Solvency II will help clear out fringe capacity claim insurers

Thierry Van Santen, CEO of Allianz Global Corporate & Specialty in France and former President of AMRAE, presented an increasingly rare positive evaluation of the forthcoming Directive to come from an insurance executive. Mr. Van Santen told the audience that, in his opinion, Solvency II will increase transparency in the market and that it will therefore become harder for smaller carriers to offer bargain rates to win new business. “I believe there is much naïvety on the part of many risk managers about this subject,” he said. “I’ve seen contracts where, from about 25 co-insurers, I didn’t know the names of ten of them,” Mr. Van Santen continued, stressing that he has been in the industry, either as a risk manager or an insurance executive, for three decades and so was surprised to see so many unfamiliar names. hideMany of these small insurers have small revenues, he said, especially in relation to the risks that they propose to cover. “I am shocked by the absence of analysis on the solvency of players that offer underpriced rates,” he said. “Solvency II will help to clarify this kind of thing.” Paolo Ribotta, the CEO of Zurich France, said that risk managers should provide their bosses with more detailed information about the companies that provide their coverage. He said that underwriting risk is a major concern of Solvency II. Mr Ribotta said that the new rules will make it more difficult for an insurance company to carry risks without also carrying sufficient reserves to cover potential losses. And, if insurers come under more pressure to keep higher capital reserves, they will demand more transparency from buyers too, Mr. Ribotta pointed out. “If you come to an insurer asking for €300m for your global activities, you will be disadvantaged against another risk manager who explains that he needs €34m for Indonesia, €18m for Japan, €25m for California etc. Quality of information will be very important in the future,” he said. Philippe Jouvelot, the chief underwriting officer at AXA Corporate Solutions, highlighted another possible effect of Solvency II: An increase of premium prices. “If we have to increase our capital reserves, price hikes will take place,” he said. Increases, however, have been widely mooted by the insurance industry in recent years, without actually taking place, and the latest survey by AMRAE on the subject found few signs of a turnaround in the market. Insurers have complained that they have had to deal with lower margins while technical results worsen. “In 2010, the market deteriorated compared to 2009,” Mr. Van Santen remarked. Mr. Ribotta noted that results are not even the main concern for insurers. The most important problem is that companies are far away, and in some lines very far away, from prices that bring technical balance. The most problematic line is property damage, where prices have been kept low by strong competition while losses have increased, especially as a result of natural catastrophes. “Natural elements are beginning to touch us in frequency and in magnitude,” said Mr. Ribotta. AMRAE’s vice-president Anne-Marie Fournier, who chaired the session, noted that insurers have changed their perception of damage insurance of late. “For a long time you were told that property damage property was very easy to forecast, that it was relatively stable, and for those reasons it was the favourite sector for insurers. But now you are saying exactly the opposite,” she remarked. Mr. Ribotta believes that some lines show signs of a change. Civil responsibility in general is one market that appears more positive than in the past and the outlook for harder prices are more positive. This includes new coverages that insurers will have to deliver for new developments in the French business environment, he said. “The economy is moving from a focus on industrial activities to the service sector,” said Mr Ribotta. “It is clear that clients’ needs are also evolving from property damage to civil responsibility.” Mr Ribotta also noted that areas such as supply chain are becoming ever more important for the insurance industry, which has to develop new ways of meeting demand from clients. Some sectors, however, like the pharmaceutical industry remain tricky areas for insurers and he does not see this scenario changing soon. Allianz, for its part, plans to focus on areas for which clients need large capacity and a long term commitment from their insurers, according to Mr Van Santen. Mr Jouvelot acknowledged that AXA Corporate Solutions has been more focused in the past three years in cargo, motor and civil responsibility lines rather than on property damage. The speakers also complained about the effect of low interest rates on insurers’ activities. The current level of remuneration offered by government bonds make it difficult to obtain adequate rates of return for their investments, Mr. Jouvelot said. The situation could become much worse if Solvency II makes it too expensive for insurance companies to invest in equities. “When interest rates go 1% down, we need to find 5% more premium revenues,” he said. Mr Van Santen noted that the historically low level of interest in the developed world is one of the reasons why there is so much capacity in the market today. “Investors like pension funds don’t know how they can achieve returns, so they turn to the insurance industry, which there were told was an interesting play,” he said. “You see there are innocent investors out there.”

Solvency II will help clear out fringe capacity claim insurers

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