IIS 2003 Seminar: Political, Social, and Economic Upheaval

A survey of CEO attendees at the recently held International Insurance Society (IIS) annual seminar placed “recovery” and “managing risk” as being the main issues of focus before the insurance industry. While these bottom-line drivers are consistent with last year’s attendee survey, they stand in sharp contrast to the more abstract “meeting customer demands” and “influence of technology and e-commerce” that which was listed as CEOs’ top priorities in the pre-9/11 terrorist attack marketplace.

The seminar speakers also focused on the changed marketplace, with emphasis on the geo-political and military tensions that followed 9/11 with the Iraq war and the rift caused in international relations between primarily the U.S. and Western Europe. The speakers note, however, the changes in the operating risk environment have not been limited to “traditional risks”, but incorporate the general global economic downturn which has had a devastating impact on insurers’ investment returns and capital holdings.

Furthermore, the rise in shareholder lawsuits and corporate scandals has not only added a new loss exposure for insurers, but created a new dynamic in strict corporate governance rules from international accounting practices to structure of company boards of directors which insurance companies have yet to fully come to terms with internally. Overall, the speakers believe that insurers now face a new era which will require drastic changes in the way the insurance industry operates. This will necessitate a strong focus on liability and asset management with a view to “managing the insurance cycle”, as well as investment in new professional talent.

Global change

In such a rapidly changing marketplace, new solutions have to be identified to accommodate shifting risk patterns, CEO speakers from primarily two panel group discussions on “global trends” and “challenges of tomorrow” agreed to. Brian Duperreault, CEO of ACE Ltd., notes that both the property and casualty and life insurance sectors face similar challenges at a global level in terms of capital pressures, a difficult investment market regarding interest-bearing holdings and equities, corporate governance and a tightening regulatory environment.

Changing regulatory requirements and approaches to corporate governance are factors which Ewald Kist, chairman of the board of ING Group N.V., cites as being prime concerns on the global front. Specifically, he points to the growing divergence in regulatory approach between North America and the Europe. And, in this respect, he observes, “even the European Union is split [in its regulatory approaches]”.

One of the biggest furors in the insurance industry at the moment is the international accounting standards (IAS) and the shift from the general accounting and auditing practices (GAAP). The move toward IAS, which focuses on current “value added” accounting is far from ideal for an industry that rests on long-term planning – let alone the differences in accounting practices currently in effect among different countries. Add to which, is the different approach being taken by countries to corporate governance requirements, with the EU even split among its members in their approaches. For an industry which is very much “global”, this developing divergence presents development constraints. He adds. “We need convergence.”

Maurice Greenberg, CEO of American International Group (AIG), says that the new rulings introduced to corporate governance in the U.S. have gone too far. “[the rulings] are negatively affecting capital investment and economic growth. You can’t legislate crime out of the corporate world.” In this regard, he took issue with the new requirement to appoint an independent board of directors, noting that such a move not only does not guarantee against abuse, but could also negatively impact the efficiency of companies.

Greenberg also voices disapproval of the shift to IAS, saying that “this is something I’m fighting against strongly”. He adds, “a ‘market to market’ standard accounting initiative [as in IAS] would be devastating for our business [being the insurance industry] which is organized around long-term liabilities.”

Other factors shaping the risk environment of tomorrow are technology, world population growth, shifting demographics, and a world more prone to natural and manmade catastrophes, says Edward Creasy, CEO of Lloyd’s of London syndicate RJ Kiln & Co. People are not only living longer, he observes, but population growth has seen an increase in communities living in high-risk catastrophe areas. Roughly 15% of today’s global population now lives in coastal areas which are prone to natural catastrophes. “By 2050, some studies show that ‘mega cats’ are expected to occur every 25 years from the current average of every 50 years. The risk is immense.” The underlying question in looking toward the risk environment of tomorrow is “are we modeling and pricing risk appropriately?” he muses. In this respect, he notes, “change is the only constant in today’s market”.

Tomorrow’s market

“The successful companies [insurers] of tomorrow will depend on strong skills in underwriting, asset management and distribution,” says Anton van Rossum, CEO of Fortis (Belgium). He notes that recent history has shown the danger of relying on investment margins to cover operating costs. “This is a dangerous game, as some companies have found out.” Asset and liability management have become critical tools in the current low-interest rate environment, he observes.

And, van Rossum notes, insurers will in future have to pay greater attention to the nature of risk they take on, with better management of their period of exposure – i.e., long-tail risks such as asbestos – and determining the full extent of the inherent risk cost. Another “winning factor” emerging in the industry with regard to personal lines carriers is “distribution strategies”, he adds, “successful personal lines carriers excel in distribution strategies”. The critical issue on the distribution front is not to try force a specific distribution approach in a market, but to allow customers to decide what is the best mode.

In this respect, Duperreault notes that the concept of “bankassurance” has not been successful in North America. Greenberg points out, however, that the “bankassurance” concept does not necessarily mean having an integrated insurance/banking operation. There are several models presently used globally to accommodate different markets, he adds, with AIG having in some countries partnered with banks to sell life insurance products. The concept of combined insurance and banking distribution is not flawed, he suggests in concurring that modern distribution strategies have to accommodate the uniqueness of each marketplace.

Greenberg also stresses the need for insurers to apply better underwriting discipline. The current environment requires a focus on underwriting profit, he adds, “insurers cannot rely on investment income as a means to make a profit. You just have to look at all the great names that have disappeared.”

Kunio Ishihara, president of Tokio Marine & Fire Insurance Co., notes that the slump in the stock markets in 2001 had far greater an impact on insurers than the 9/11 terrorist attacks. “The industry’s real weakness is inadequate asset management controls.” An integrated risk management approach is needed, he adds, with regard to quantifying and identifying risk relative to capital.

Getting the business back onto a secure road of profitability and maintaining proper controls to ensure it stays that way means the industry has to invest in people, says Creasy. The real issue with regard to industry discipline is the “people factor” he adds, “without the right people, we won’t be able to deliver”. In this respect, Creasy supports the view that tomorrow’s successful insurers will be those that maintain market discipline with a keen eye on the premium to profit ratio. “To maintain a robust, healthy industry means managing the business cycle.”