Transparent Analysis-Florian Karle

COMMERCIAL RISK EUROPE: In which markets does your company operate and what is your strategy for growth?

FLORIAN KARLE: We have three segments. A commercial segment where companies have a turnover of up to €20m, a medium-sized area of up to €500m and an industrial line that starts at €500m. In 2010 the business with medium-sized customers was the most difficult area with regards to their willingness to change to another broker. The big industrial client business was the biggest growth driver last year, but we want and have to generate more new business in the medium-sized segment in the future. That is the solid base we need.

CRE: What services does your company offer specifically for large European corporate insurance buyers?

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FK: We offer extremely transparent international cover. We analyse existing global programmes and display results online—that is the main benefit for the majority of our clients. We created an online tool for handling our customers’ claims. We can offer economies of scale with regard to staff too. Clients can outsource complete divisions; we can handle the full process for big industrial clients. We have a large staff and we can offer services 24/7.

CRE: Will customers demand brokers that can offer a complete A-Z service in future or will they seek to increasingly unbundle the services and use more niche brokers?

FK: It depends on the industry and the size of the company. There will be specialised companies, which will also demand specialised brokers. This is true for alternative energy, modern logistics and for financial damage cover for lawyers. When dealing with medium-sized companies brokers will have to be all-rounders in the future. They can offer industrial clients certain selected services. But brokers will only be able to do this if and when the fee is appropriate. Clients cannot expect to pay next to nothing for services. A change of mindset has to take place. Brokers have learned not to sell additional services because they were included in the big companies’ premiums in the past. Brokers now have to make their services transparent and find ways to sell the benefits to the client. And customers have to understand that additional services have to be paid for.

CRE: How should brokers be paid for their services to customers?

FK: In the traditional business with medium-sized clients a rapid shift from commissions to fees will not be possible. It works as a mixed calculation over the law of large numbers. When operating on a fee basis, we will lose money with private and small-scale commercial business and will thus not be able to afford this business any more. It will revert to the insurance agencies. The result will be a rise in premiums and a lack of independent advice.

None of the big industrial clients do business on a commission basis. Here we have a daily fee rate. In the medium-sized segment this would result in services becoming more expensive rather than cheaper. With daily fee rates, the sky is the limit as regards costs.

CRE: Does a cross-border buyer need to use a global broker or can they rely on smaller independent brokers in networks?

FK: We are clear proponents of the network idea. Our nightmare scenario is what happened to Jauch & Hübener in 1997. Overnight they lost their entire network to a com-petitor. We don’t want this to happen to us, so we created our own network named WBN, which is internationally focused with a presence in more than 70 countries. Brokers have to decide for themselves whether to build up their own network, which is very costly and time consuming, or use the network of another company. But being internationally active is very important for brokers, they cannot do business without it.

CRE: Can global programmes ever be 100% compliant?

FK: I do not know if global programmes can ever be 100% compliant—this is not possible today. We do not have a global tax authority that is responsible and can give binding statements. We will never have a global government that stops countries from banning insurers from foreign countries writing business in a particular jurisdiction. It is one of the most interesting topics for the future and one of the reasons why companies need a broker.

CRE: What percentage of corporate risk is actually insurable today, is this higher or lower than five years ago and what percentage will be insurable in five years time?

FK: When the premium level is low, companies buy a lot of cover for their risks. However, the risk only appears to be well insured as an insurer’s willingness to pay for claims is lowest in this situation—because it is not possible to pay everything with a low level of premium income. When prices rise again, companies reduce their cover. This is not good. The amount of insurance should correspond to the amount of risk, not the premium level.

CRE: What are the key emerging risks for you customers—which are the black swans?

FK: Apart from natural catastrophes, insufficient product quality is one of the major risks. I am not sure if the level of quality is keeping pace with the speed at which the German economy is growing at the moment. This is an unhealthy trend. During the financial crisis qualified staff were laid off, insufficient quality became apparent and then we had a growth spurt. Too much up and down may lead to product liability cases in the next three or four years.

CRE: Do you think that corporate insurance rates will rise, stay the same or reduce over the next six months?

FK: Nothing much will happen during the next six months. At the moment we are still seeing strong competition and aggressive pricing. The market has to turn; we need higher premiums. But we do not think this will happen very soon. However we must differentiate between the various lines. Premiums in industrial property and casualty, motor and D&O depend strongly on the losses experienced by the individual companies in the past. Credit insurance premiums are rising strongly for all companies while limits are only increasing slightly.

CRE: What will trigger a hardening?

FK: Insurers would have to get so many claims that the premiums are not enough to cover them. But you need one or two global events for that to happen. Neither the earthquake in Japan nor Hurricane Katrina were such events. Alternatively the greedy mentality stops and insurers start calculating the amount of premiums they really need and begin to enforce that price level. We are all in the same boat, risk carriers, brokers and clients. The current premium level is not sustainable.