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P&C look back and prospects: Stage 2015 set: Regulations, risk management, Real Action!

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Source: Asia Insurance Review | Jan 2015

2014 came and went by in a flash, albeit not without leaving its mark on history. We look back at the most significant events and trends that have kept industry players awake at night, all of which they say will continue to play out in the year ahead.
By Dawn Sit
C-ROSS, regulatory changes and more
There have been ongoing regulatory changes in many of the countries in the Asia Pacific region in 2014, much of which was focussed on introducing tighter solvency rules. Mr Malcolm Steingold, CEO for Asia Pacific at Aon Benfield reckoned the most significant of those developments is the proposed China Risk Oriented Solvency System (C-ROSS), a regulatory framework currently being developed by CIRC which is expected to come into effect in 2016.
Sharing Mr Steingold’s view, Mr James Beedle, Senior Managing Director of Willis Re Asia said: “Much of the conversation at the recently-concluded EAIC meeting in Taipei focussed on the new draft C-ROSS regulations and their implications, both in terms of what reinsurance to purchase and from which reinsurers.” 
Whilst the regulations remain a draft at this stage, the regulatory direction remains clear and reinsurers will need to start building strategies in response to them, added Mr Beedle.
“Regulation changes are occurring in different markets, most notably with China and C-ROSS, and these will possibly change how reinsurance is transacted in the market permanently,” said Amlin Singapore’s MD Simon Clarke.
Brewing changes and the long-awaited AEC
Aside from China, Mr George Sartorel, Regional CEO of Allianz Asia Pacific noted the regulatory environment in other Asian regions such as India, Indonesia and Malaysia, also had an effect on growth and business achievements. “The challenge remains to adapt quickly to these external changes and fine-tune the respective business strategies to stay ahead of the competition.”
Mr Shaun Standfield, Chief Underwriting Officer – Asia, QBE Asia Pacific said: “With significant regulatory changes in emerging markets – for example, tariff re-introduction in Indonesia, and upcoming de-tariffication in Malaysia – there has been increasing pressure on profitability for many insurers operating in the softening Asian market.”
Not forgetting, the upcoming launch of the ASEAN Economic Community (AEC) this year has had the industry waiting with bated breath. “The formation of the AEC had begun drawing more attention in 2014. While the impact on the insurance industry would only come much later, there is little doubt that the Community will usher in an era of fundamental changes in the region’s insurance practices as well as regulations,” said Swiss Re’s Asia Chief Economist Clarence Wong.
Positive consequences?
Notwithstanding, with the regulatory developments and implementation of risk-based regimes thus far, Lloyd’s head of Asia Pacific Kent Chaplin is sure of the positive consequence, which is stronger domestic markets. “But the challenge for many offshore reinsurers will be how to continue to service those markets,” he added.
Mr Steingold said: “These changes will leave an indelible mark on the industry on many levels. They have and will continue to result in consolidation of the industry in those countries impacted by regulatory change. Insurers will also need to reassess their catastrophe reinsurance programmes in light of increased solvency and we will see substantially more CAT cover purchased in the region”.
Low insurance density, emerging risks and the impact of climate change
Mr Stuart Spencer, CEO of General Insurance Business, Asia Pacific, Zurich Insurance, considered 2014 to be a “relatively benign year so far” in terms of “severity and frequency of natural catastrophes in Asia, in comparison to recent years”. He noted that the limited claims associated with catastrophes led to an increased cash flow, and meant that insurers have had to make important decisions on how best to use the extra capital.
While agreeing that in some markets like China and India, insurance losses were limited due to low penetration, Mr Sartorel said that the frequency of natural disasters in 2014 “was much higher than in previous years”, and attributed climate change as the cause. “Climate change led to frequent natural disasters in many densely-populated regions of Asia Pacific, which left a heavy toll in terms of economic losses in those areas.”
Mr Beedle noted the Japan snowstorm that occurred in early 2014 took some reinsurers by surprise as to the “quantum of loss”. “Market estimates now have the loss at somewhere between US$3 billion to $3.5 billion, which made it the largest catastrophe loss in Asia last year,” he said.
Weather-related threats are only increasing
Meanwhile, Munich Re Chief Executive for Australasia, Japan & India Roland Eckl quoted from his company’s proprietary GEO Risks Research statistics that the number of weather-related catastrophes had more than quadrupled in Asia in the past 33 years, with floods and typhoons posing the greatest threat. And whilst nearly half of all worldwide economic losses in 2013 had stemmed from the Asia Pacific region alone, only 14% of insured losses were incurred there.
“Many countries in Asia Pacific are highly exposed to emerging and changing risks, for example climate change, business interruption, environment and product liability, among others. There is an urgent need to enlarge local markets by increasing insurance density to provide sufficient cover for these risks. Exposures are growing rapidly, but insurance density isn’t keeping up and remains low in most emerging economies in APAC,” he said.
He urged the insurance industry and governments to step up collaboration so as to “help spread risk portfolios and significantly increase insurance penetration”, and added that transparency has to be maintained to avoid “exposure blind spots on top of huge Nat CAT exposures”, and increased on the “correlations between supply chains and cross-border trade”.
Is climate change truly the culprit?
Notwithstanding the above concerns on climate change, it is interesting to note that the topic of global warming and climate change’s impact on the higher frequency of natural disasters and greater severity of losses was discussed at the recent EAIC. And from views offered by panellists, it seemed the former’s impact may not have been as pronounced as theorised. 
The summary at the Congress was that “urbanisation, insurance penetration and wealth seem to be driving the economic and insurance losses and so climate change is not really the villain, it is the people that are the problem”. 
Fast-developing demographic changes and an increasingly competitive market landscape
The combination of a growing middle class across Asia Pacific, particularly in countries such as China and India, along with an increasingly ageing global population, serve as a reminder of the tremendous challenges and opportunities that these demographic shifts present to the insurance industry, noted Mr Jose Hernandez, President & CEO of AIG Asia Pacific.
“Insurance companies are uniquely positioned to provide tools to better prepare for the unexpected, and to offer building blocks to secure income streams in retirement. We also have a key role to play in helping consumers manage healthcare costs.”
Competition on multiple fronts
Competition in the region, whether on the business or talent front, did not seem to be letting up anytime soon. Both Mr Chaplin and Mr Andrew Vigar, Regional Manager, Asia, at XL Group noted that as competition continues unabated, this has put further pressure on prices and is prolonging the soft market.
On the M&A front, Mr Standfield noted that the competition landscape had evolved with M&A activity and additional competitors entering the region.
Similarly, Mr Beedle said: “We have seen continuing M&A activity in 2014 which will have implications going forward.” Giving the divestment of RSA’s assets in the region and the sale of Wesfarmers to IAG in Australia as examples, he said these activities underlined the belief that achieving scale is an important component of a successful strategy in the current market.
Competition on the talent front remained similarly intense. The investment in “fresh talent”, noted Mr Vigar, is also one of the key factors – aside from staying disciplined and focussed on clients, and maintaining relevance toward market concerns – by which successful companies remained so. “The enhanced teams combine global and local expertise and have played to their strengths in order to gain traction in a crowded market,” he said.
Dearth of experienced talent and skills gap
Mr Steingold also highlighted an increased demand for experienced talent last year. “The obvious impact is the pressure on remuneration packages, which are often already too high relative to skill and experience. A more subtle impact is that some high potential people change employers so often that there had not really been the opportunity to ‘test’ their real potential. An underwriter’s ability for example, can only be assessed against a meaningful number of years’ result; changing jobs too often militates against such assessment,” he said.
He added: “We have also seen many examples where a firm seriously invests in training and developing young graduates, only to lose them when they are starting to become productive and repay this investment.” As such, there is a potential risk that “less enlightened organisations will stop investing in young talent”, which would be to the detriment of the industry as “fresh high potential talent is the lifeblood for a healthy future”. 
Cyber risks and the aviation shock events
The past year saw a continued increase in data and privacy breaches around the world – examples included the South Korean data breach incident, along with other high-profile cyber breaches involving major retailers and financial institutions. These highlighted the real and growing need for companies to take action to protect themselves and their customers against cyber-attacks. 
“These opportunistic crimes are clearly on the rise and companies must be prepare to act to repel such cyber activity. There is an opportunity to educate our customers about the danger and damage caused by data and privacy breaches, and the potential impact that a board of directors faces,” urged Mr Hernandez.
Mr Wong concurred: “With the rapid progression in the use of digital and social media, the risk facing corporations and individuals are fast increasing. The associated liability risks will need to be carefully managed by all stakeholders, including insurers.”
Shock loss events in aviation
Turning to the loss of the two Malaysia Airlines aircrafts in 2014, which were no less catastrophic than natural disasters, both Mr Sartorel and Mr Hernandez noted these occurrences reinforced the critical role that insurance plays for individuals and institutions in the aviation industry.
“These tragedies were also a stark reminder of how regional or local incidents can have a global impact. The insurance industry should not lose sight of the global roles we play in trying to mitigate risk and to respond to customers in need,” added Mr Hernandez.
Top concerns for 2015

We ask the CEOs what their top concerns are for 2015 and here’s what they have to say in their own words.

Cybercrime intensification and promoting risk management
“Businesses need to safeguard against cybercrime and data breaches whether they be the result of sophisticated computer hacking or employee error. There is an obligation to constantly monitor the cyber landscape and the insurance industry needs to constantly evolve to keep on top of cyber risks as these become increasingly sophisticated. These threats will only expand and intensify in 2015.
In 2015, companies must continue to make key decisions based on their respective risk appetite in balancing risk, profit and growth. Each market is different, but a solid governance structure and an ability to manage risk is paramount for companies if they want to increase profitability, maintain shareholder confidence, reduce volatility and protect their reputation.”
Mr Jose Hernandez 
President & CEO, Asia Pacific, AIG
The digital trend and catering to new millennial customers
“One of the biggest concerns will be how to attract new millennial customers whose behaviour is completely different to that of our current customers. The millennial customers use digital devices much more than conventional devices. In addition, they have become more demanding, preferring to use digital devices to manage their personal and financial needs, and demanding information or services anywhere, any time and all the time. Insurance companies need to fine-tune their business processes to cater for such demanding future customers.”
Mr George Sartorel
Regional CEO, Allianz Asia Pacific
“Digitalisation will probably have a significant impact on many business models in the future and is consequently embedded in Munich Re’s overall strategy. It will bring challenges and opportunities for the insurance industry along the whole value chain. Big data applications should make it possible to assess risks at an earlier stage and even more precisely. Munich Re believes that the improved possibilities for data analysis and greater data resources will create opportunities to make previously uninsurable risks insurable and thus to tap into new business segments.”
Mr Roland Eckl
Chief Executive for Australasia, Japan & India, 
Munich Re
Global events
“The risk landscape for global businesses in 2014/2015 is becoming increasingly complex, given the threats posed by a number of both natural and man-made hazards, as well as the ever tightening regulatory and legal regimes. This, in turn, could lead to many pitfalls in the landscape of the insurance claims world. 
2014 also saw two major aviation losses in Asia, and the fall in oil prices has had an impact on the demand for vessels in the oil and gas sector in the Asia Pacific region. Hence, 2015 is likely to see a fall in freight prices which, in turn, may result in an oversupply of freight tonnage and a drop in new builds. This will result in a soft market and impact claims trends for 2015.
The outbreak of Ebola, consistently low interest rates and increased sanctions against Russia are also factors that will have an impact on claims trends for 2015.
Amlin’s strategy in managing these claims trends is two pronged: firstly, at the point of inception via risk management; and secondly, at the claims stage via proactive claims management.”
Mr Simon Clarke
Managing Director, Amlin Singapore
“According to David Guest, our underwriting expert on crisis management, the expansion of ISIS in Iraq, Syria, eastern Libya and Egypt this year saw an influx of supporters from countries such as the UK, Australia, Europe and Asia. Many of these rebels, who have received insurgency training and ideological indoctrination during their time in the Middle East, are expected to return to their home countries in 2015, bringing with them new and unknown terrorism related risks. The crisis management arm of the insurance industry is working with private and public sector stakeholders to prepare for and mitigate the impact of returning rebels.”
Mr Andrew Vigar
Regional Manager, Asia, XL Group
Continued growth
“Our top three concerns for the year ahead are: i) Growth, ii) Growth and iii) Growth. While this may seem a facetious response it is not intended to be. Any other concerns are really a subset of our focus on growth.
We manage growth by remaining relevant to our clients and potential clients by constantly listening to what their concerns are and their objectives. Our growth in simple terms comes from our capability in quantifying and transferring risk and matching these capabilities to help our clients achieve their own objectives. The most frequent request from clients in the region is also support in in developing new products. In light of the Aon’s vast bandwidth across the world of risk, we are well positioned to assist clients with new product development which in turn can result in substantial growth opportunities for us.”
Mr Malcolm Steingold
CEO, Asia Pacific, Aon Benfield
“Whilst principally a concern for reinsurers, the continued competitive pricing environment will almost certainly continue into 2015 and possibly beyond in the absence of any catalyst to alter market pricing dynamics. Both reinsurers and their insurance clients are continuing to look at the best way to adapt their strategies to the new environment which could well be a more permanent shift in our industry as opposed to a cyclical one, given not only the amount of capacity available in the market but the speed at which new capital can be deployed.
Perhaps one of greatest challenges for the long term success of the industry is to increase the sales penetration of general insurance products throughout Asia. In certain markets we continually witness a very significant difference between the insured loss arising out of an event and the economic damage. The challenge for our industry across both insurance and reinsurance is to work to close this gap by offering insurance products which consumers and businesses see value in purchasing.” 
Mr James Beedle
Senior Managing Director, Willis Re Asia
Developing markets, maintaining discipline and delivering innovative solutions
“I expect the same trends to continue and we will be working closely with Asian regulators to develop open and liberal markets to allow cross-border insurance and reinsurance to flow freely.
We need to continue to maintain underwriting standards to achieve profitable and sustainable underwriting. In addition to applying robust underwriting discipline, we will seek to introduce new products to differentiate ourselves from our competitors.
We also need to stimulate insurance demand by delivering innovative solutions which meet our customers’ changing requirements and by raising awareness of the positive role our industry plays in protecting economies.”
Mr Kent Chaplin
Head of Asia Pacific, Lloyd’s
“Abundant liquidity, made available by central banks all over the world, is increasing competition. A difficult environment, but certainly not without interesting opportunities. Against this background, Munich Re believes price discipline, consistent cycle management and underwriting discipline are imperative. With our strong client relationships and our technical expertise combined with in-depth local market knowledge, we should be able to generate new business opportunities in spite of the current market environment.
Despite the current market situation worldwide, Munich Re expects a moderately increasing demand for P&C reinsurance in Asia, driven by growth markets and a greater need for innovative and tailor-made insurance solutions that cover new risks. We are in close contact with our business partners to jointly pursue innovative ideas in terms of new product features, distribution channels, etc. It is particularly important for us to be flexible and to adapt to this emerging and changing risk landscape.” 
Mr Roland Eckl
Chief Executive for Australasia, Japan & India, 
Munich Re
Underwriting profitability
“Underwriting profitability is expected to be a challenge due to the excess capacity as well as reserve releases potentially moving in the opposite direction.
QBE will continue to explore ways to offer value beyond price for our customers as market remains soft in the new year. Greater focus is placed on developing customer value proposition delivered globally through: 1) our customer focused underwriting and claims service approach; 2) geographical reach via segmentation, product design and distribution channels; and 3) increased leverage of our balance sheet and capacity to take on risk with a multinational footprint.”
Mr Shaun Standfield
Chief Underwriting Officer – Asia, QBE Asia Pacific
Talent acquisition
“Getting the right underwriting talent in the right places. We have, and are continuing to actively follow a strategy to combine local knowledge and experience with global expertise in all of our operations worldwide.”
Mr Andrew Vigar
Regional Manager, Asia, XL Group
“Asia’s sustained economic growth has inevitably attracted new entrants to the region as insurers see enormous opportunities here. This intensifying competition creates a battlefield for employing quality talent and puts downward pressure on pricing as new players seek to capture a greater market share.”
Mr Stuart Spencer
CEO, General Insurance Business, Asia Pacific, 
Zurich Insurance
Economic environment and regulatory changes
“Economic uncertainty is high on the agenda, given a slowing Chinese economy, the risk of Japan falling back into recession, and impending interest rate normalization in the US. Close monitoring of the global economic landscape and holistic risk management, including active use of scenarios, will be important in coping with this challenge.
Regulatory change is another key concern. The implementation and revision of a risk-based solvency regime is gathering momentum. There are on-going improvements in regulations to better protect consumers. We are also expecting increasing regulatory convergence across the region. Close monitoring and proactive dialogue with regulators and stakeholders are keys to successfully managing this issue.”
Mr Clarence Wong
Chief Economist, Asia, Swiss Re
“Another challenge for us as an industry is to manage and adapt to the ever-changing regulatory environment. Two examples currently include China and Indonesia where new rules are being discussed albeit there remains significant uncertainty as to what the final rules will entail. The reinsurance market would hope for certainty around these rules as soon as possible to facilitate longer term response planning.”
Mr James Beedle
Senior Managing Director, Willis Re Asia
“The overarching theme for 2014 had been how the insurance industry was dealing with the sustained, historically low interest rate environment that has led to lower levels of investment income derived from premiums. This theme is set to continue in 2015 as insurers need to offset lower investment income by expanding their margins through disciplined underwriting, adjusting prices, paying greater attention to expense management and being more selective with risk.
Regulation is another hot topic that will continue into 2015. There is always the potential for more comprehensive and complex regulations to be imposed on the industry, which does impact how insurers can provide a seamless web of coverage to multinational clients.” 
Mr Stuart Spencer
CEO, General Insurance Business, Asia Pacific, 
Zurich Insurance


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