Time for evolution not revolution-Amer Ahmed

Amer Ahmed, CEO of Allianz Re, conceded that 2011 was a ‘very challenging’ year for the Munich-based group’s reinsurance arm and for the industry as a whole. It was indeed the first time in a decade that Allianz Re reported a combined ratio over 100%. The reinsurance executive, who recently took sole control of Allianz Re, said, however, that there were a number of factors that made last year an extraordinary experience for the company and the market as a whole. Firstly, the frequency of catastrophic events was ‘extreme’ he said. “New Zealand alone had three events. The Japan earthquake and tsunami was a human and societal tragedy. Having a large earthquake in Japan in itself was not a big surprise but the effects of the tsunami were more devastating than foreseen. Nevertheless, this event did not throw the market too far off course,” said Mr Ahmed.hideAnother key feature of last year, and one that is still rippling through the market as it works out its reaction, were the losses that came from secondary perils or so-called ‘cold’ spots such as the Thailand flooding that raised concerns on a number of different levels. “We know that Thailand is prone to flooding but the severity was much greater than envisaged. Second, it became clear how human interaction imposed upon the flow of water can lead to unexpected consequences. Third, and perhaps most important, Thailand showed the impacts of globalisation and concentration into industrial parks, such as those in Bangkok, which led to an immense accumulation of insured values in the area,” explained Mr Ahmed. The big question raised at last year’s Monte Carlo Rendez-Vous and Baden Baden meeting was how could and should the market respond to this remarkable and challenging string of losses, particularly in the field of business interruption and contingent BI. Insurance and reinsurance buyers feared a sudden loss of capacity as has occurred in the past in more standard cat lines after big events. Thankfully a bloodbath in this tricky area has not yet occurred and the signs are it will not. But that is not to say that the market—from ultimate insured to final reinsurer, has not had a long and hard look at the underlying exposures and the development of the coverage on offer. Mr Ahmed said that the key to this area is information. “First, we all need better information about the risk exposures. For property insurance this should be relatively straightforward—insurers should know where buildings are located so that a comprehensive picture can be built,” he said. “Second, we need to look at the elements that move such as stock and goods in transit. This is more difficult to judge and with business interruption this moves on a level further in complexity. One can judge the potential damage to property relatively easily but it is much more difficult to model the consequences on business operations and getting them up and running again. Therefore improved transparency on the underlying exposures and risk is the top priority,” he explained. Mr Ahmed said that once carriers have a good understanding of the risk they can then model the potential losses. But, while there are many models available nowadays, especially for the major perils around the world, some of the key drivers and assumptions behind these models need to be ‘better understood,’ he said. “We need to improve the dialogue with our customers to better understand their business, risks and needs and also to explain the benefit we offer through our products. This takes an investment in time and effort from both sides but it also means that insurance becomes more of a risk management tool rather than a commodity that is bought for the cheapest price. This is a critical element and I hope that it will help provide more value than that which is delivered simply with coverage. Insurers need to be more strategic and innovative in that respect or they may miss out on opportunities,” he warned. As the market inevitably tightens and the latest breed of compliance and capital adequacy rules kick in via regimes such as Solvency II, it seems logical that there could be a bifurcation in the market as a result of this rising complexity of requirements to properly assess the risk. Some insurers will be willing and able to make the investment in innovation while the majority will surely steer clear of this more complex business because of the cost and time it would take to recoup the investment. Mr Ahmed said that in the current economic environment the whole industry faces a challenge. “Insurers take on premium income and when a loss happens they are supposed to pay out. This is what our job is all about. But we have to make sure that we have enough premiums across the portfolio to make this work, to pay for the losses and generate a return on the risk capital that supports the risk we carry. In that sense, reinsurance is a pretty straightforward concept that provides stability by the international spread of business that reinsurers build across the globe,” he said. “As a large insurance group we are investing in upgrading the exposure data we gather and in analysing this to actively manage the overall portfolio. Things can change very quickly in today’s global environment. Maybe we need to be ready to analyse our exposures more frequently than in the past and react more quickly. Perhaps the traditional annual cycle for reinsurance needs to be reconsidered,” he continued. One thing that could help persuade more insurers and reinsurers to invest in the kind of people, data and relationship building with customers that deeper analysis of rapidly changing risks requires would be a fatter margin and a harder market. Mr Ahmed said that underwriters obviously cannot rely on investment income to bail them out currently and therefore need perhaps to look longer and harder at risks than they did in the past and be prepared to walk away where necessary. But he does not expect a dramatic market reaction commencing at the Monte Carlo Rendez-Vous talks next week. “Clearly the recent catastrophe loss experience has been in the headlines and on the mind of everybody in the market. As we are heading into renewal season it s important to address the issues that were identified. We know that in the current environment there is little scope to offset poor underwriting results with investment income. Therefore, there has to be a strong focus to get the risk assessment and underwriting right,” he said. “The modeling of major perils plays an important role and impacts the overall market dynamics. For example, we have seen changes in the catastrophe models for the US with some upward trend across the board. Last year’s events in Thailand, New Zealand, Japan and the huge damage from tornadoes in the US may not have hurt the reinsurers in the same way as a dramatic single loss in the past. “But a lot of companies were impacted by a string of mid-sized losses across the world. Therefore, I expect rates will continue to drift up gradually, but it has to flow through the system. Where we don’t see that prices are adequate we are prepared to let that business go even if it results in a shrinking top line,” continued Mr Ahmed. There has been much debate in recent times about the investment outlook and how reinsurers and insurers should react to tough market conditions dominated by prolonged low interest rates, potentially rising inflation and the tighter rules from Solvency II. For Mr Ahmed the required reaction is simple: disciplined underwriting. “For reinsurers the overall investment environment reinforces a focus upon underwriting quality. This should always be the case, but with lower asset returns you have to maintain even more discipline in underwriting. We want to write business, we are here to underwrite business, but Allianz Re is under no pressure to do so if the business is not adequately rated,” he said. Mr Ahmed said that Solvency II would not represent a fundamental change for Allianz Re because the Allianz group strongly believes in a risk-based approach to capital and has followed this approach for some years already. “The implementation of Solvency II still remains a major challenge though and will take a lot of resources and time to get it right. But I think we have the ability and the foundations in place and we hope that the regulatory burden will be manageable. As for impact on the business, I expect some changes in buying behavior, some will buy more reinsurance and others may buy less or differently, but for sure there will be very interesting discussions about capital management,” he said. So what of Allianz Re’s future strategy and outlook? Mr Ahmed explained that, as a group, Allianz buys a significant amount of reinsurance. The basic strategic role of Allianz Re is to continually look at the group’s insurance risk landscape and risk appetite, and to use reinsurance as a tool to actively manage volatility and optimise its capital position, he added. “We also have to make sure that we have the best protection in place for individual companies within the Group. This has been the agenda for the last few years and in that function reinsurance will continue to be very important for Allianz,” he added. In terms of significant market changes Mr Ahmed does not expect any radical or revolutionary change. There has, for example, been some talk of alternative risk transfer (ART) making something of a comeback as companies seek to manage their capital and exposures a little more creatively and under strict budget controls. In the past Allianz was quite an active player in the ART market, particularly when multi-year and multi-line coverages were all the rage and the regulators became wary of forms such as time and distance coverage, demanding that real risk transfer take place before any accounting or fiscal benefits could be claimed. Mr Ahmed said he thinks that the proposition of traditional reinsurance can be improved by adding some features from the ART toolbox. “This could help tailor reinsurance coverage for specific needs of insurance company clients. For example, looking at reinsurance covers over periods longer than one year, or across lines of business, can create benefits for cedants and reinsurers. However, we must be clear the objective would be to provide more customised reinsurance solutions. If seen as a way only to reduce reinsurance costs—that will only end in a bad place,” he concluded.

Time for evolution not revolution-Amer Ahmed

Want to read this article?

Read Next

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Alternative solutions and specialty drive Scor’s Q1 growth

AXA XL names new client and distribution officer in APAC and Europe

Costs rapidly rising for employee health insurance in Portugal

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Alternative solutions and specialty drive Scor’s Q1 growth

AXA XL names new client and distribution officer in APAC and Europe

Costs rapidly rising for employee health insurance in Portugal

Want to read this article?

Read Next

Risk managers want software providers to integrate more AI tools

Court says German government must tighten up climate protection

Alternative solutions and specialty drive Scor’s Q1 growth

AXA XL names new client and distribution officer in APAC and Europe

Costs rapidly rising for employee health insurance in Portugal

Related Articles