Last thoughts from Berlin

I’m back in the office after a week’s vacation following this month’s International Insurance Society seminar in Berlin, and thought I’d offer some final thoughts from that event.

With Solvency II factoring heavily in many discussions during the global insurance executives’ gathering, and companies’ efforts to address risk being a key component of Solvency II, risk management was a topic that came up frequently during the Berlin gathering.

A case in point was a discussion involving Wilhelm Zeller, chief executive officer of Hannover Re, and David Greenfield, chief financial officer of Axis Financial, in which both offered some thoughts on their companies’ risk assessment and risk management efforts.

Mr. Zeller noted that at Hannover Re, the risk management effort is focused on protecting the company’s capital, stabilizing and optimizing results and allowing the German-based reinsurer to profit fully from hard markets. Risk management at Hannover Re is not meant to protect any given year’s earnings, he said, nor is it intended to “protect the mere survival of the company.”

He outlined the “risk hierarchy” as viewed by those involved in Hannover Re’s group risk management program. At the top is reserve risk, followed by exposure risk, mispricing risk, investment risks and other balance sheet risks. To manage the top risk in that hierarchy, reserve risk, the company conducts multiple reserve risk assessments and makes extensive use of external consultants, Mr. Zeller said. “We feel that we can’t get enough input.”

In terms of exposure risks, events like Hurricane Katrina force the company to adjust its assumptions, Mr. Zeller said. That means recalculating the prices required to meet certain risks, he said. “If you can get it in the market, then you stay in the market. If you can’t get it and you are disciplined. . .then you exit,” Mr. Zeller said.

In discussing his company’s risk management efforts, Mr. Greenfield said some of Axis’ more significant risk management strategies include selective diversification, defined tolerance levels and a strict risk selection and management process.

“We’re not afraid to eliminate a previously profitable line of business that is showing greater competition in order to devote our capital to better opportunities,” Mr. Greenfield said.

Asked about the impact stock market pressures can play in companies’ decisions regarding reserve adjustments, Mr. Greenfield alluded to a seemingly very real disconnect between Wall Street’s emphasis on quarterly results and the longer term nature of the insurance business.

“We can spend all afternoon talking about the value of quarterly reporting in the insurance business, where sometimes it takes years to find out whether you’ve made a profit or not,” he said.

I’ll be covering this year’s IIS seminar more extensively in the next issue of Industry Focus.

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