How much, how soon?

November 19, 2008

With Congress and the incoming Obama administration sure to make reforming financial services regulation a top priority in 2009, there seems to be a growing sense in the insurance industry that some sort of federal insurance regulation is inevitable.

The only questions seem to be: how much federal regulation of insurance, and how soon will it be put in place.

capitolI had the pleasure last week of moderating a webinar involving a panel of experts on the subject of insurance regulation, and they were unanimous in the opinion that federal regulation is coming. The Industry Focus Online Executive Forum, “The New Regulatory Reality: Reforming Regulation in Times of Turmoil,” if you want to give it a listen.

The panelists included Howard Mills, director and chief advisor in the insurance industry group of Deloitte L.L.P. in New York and former New York insurance superintendent, Francine L. Semaya, chair of the insurance corporate & regulatory practice at the Cozen O’Conner law firm in New York, and J. Stephen Zielezienski, senior vp and general counsel of the Washington-based American Insurance Assn., and between them there was no shortage of strong opinions about the future direction of insurance regulation.

Mr. Mills said he expects the new Congress to move quickly in all areas of financial services regulatory reform, including insurance. And, he said, the outcome might see the much discussed Optional Federal Charter for insurance companies becoming something much more than an option.

Under the reformed regulations, he speculated that state regulation may well continue over such areas as solvency and consumer protection, with a federal regulatory overlay, perhaps responsible for regulating systemic risk issues.

Meanwhile, Ms. Semaya suggested that in the clear climate, with “the insurance industry almost in an upheaval,” it’s possible the industry will see “not just an Optional Federal Charter, but more federal regulation than we ever asked for.”

Mr. Zielezienski agreed that there will “undoubtedly” be some federal role in insurance regulation. And he noted that much of the framework for those changes has already surfaced in Congress, with OFC bills introduced in the last two Congresses and a proposed federal Office of Insurance Information figuring prominently in the financial regulatory modernization blueprint presented by the U.S. Treasury earlier this year.

The panelists in the Industry Focus Online Executive Forum also covered such topics as efforts to harmonize insurance regulation worldwide, solvency issues and regulation, modernization of reinsurance regulation and the likely impact of this month’s elections on insurance regulation. It was quite an interesting discussion. You should check it out, if you can, at


Talent is key

July 15, 2008

I’ve spent the last several days in Taipei, where I’m attending the 44th Annual Seminar of the International Insurance Society. Not surprisingly, given the conference venue and current trends in local business, much of the discussion has centered on the insurance industry’s Asia efforts.

Beyond even talk of the importance of providing appropriate products for different local markets and the various distribution challenges posed by many emerging markets, perhaps the most frequently cited issue facing the industry as companies look to expand around the globe is the talent shortage confronting them in emerging markets.

Many of the panelists addressing the talent issue spoke of not only the difficulty of finding needed talent locally, but of the importance of retaining it once companies had recruited and trained individuals.

Martyn Parker, Hong Kong-based group executive board member and chief executive officer of the Asia division of Swiss Reinsurance Co., conceded that there will always be employee turnover. That said, “The turnover that really does trouble me is the turnover to competitors, which is always disappointing after you’ve invested in people,” he said.

For Swiss Re, retaining talent in rapidly developing Asian markets is more challenging than recruitment, Mr. Parker said. Meanwhile, Michael J. Cassella, senior vp and managing director Asia-Pacific for the Chubb Group of Cos. in Singapore, took the opposite view, to an extent.

“I’d say our greatest challenge is finding the talent,” he said. Consequently, Chubb puts considerable effort into retaining employees in Asia so it won’t have to devote additional resources to finding and developing replacements.

Whether recruiting or retention is the greatest challenge facing insurance industry companies moving into emerging markets, clearly solving the talent issue is key to the success of their efforts.

“I think there’s a strong correlation between companies making the most progress and their talent management piece,” said Swiss Re’s Mr. Parker.

I’ll be posting more to the blog about the IIS in the days to come, and will be writing about the conference more extensively in the August issue of Industry Focus.

Listing the risks

March 12, 2008

It won’t produce the laughs that one of David Letterman’s Top 10 lists might, but a recent Top 10 list offered by Ernst & Young may well get insurance executives’ attention late at night.

The list is the Top 10 Strategic Risks facing the insurance industry, set out in a new study, Strategic Business Risk Insurance 2008, produced by E&Y in conjunction with consulting firm Oxford Analytica. According to the study, the top 10 risks are:

1.   Climate change
2.   Demographic shifts in core markets
3.   Catastrophic events
4.   Emerging markets
5.   Regulatory intervention
6.   Channel distribution
7.   Integration of technology with operations and strategy
8.   Securities markets
9.   Legal risk
10. Geopolitical or macroeconomic shocks

The report notes that risks change over time, and that if such a list had been compiled 10 years ago, it’s arguable whether climate change would have been on it. Today, however, climate change tops the list,  and is “typically viewed as a long-term issue with broad-reaching implications that will significantly impact the industry,” the report says.

As for demographic shifts in core markets, the report notes that with baby boomers reaching retirement age, the insurance industry is well positioned to meet the generation’s new demands, but could lose out to other sectors.

Changing weather patterns, terrorist attacks and pandemics are among the factors driving catastrophic events to the third position on the list, while the report’s authors noted that number four, emerging markets, present both risks and opportunities for insurers, with success in those markets not a given.

Technology factors twice on the list. In the sixth spot, channel distribution, the report notes that technology has changed the way insurance is sold and that the possibility of Internet disintermediation is becoming a major risk for insurers, with companies offering multi-channel access for sales and information enjoying an advantage.

One down the list at seven is integration of information technology with operations and strategy, a risk some companies have become painfully aware of through their own experience in recent years. “Insurers need to view technology as an enabler to keep pace with the competition,” the report says.

The report also lists some “Below the Radar” risks that, while not making the Top 10, have the potential to make the list over the next five years. That list includes over-reliance on model-based risk management, threats to the reputation of the industry, losing the war for talent, increasing corporate exposure to global regulatory heterogeneity and possible emergence of entirely new risks.


Healthy alternatives

November 6, 2007

I’m in Scottsdale, Ariz., this week, attending the 17th World Captive Forum, where approximately 350 attendees have gathered to discuss the latest developments in captive insurance and other alternative risk financing techniques.

The meeting began this morning with a keynote from Robert P. Hartwig, president of the Insurance Information Institute, who suggested the future bodes well for the alternative risk market, though things might not look quite as bright in the near term for traditional market insurers.

“The majority of the market is still traditional, but the alternative, including captives, has grown consistently,” Mr. Hartwig said, with alternative risk financing vehicles now making up over 30% of the total risk transfer market.

And, though the traditional market is softening considerably, insurance companies shouldn’t assume that insurance buyers that looked to captive insurance vehicles when prices were high and coverage was scarce will abandon those vehicles and return to the traditional insurers, the III president said.

The insurance industry has made buyers comfortable with the notion of retaining more risk, Mr. Hartwig said, “So there’s leakage everywhere.” He laid out a scenario in which primary insurers are being squeezed by buyers’ higher retentions, excess insurers are being squeezed by higher primary retentions and lower reinsurance attachment points and reinsurers are being squeezed by higher insurer retentions and a growing risk-linked securities market.

Still, the global commercial lines insurance market’s results were “excellent” in 2006 and are “very good” this year, according to Mr. Hartwig, with prospects for the industry to still turn an underwriting profit in 2008. But, as prices soften and the industry moves towards what Mr. Hartwig suggested history shows is an inevitable trough in the insurance market cycle, a key challenge for insurers will be whether they can maintain price and underwriting discipline.

One factor that might help them maintain that discipline is the current relatively low interest environment and relatively volatile investment markets, which are enforcing discipline, Mr. Hartwig said. In such an environment, where insurers’ investment returns are challenged, cash flow underwriting won’t work, he said.

Nobel thoughts

October 12, 2007

I’m not sure that the awarding of this year’s Nobel Peace Prize to Al Gore and the United Nations’ International Panel on Climate Change for their work raising awareness of global climate change is going to do much to sway the opinions of some folks on the climate change issue.

But, it’s quickly becoming obvious that in the short term anyway, it’s going to raise some hackles.

There will no doubt be some discomfiture among those who challenge suggestions that global climate change is a cause for concern, and those who suggest that current changes in world weather patterns represent no more than natural cyclical phenomena and are not related to man-made causes.

And there are, I’m sure, still some who simply don’t like the former vice president. Still a bit tetchy over that whole messy 2000 presidential election thing, perhaps–and the inconvenient truth that Mr. Gore did win the popular vote, some would probably have preferred he disappear from the public eye. Unfortunately winning an Oscar and a Nobel Peace Prize don’t do much to promote one’s fade into obscurity.

My wife’s initial take this morning was that the selection was ridiculous as the prize should honor someone who fights for human rights. I think my suggestion that one could make a case that a habitable planet could be considered a basic human right convinced her that the Nobel committee was probably on task in giving the issue of climate change some thought in considering this year’s winners.

The impact of the Nobel committee’s announcement on popular discourse aside, though, I’ll be looking to see how today’s news and the latest high profile attention given to the climate change issue  plays in the insurance industry. As I’ve noted previously in this space, it’s interesting to me that many in the industry have been willing to put aside political considerations in order to look objectively at the business considerations posed by climate change and the associated exposures.

Insurance industry companies and their trade groups have come forward in recent months to study the issue, offer “green” products, reduce their own carbon footprints and provide Web sites offering information on climate change. Today I got a release from risk modeler Risk Management Solutions Inc. calling the recognition of the IPCC’s efforts “deeply deserved” and congratulating Mr. Gore as well, and noting that Robert Muir-Wood, the company’s chief research officer, has contributed to the IPCC’s work.

It will be interesting to see whether this latest bit of attention to the climate change issue draws responses from other industry companies as well.

In their prime

August 30, 2007

Whatever the ongoing consternation about U.S. subprime mortgage market and its implications for investors and the economy, the subprime market’s woes seem to be of little immediate concern to the insurance industry, according to the rating agencies.

Last week Moody’s Investors Service Inc. weighed in about insurers’ limited exposure to subprime mortgage-backed investment instruments, and yesterday Standard & Poor’s Corp. offered a similar take.

“Standard & Poor’s Ratings Services has surveyed all the insurance and reinsurance companies it rates globally to determine their exposure to U.S. subprime mortgage-related instruments,” said in its report. “The main conclusion: We expect that these sectors will navigate the recent deterioration in subprime mortgage-related assets with sufficient liquidity to meet their financial obligations.”

S&P said the “vast majority” of insurance companies it rates have “negligible” subprime exposures, and that while a small number of companies had exposures that weren’t negligible, the rating agency considered those companies’ exposures “manageable” because they targeted higher rated classes of instruments in making their investments.

Life companies generally had a higher percentage of subprime exposure, S&P said, though adding that that fact isn’t surprising life insurers’ longer-tailed liabilities, need for longer dated assets and life companies’ pursuits of higher yields. Still, the life sector’s exposure is “relatively modest,” S&P said.

Last week Moody’s said the “vast majority” of U.S insurers have either no exposure or an extremely limited exposure to the subprime mortgage sector. Moody’s based its analysis on a survey of companies and a review of insurers’ statutory financial statements.

Last thoughts from Berlin

July 23, 2007

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.