite there. There are clearly some major challenges facing all companies as they switch to a flat and digital organisation with new styles and structures of work. This is further complicated by the rise of different work/life expectations from younger people coming into the workplace that are in stark contrast with the traditional hierarchical structures of old.

As described by HDI Global board member Stefan Sigulla, HDI is itself undergoing quite a transformation process as it invests in the systems and technologies required for it to be the agile, reactive, nimble and cost-effective partner that today’s risk managers with multinational corporations want and need. As proof of the company’s commitment to this significant project, it announced the appointment of Dr Thomas Kuhnt as a new board member responsible for information technology and operations last May.

At the same time, Dr Edgar Puls relinquished his responsibility for operations and IT to take over property, engineering, marine and multirisk alongside European operations, following the departure of Dr Joachin ten Eicken.

Dr Kuhnt, who joined from management consultancy McKinsey & Company where he was a senior partner providing advice to property/casualty insurers, used his time on stage in Frankfurt to explain the aims of HDI’s IT transformation process.

From bean-counter to bean-seeder

Clemens Jungsthofel, coming from the audit and consulting firm KPMG, joined HDI Global as chief financial officer (CFO) and member of the management board in January 2018, shortly before Dr Thomas Kuhnt attived to take over IT and operations, from rival consulting firm Mckinsey. The switch from auditing towards operative management is quite a big step. Mr Jungsthofel was asked what are the main differences compared to his previous role and what are the biggest challenges in his new role.

“I think there are three main differences. First, different perspectives. As an auditor you only arrive when the financial year is over. That means that it is very much a ‘rearview mirror’ perspective, whereas the CFO role is forward-looking. Second, the CFO role is much broader and much more strategic, whilst the audit focuses on the financial statements. Third, as a result of the previous point, as a CFO you have to make wide-ranging and sometimes quick and tough decisions that you will be held responsible for, and this can be challenging at times.

“In a nutshell, the role change feels a bit like turning from a bean-counter into a bean-seeder and that is exactly what I was looking for when I joined HDI.”

No one-size-fits-all with 20/20/20 strategy

Edgar Puls, member of the HDI Global SE executive board, responsible for the European Operations segment, information management and organisation functions, as well as the non-life, engineering insurance and marine divisions, was asked about the group’s 20/20/20 strategy and whether the group is on track to hit its targets by 2020. The news is positive, according to Dr Puls.

“Yes, we are absolutely on track, even a bit ahead of plan. All in all, we have achieved up till now nearly 14% result improvement on our fire portfolio. We are consequently increasing insufficient premium rates in the entire portfolio. The effects will mainly materialise in our loss ratio as from 2019.

“We calculate price and conditions for each and every client individually; we are definitely not following a one-size-fits-all-approach. For example, a client who does not have a nat cat exposure, of course doesn’t have to pay for it. At the same time, we double check in which industries we give how much capacity and of course we also recheck our share on each and every account. In higher-exposed industries, we decrease our share to control the volatility and vulnerability of our book. If pricing and risk is adequate, we are not afraid of providing significant capacity.

“We are not banning entire industries from our portfolio, but every client should pay an adequate premium from which we at least have the chance to earn a margin. If we don’t find an agreement, we will part ways. Of course, the length and the quality of the respective relationship as well as a view across all lines we hold with the respective client is part of our assessment.”

No fear of volume loss as re-underwriting continues

Frank Harting, member of the HDI Global SE Executive board responsible for the large corporate division, the industrial enterprises division, the division mid-market Germany, and marketing global, was asked whether he fears a shrinkage in premium volume in the German market because of the re-underwriting exercise.

“We do not fear a volume shrinkage. As Dr Hinsch stated in February 2018, we are absolutely willing to lose up to €400m of our €1.4bn property portfolio during the years of property re-underwriting in order to reach the necessary combined ratio improvement. Even if we part with a large proportion of our property portfolio, our cost ratio will remain below our peers’ average.

“About ten per cent of our worldwide gross premium has been cancelled since we started the re-underwriting at the beginning of 2018. A significant part of the volume was compensated by premium increases during the renewal period. Overall, we are expecting a moderate premium decrease of less than ten per cent, putting us above the threshold Dr Hinsch mentioned earlier in 2018. Over the next months we will continue our re-underwriting!”

Fit for the digital age

For many insurers, IT is a complex and cumbersome issue. Dr Thomas Kuhnt, member of the HDI Global SE executive board responsible for information technology, project management and operations, and for group accident, was asked how he and his fellow management team are approaching the effort to modernise HDI’s infrastructure and make it fit for the digital age.

“Complex and cumbersome – that is indeed a good description of nearly every insured’s IT and the state within HDI is no different. The difference is that HDI Global SE has realised that IT and IT capabilities are a core competence of an industrial insurer. Knowing this, we have decided to invest more than €100m into the modernisation of our core IT. This dedicated investment is a very strong commitment towards our industrial lines business.

“Investments into IT need to always be business-driven and guided by clear targets. First of all, we want to improve customer satisfaction. Having reliable, lean and fast processes is a value in itself. We also want to provide more business insights from data analytics and for that we need reliable and consistent data. A functioning, well-executed and designed IT backbone is the necessary condition to achieve this.

“We are also enhancing our way of working within HDI. In the past, IT guys and insurance people lived on different planets; the demand was specified and IT did the programming. Today, working in small cross-functional teams and working together towards a common goal is more usual. By employing this so-called agile methodology, we get a better understanding and quicker results in terms of working solutions.

“Last but not least, we want to make use of digitalisation and exploit the opportunities for industrial insurance. I personally think that digital interfaces will enhance our customer interactions; artificial intelligence will help us to improve our risk engineering advice and to make better underwriting decisions; and blockchain creates opportunities for more efficient transactions. All in all, IT is a tough issue but also a big opportunity and differentiator for the few players who get it right.”

Continued profit-driven international expansion the goal

Jens Wohlthat, member of the HDI Global SE executive board responsible for the global division, was asked about HDI’s latest targets for growth following an impressive period of recent international expansion.

“We are very proud to have managed our international expansion so well in the last [few] years. More than half of our premium today comes from non-German territories. This is a great success. Our clients benefit from a strong international network based on entities that are successful and knowledgeable in their respective markets as well. They also benefit from a broader diversification of their insurer. In the mid and long term, it is our ambition to further grow internationally.

“However, we will follow a very careful and rigid approach to not seek top-line growth at the expense of our bottom line. In the short term, our highest priority is to stabilise our bottom line in all markets.”

Forging ahead into the cyber age

Stefan Sigulla, member of the HDI Global SE executive board responsible for the motor and liability divisions, was asked what customers can expect from HDI in the critical area of cyber insurance.

“First of all, cyber insurance has been one of the most exciting topics within industrial lines insurance for years. We are witnessing the birth of a completely new form of coverage for a completely new type of risk. D&O was the last example of a new risk such as this. However, the scale and size of cyber insurance opportunities are on a different level. I think in less than ten years, cyber insurance will have the same importance as property and casualty insurance.

“Clients expect from us, as an insurer, two things: we have to develop risk management expertise to cover as much risk as possible and, at the same time, do this in a responsible way. Cyber risks come in numerous variations. From data breaches and third-party exposures to hacking, espionage and business interruption, [there is] a mixture of first- and third-party claims potential, triggering different parts of the policy. Widespread virus scenarios on the other hand show that there is a severe accumulation risk within this new line. Clients can expect that we, as an insurer, carefully manage this accumulation risk and utilise diligent underwriting as in our other lines of business.

“Therefore, an insurer needs to very carefully grow in cyber. We also have to take into account that the insurance solution can only be part of a broad defence strategy to secure security and data integrity within a corporation. Apart from risk transfer and further extending the insurability of cyber risk, clients can expect high-quality services from HDI. Having forensic and IT security experts available that provide clients with the expertise needed, are among the core services that we provide our clients within our cyber proposition.”