Topics Magazine - Munich Re

TOPICS Magazine

The magazine for insurers Facts, markets, positions Issue 1/2015

Big data – An immense challenge The amount of data worldwide is skyrocketing. Analysing these data could improve many business processes in the insurance industry. But how can we best take advantage of these opportunities? PAge 32

Marine Growth markets in focus

Canada Prospects: Partly sunny

Motor market UK: A trendsetter

EDITORIAL Dear Reader, These days, everyone seems to be talking about big data. But at present, it is hard to gauge what the analysis of ever-growing data volumes will actually mean for insurers in the medium term. With this in mind, we are approaching the issue step by step at Munich Re, exploring both the opportunities and the risks involved. Last autumn, we launched five pilot projects with the aim of investigating where and how genuine improvements in business processes, risk management and underwriting can be achieved, basing our research on specific, defined objectives. One such project is presented in the article beginning on page 34. Most of us spontaneously associate the term North America with the USA. But Canada, geographically speaking the larger of the two countries, harbours a great deal of potential. Rich in raw materials, it is a very wealthy nation and weathered the financial crisis much better than its fellow G7 members. But Canada’s booming cities with their high concentrations of values are increasingly at risk from weather-related natural catastrophes. To find out more, read our market portrait starting on page 12 and the article on page 46. Last but not least, in this issue we will be presenting our new organisational structure in marine business. In an interview starting on page 42, John C. Wilkinson talks about his unit’s goals and the challenges to be met in the marine business. Munich, January 2015

Torsten Jeworrek Member of the Munich Re Board of Management and Chairman of the Reinsurance Committee

NOT IF, BUT HOW

Munich Re Topics Magazine 1/2015

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Market portrait Canada Canada, the world’s second largest country, is a popular destination for emigrants, especially from Asia. Vancouver is now home to the third largest Chinese community outside the People’s Republic. But Canada’s prosperity is being increasingly threatened by severe storms and floods, which have dented the balance sheets of Canada’s non-life insurers in recent years.

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Contents

Low interest rates, rising claims, thin margins: The UK motor market is in a difficult position. However, business trends there could point the way for other markets.

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Enterprise risk management Closer links between risk management and business management Supervisory systems around the world are undergoing major transformation. It is becoming increasingly important for companies to manage their business holistically. MARKET PORTRAIT CANADA Prospects: Partly sunny Thanks to its abundance of raw materials, Canada is one of the wealthiest countries on earth. But the growing concentration of values there presents risks.

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No calm after the storm Weather-related natural catastrophes are proving a major headache for insurers.

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We want to make a bigger impact Philipp Wassenberg, CEO of MROC, talks about the challenges that lie ahead.

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Living with the new normal Canadian insurers face challenges from increasing exposures.

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Analysis is the key with big data: But business processes can only be improved if the right conclusions are drawn from the mass of data available.

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MOTOR MARKET UK: A trendsetter Other markets can learn a lot from developments there. big data An immense challenge How can we best take advantage of the opportunities offered by big data? Marine We can achieve most in the growth markets John C. Wilkinson talks about the marine market and the objectives of the new Global Marine Partnership.

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Editorial1 News4 Literature41 Column46 Imprint48


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NEWS

Knowledge in dialogue Client seminar programme 2015

event

Munich Re

CLIENT SEMINARS

Big Data and Business Analytics Conference

Munich Re wins prize for sustainable business practices

Knowledge in dialogue 2015

Big data and business analytics are becoming increasingly important to the value-added chain of insurance companies. This is particularly true of health insurance. But what are the concepts behind these terms?

On 5 December, Munich Re won the “German Investors’ Award for Responsible Management” at the German Economic Forum in Frankfurt. Board Member Jörg Schneider (second left) accepted the prize.

The “Munich Health Big Data and Business Analytics Conference”, to be held in Munich on 19 and 20 March 2015, will explore this question. Renowned speakers will be presenting their specialist knowledge and holding discussions with participants on practical applications, for instance in fraud management or customer relationship management.

A jury analysed over 160 German companies for the prize, assessing their quantitative performance on the basis of the DVFA/EFFAS “Key Performance Indicators for Extra-/ Non-Financials” and core sustainalytics data. But the prize was not awarded on the basis of these figures alone. The winning company had to meet the qualitative requirements of the Environmental, Social & Governance Panel. And this body concluded that Munich Re had achieved excellence in this domain.

The new client seminar programme “Knowledge in dialogue 2015” is now available. We will again be offering our international clients an extensive programme of seminars and workshops this year. The available courses will cover not only all the important classes of insurance business but also specialist topic areas such as financial lines insurance and enterprise risk management.

>> C ontact your Client Manager if you would like to attend.

>> Contact your Client Manager if you would like to participate in a seminar.

News in brief Our engineers support major projects all over the world, using their technical expertise to assist clients up to successful project completion and beyond. Read up on exciting engineering projects around the world in our new free Engineering Newsletter, available by e-mail. >> S ubscribe at www.munichre.com/en/engineering-news

Munich Re will be holding a Claims Conference for clients from Africa and Asia in Dubai on 3 and 4 March 2015. The topics “Business interruption” and “Delay in start-up” will be explored and discussed from different perspectives under the heading “The clock is ticking”.

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Disciplined and creative cycle management meets innovation: these are the two pillars of our strategy. And Munich Re is taking a new approach to boosting innovation: in the first quarter, it will be sending three innovation scouts, Tobias Farny, August Pröbstl and Bob Mozeika, to Silicon Valley for a year to observe, test, learn, and explore new terrain. After all, as Torsten Jeworrek says, “We need creative and intelligent solutions for the relevant risks of the digital world”.

NEWS

A complete overview: Our Twitter timeline.

A glimpse behind the scenes: Live tweets from events.

Posts on current economic developments.

Up-to-the-minute information on products and services.

Social media

Join us on Twitter! We have been sharing news and information on social media for several years now. Our Twitter account www.twitter.com/MunichRe is just one of the channels we use. You can find up-to-date information on events as well as comments on current affairs or on general topics affecting the insurance industry and the economy. You can even take a peek behind the scenes. Follow us to stay up to date. And tweet us your questions on our company, products and services. We look forward to hearing from you. We even have a dedicated channel for specific, complex reinsurance issues: www.twitter.com/MunichRe_InFocus. Links to our other social media channels are provided on page 48. Join us online. We’re just a click away.


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Enterprise Risk Management

Closer links between risk management and business management Supervisory systems around the world are undergoing major transformation. Topics talked to Bernhard Kaufmann and Jürgen Dümont about the challenges in managing Group-wide risk and the changes that Solvency II will bring.

Topics: Mr. Kaufmann, you have now been in charge of Group-wide risk management at Munich Re for a year. Has any issue particularly occupied you in the last few months? Bernhard Kaufmann: The main risk management issues haven’t really changed much over the last few years. We have been busy with the preparations for the new European solvency regime for a long time. Our main task has been to develop an internal model we can use to calculate our capital requirement under Solvency II in the future, but we have also had to deal with many other Solvency II issues, ranging from governance to special reporting requirements for the supervisory authorities. The second focus of our work, which is becoming increasingly important, is “business enabling”. We are looking at how we can apply the knowledge and information acquired in risk management to our operative business, and how we can make best use of our expertise to be able to offer our clients products that add particular value.

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What are your main objectives? Kaufmann: Integrated Risk Management at Munich Re in Munich is responsible for Group-wide risk management. The objective is to monitor and assess underwriting risks, risks on the assets side and operational risks holistically for the Group. This will create transparency and enable us to manage these risks actively. What we experienced in 2001/2002 taught us how important it is to have this overall view – in the capital market environment at that time, risks on the assets side endangered our rating and hence threatened to have a negative impact on our core business of reinsurance. You have experience in both insurance and reinsurance. How does that help you in your new function? Kaufmann: The focus of a reinsurer’s business is on assuming peak risks such as natural catastrophes, pandemic risks and other large risks, primarily from insurance companies, and the management processes and controls are geared to that. In primary insurance on the other hand, the design and sale of products aimed at very large customer groups and the operations needed for that are very much in the foreground, so that operational risks play a major role. At Munich Re, we see risk management as an umbrella covering

both insurance and reinsurance. As we have to deal with issues in both, it is very important for us to have knowledge and expertise in both fields of business. And it is also very useful to know first-hand what issues are currently relevant in insurance when we are developing products for our reinsurance clients. Jürgen Dümont: In the course of the changeover to Solvency II, questions are continuously cropping up that we need to address internally, but that we know also affect our clients. This common ground provides us with opportunities to work with them. How do you ensure that we don’t miss changes in the market or emerging risks? Kaufmann: As the world’s largest reinsurer, it is particularly important for us to keep an eye on emerging risks and to anticipate and analyse possible developments. There is a special group in risk management whose job is to ensure that we always know what is going on. To avoid risk management becoming a purely academic exercise, we have established close links with the expertise available in specialist areas, for example through the Emerging Risk Think Tank. Colleagues from other areas, including underwriters, lawyers, geologists,

Enterprise Risk Management Bernhard Kaufmann has been Munich Re’s Chief Risk Officer since early 2013. Jürgen Dümont heads up the Solvency Consulting Unit.

mathematicians, physicists and physicians, are actively involved. The advantage of this committee is that it provides scope for unconventional approaches and a broad variety of perspectives. The close networking with different areas gives us a comprehensive picture. What are you looking at in the Think Tank at the moment? Kaufmann: We have a dozen or so emerging risks constantly on our radar. In the macroeconomic area, we are currently mainly watching geopolitical developments and their potential repercussions for the eurozone. Other issues are demographic change, climate change, new technologies and IT risks. A lot is happening in the area of cyber risks. Many companies are becoming increasingly aware how expensive a problem with sensitive customer data can be, and managers are looking for solutions. In the space of a few years, a phenomenon seen as a theoretical risk has produced actual loss events and already cost some insurers money. It’s a good example of how quickly emerging risks can develop.

At Munich Re, integrated risk management is part of the core business. But how well prepared is the industry in general? Kaufmann: There is an unmistakable trend towards the comprehensive analysis of risks. In Germany for example, the 1998 law on control and transparency in the corporate sector encouraged companies to move in that direction. At that time, risk management was generally still set up as a control function. In the course of the Solvency II debate, risk management has progressed to take on a more proactive role. We have always kept pace with this transformation at Munich Re, but this is not the case for all companies and markets. Does it depend on the size of a company? Kaufmann: I think it’s primarily to do with the corporate culture. If, as at Munich Re, the Board considers risk management to be an integral part of the business model and that view is actively propagated and followed in practice, it receives a level of support that may not exist everywhere.

To what extent can we support other companies in this process? Dümont: Ultimately, the impulse must come from companies themselves. Munich Re’s current risk management has its origins in the difficult times experienced shortly after the turn of the century. Many companies – fortunately – were spared such experiences and are only now giving their full attention to the issue. Whilst creating close links between business management and risk management has already been a key issue for us for some time, regulatory changes such as Solvency II have been the driving force for many of our clients, especially those operating in smaller markets. However, clients are becoming increasingly aware that risk management can make a valuable contribution to the management of the business. Even in markets not subject to regulatory pressure, the larger companies at least are giving more consideration to how risk management can give them a competitive edge.


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Risk management can provide valuable impulses for our operative business. Bernhard Kaufmann

Supervisory regimes are on the move worldwide. Are the insurers affected facing challenges similar to those posed by Solvency II, or are there differences? Dümont: The common denominator is what is known as the qualitative pillar – Pillar 2 under Solvency II – which covers the requirements for risk management and the system of governance. There are many similarities in the regulatory process around the world. A simple example is the separation of risk assumption and risk control, which is a fundamental principle of risk management. There are major differences, on the other hand, in the quantitative treatment of risks and the preparation of the solvency balance sheet. With the economic balance sheet, a strict approach has been adopted for Solvency II. The requirements of other supervisory regimes are not always as stringent. In the third pillar, reporting, Europe is certainly investing more time and effort than anyone else, principally due to the high complexity involved.

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What do you think of the attempts by the supervisory authorities to establish ComFrame as a global capital standard for insurers so that capital requirements will be comparable worldwide? Would Solvency II have to be changed again?

Americans take a different view even of the principles, it will be difficult to find solutions that are acceptable for everyone.

Dümont: ComFrame has not yet come into force and the USA is not a great fan of it. The US system helped it through the financial crisis well enough and there is little inclination to change it. If ComFrame does come, I don’t expect we will have to make any changes to our capital resources, but we would have to deal with the – presumably multifaceted – requirements of another institution.

Kaufmann: Yes, I am sure they will. We’ll have to wait and see whether they relate to all of the regulatory pillars or only to Pillar 2, leaving out the quantitative aspects.

Kaufmann: The appeal of Solvency II is that the information produced can be used to manage the business. A global solvency regime that based capital standards on other principles could be a problem. We might then have to reconsider decisions we believe to be sensible from an internal perspective because they would result in a higher capital requirement under ComFrame. We would then have a management and control problem. We therefore want ComFrame to be based on similar principles to Solvency II. However, as the

So will uniform worldwide standards ever be possible?

Dümont: A uniform standard actually already exists – the Insurance Core Principles of the International Association of Insurance Supervisors. It is a blueprint for modern supervision and much of it resembles Solvency II. For example, it sets reasonable standards for a balance sheet based on economic principles. The difference is that the rules are less detailed and the quantitative requirements not specified. So the basic principles are there, but when it actually came to implementation, it would be difficult to find a single set of rules that would accommodate all of the interests involved.


A number of primary insurers have already been classified as systemically important, and attempts are now being made to have reinsurers added to the list. What are your views on this? Kaufmann: I can’t see how the failure of a reinsurer would trigger a systemic crisis, and that is the view we put forward in the relevant consultation processes. In my opinion, the whole discussion is being driven by politics. Governments are keen to ensure that in future no financial institution in a precarious position has to be rescued by the state, and hence by taxpayers. That is understandable, but people are generalising, and banks, insurers and reinsurers are being tarred with the same brush. Big banks are rightly considered systemically important because they are so closely interconnected, but no such relationship exists between reinsurers. Dümont: The definition of systemic importance was the product of a bureaucratic process, with size and degree of interconnectedness the most important criteria. In our opinion, size was weighted too high, and interrelationship too low. Under these conditions, it is, of course, likely that the large primary insurers will be categorised as systemically important.

The introduction of Solvency II in the EU has been postponed several times. Are you glad that it will finally be happening in 2016? Kaufmann: If our internal model is indeed certified next year and Solvency II then comes into force a few months later, our first feeling will be one of relief, as we will then be able to put a tick against all of the preparations we have worked so hard on in the Group. Above all, however, we will be happy that we can then devote more time to the issue of “business enabling” and finding ways of further improving synergies in management and control. How far have the preparations for Solvency II got in the market as a whole? Kaufmann: There are a few companies who, like us, have been working on an internal model for a long time, but in Germany, for example, they can be counted on the fingers of one hand. So the market is divided in two. A few are very well prepared, are in close contact with the supervisory authorities and have a very clear picture of what is in store, but the vast majority are only now starting to prepare for Solvency II and are slowly getting a feel for what Solvency II will mean for them.

So is Solvency Consulting receiving a lot of enquiries? Dümont: Definitely. We have seen a great deal of interest in the last few years, though the constant postponements of Solvency II have not helped maintain the pressure. Smaller clients in particular have a lot of questions. What will happen if a company doesn’t meet the Solvency II requirements? Dümont: It is difficult to predict how the supervisory authority will react if an insurer isn’t fully prepared. Consultants Ernst & Young recently published a study that suggested that only 80% of companies in Europe will fully comply with the Solvency II regulations by 1 January 2016. In other words, one in five insurers will not be adequately prepared. The reaction of the authorities will doubtless depend on the seriousness of the failings. We’ll have to wait and see how the supervisors act in practice.


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Regulatory changes are the driving force behind closer links between business management and risk management. Jürgen Dümont

Do you expect changes in Munich Re’s underwriting policy as a result of Solvency II?

Will Solvency Consulting continue to support our clients even after implementation of the new regime?

Kaufmann: Since our internal management has already long been based on economic principles, we meet the Solvency II requirements in both underwriting and investments. So I don’t really expect there to be any change in internal management in reinsurance or in the underwriting policy.

Dümont: I think it would be presumptuous to say that there will still be a huge demand for consultancy after Solvency II has been introduced. On the other hand, that doesn’t mean our work will suddenly grind to a halt when the regime is switched on. Even after that, clients should have the possibility of talking to a competent partner on any Solvency II issues. In addition, new supervisory regimes are also being introduced in Asia and Latin America and our clients will need similar support there – and they should be able to get it.

Reinsurance is set to become more important under Solvency II as it will affect the balance sheet directly. What impact will that have? Dümont: I certainly expect demand to rise. Some companies will find that they don’t have enough capital and will turn to reinsurance for relief. Others will decide to maintain a safety margin until they have got used to the new regime. In the medium term, the motivation for buying reinsurance will change. In addition to risk transfer, it will be used for capital management, which now only happens in certain cases. In some countries and lines of business, for example in Canadian life business, we have been seeing this client motivation for some time, and capital management has developed into a driving force there.

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Canada

Prospects: Partly sunny Canada is one of the wealthiest countries on earth and a popular destination for emigrants. But its thriving big cities, with their growing concentration of values, harbour risks for insurers. This was clearly illustrated by the extreme losses from weather-related natural catastrophes in 2013.

Till Heydel and David Flikkema

The second largest country in the world, covering an area of just under ten million square kilometres, Canada has always held a special attraction. Spectacular scenery and a wealth of mineral resources have drawn adventurers and explorers to its shores from all over the world. Yet large swathes of its northern territory remain uninhabited, with the bulk of Canada’s popu lation living in a 200 kilometre wide strip along the border with the USA and on the east and west coasts. The majority of Canada’s 35 million inhabitants live in cities in the southernmost part of the country. Storm losses increasing In terms of extreme weather, 2013 was remarkable for several reasons: floods in the province of Alberta and a severe storm over Canada’s biggest city, Toronto, proved to be the most expensive and the third most expensive losses in the country’s history. Both events occurred within a few weeks of one another in June and July, in the process setting another notable record: it was the first time that two natural catas trophes whose economic losses each exceeded the CAD 1.65bn mark (US$ 1.5bn) had occurred in the same year. Moreover, 2014 was the sixth year in suc cession in which insurers had to settle losses of over CAD 1m because of extreme weather events.

Skyscrapers and towers: 80% of Canada’s 35 million inhabitants live in the southernmost part of the country. Munich Re Topics Magazine 1/2015

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Canada It is a trend that may well continue in the future. This is because the big cities, and therefore the concentra tion of values, will continue to grow substantially, in part because of the steady influx of immigrants. Over the course of its history, Canada has experienced several waves of immigration. Immigrants from Asia are the principal group today. They make up the bulk of new arrivals and in many places have left a lasting mark on their new country. The third largest Chinese community outside the People’s Republic has mean while developed in Vancouver, in the southwestern corner of British Columbia. Whereas nearly every fifth inhabitant (18%) was of Chinese origin in 2006, the figure in 2031 could be around 23%, according to a study commissioned by Citizenship and Immigration Canada. The stream of immigrants from Africa, the Caribbean, and Central and South America has also swollen over the years. According to the national sta tistics office, over 20% of the country’s population was born abroad, the highest figure for any of the G7 member states. Raw materials and energy dominate Canada is extremely successfully economically, not least thanks to its immigrants. With a gross domestic product of almost CAD 1.9bn in 2013, it is the eleventh largest economy in the world. It has the second largest oil reserves in the world after Saudi Arabia, mainly in the form of oil sand in the province of Alberta. Along side raw materials and energy, industry and agricul ture number among the most important industries.

Despite the fact that the economy weathered the global financial crisis of 2008/09 thanks to a strong banking sector and sound budgetary policies, compa nies that were heavily dependent on exports did not emerge unscathed from the global downturn. Key economic indicators like the unemployment rate (see Fig. 1) have still not returned to pre-crisis levels. An additional factor is that the industrial sector has become less significant because of a drop in produc tivity within the NAFTA (North American Free Trade Agreement) region. The structural problems related to this decline mainly affect eastern parts of the coun try. In contrast, the western provinces, British Colum bia and Alberta in particular, are reaping the benefits of an abundance of raw materials and the growing importance of trade with the Pacific Rim states. Admittedly, the contribution of the export economy to growth has been fairly modest recently, and Canadian economic growth has been weaker over the last few years than in other countries that export raw materials. Private debt is a cause for concern Without high consumer spending and a buoyant house building sector, the economy would have declined more sharply during the global financial crisis. The downside of this is the high level of debt owed by private households. According to the Organisation for Eco nomic Co-operation and Development (OECD), private debt increased to 165% (143%) of disposable income between 2007 and 2012. This is the highest figure of all G7 states. The 2012 figure in the USA was 111%, in Japan 123% and in Germany 93%. Mortgages and property-backed consumer loans account for an esti

Fig. 1: Gross domestic product (GDP) and unemployment rate % 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 -1,0 -2,0 -3,0

9.0 8.0 7.0 6.0

Since 2010, there has been a steady reduction in the unem ployment rate. Nevertheless, it remains higher than before the financial crisis.

5.0 4.0 3.0 2.0

GDP slumped during the finan cial crisis but recovered fairly quickly.

1.0 0.0 – 1.0 – 2.0

* Forecast

– 3.0 2006

2006

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2007

2007

2008

2008

2009

2009

2010

2010


2011

2011

2012

2012

2013

2013

2014

2015

2014* 2015*

Source: OECD, Munich Re

Canada

The port of Vancouver: The western provinces in particular benefit from trade with the Pacific Rim states.

mated 80% of private debt in Canada, and in the view of the International Monetary Fund (IMF) constitute the biggest individual risk for Canadian banks. The IMF, however, is also concerned by the boom in the property market, which it describes as the biggest domestic risk to the country’s financial stability. At the same time, it believes the authorities could keep borrowing within controlled limits by using effective instruments such as mortgage insurance. It also points out that more restrictive guidelines on mort gage lending and controls from the national housing agency, the Canadian Mortgage and Housing Corpora tion (CMHC), have helped to slow down the increase in both private debt and house prices. But the Canadian property market is still considered expensive: the IMF estimates that house prices in 2013 were overvalued by an average of around 10%. Many analysts even con sider the price bubble to be much bigger than that. On the other hand, public finances are in relatively good shape compared to other industrialised countries, even though, according to the IMF’s calculation, the debt-to-GDP ratio climbed sharply to 89% in 2013. The debt ratio should fall again over the next few years because the governments, both at national level and in the different provinces, are now consolidating their budgets.

Orientation towards Pacific states The USA is still far and away Canada’s most impor tant trading partner. Roughly three-quarters of all exports are destined for the country’s southern neigh bour, followed by the EU with over 7%, and China with more than 4%. With the aim of diversifying trade in energy commodities (virtually all oil exports go to the USA) new infrastructure needs to be built. Asia will become increasingly important for Canada, especially in respect to the energy exports. Overall, the trend is clearly upwards. Where ten years ago, exports from British Columbia to the Pacific region accounted for just 24%, the figure today is almost 43%. And in 2011, for the first time ever, more goods left British Colum bia for Asia than for the USA. Thanks to its multicul tural population structure and its proximity to the Pacific region, British Columbia is ideally placed to expand trade relations with emerging economies there.


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Canada

No calm after the storm Despite the fact that their balance sheets were heavily impacted by severe weather events, Canadian non-life insurers still managed to close 2013 in the black. Changes to general regulatory conditions are having an increasing impact on companies.

With premium income of approximately CAD 131bn, which equates to a global market share of around 2.8%, the Canadian insurance market was one of the top ten in the world in 2013. The property-casualty (P&C) and life sectors were almost equal in size, with premium income of about CAD 52bn and 55bn respectively. The share of health insurance is CAD 24bn. Whereas the market penetration of 2.8% for P&C c orresponds roughly to the level in other industrialised countries when measured against GDP, life insurances are fairly under-represented at 2.9%. Motor insurance is the largest class of business The non-life sector is dominated by the motor seg ment, followed by the property and liability segments (23%) (see Fig. 3). Severe weather events, hail and ice storms and floods produced record losses in 2013. Despite this, the P&C industry closed the year with a positive underwriting result of CAD 285m (previous year: 1.858bn). The combined ratio rose from 96.0 to 99.4.

Even though attention in 2013 focused on weatherrelated events, the influence of shifts in the regulatory environment from 2014 on should not be underesti mated. These include stricter guidelines for the calcu lation of the mandatory Minimum Capital Test (MCT) for earthquake risks, and the requirement that com panies now carry out their own risk and solvency assessment (ORSA). Falling rates are causing problems Particular attention needs to be paid to the reduction in motor insurance premiums in Ontario, where the provincial government announced recently that rates for motor vehicle insurance had to be reduced by 15% within two years. Far-reaching repercussions can be expected. Even though the loss ratio in the motorvehicle segment fell slightly in 2013, the level of 80% is still quite high. The bitterly cold and snowy winter in 2013/14 drove up costs for property damage in par ticular. In the light of declining premiums, this erosion of margins is likely to put a significant strain on nonlife insurers in Ontario. Without additional reforms to the present system, and new approaches such as a “pay as you drive” system, it is doubtful whether the

Fig. 2: Premium growth of the Canadian insurance market CAD m 150,000

150000

120,000

120000

90,000

90000

P&C

60,000

60000

Health

30,000

30000

Life

0

0

16

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


Source: Munich Re

Canada decreed premium reduction can continue in the long term. With “pay as you drive” insurance, a GPS receiver identifies how a driver accelerates, brakes and corners in a vehicle. The insurance company therefore learns something about the insured’s style of driving, and can adjust the premium rate accord ingly. The experts in Munich Re’s Motor Consulting Unit also offer suitable solutions for this type of insur ance. In consultation with the client, they develop strategies and processes to optimise business opera tions according to the specific market situation. The team offers primary insurers a comprehensive analysis of their business that ranges from underwriting, risk selection, monitoring, pricing and claims handling, through to IT systems, marketing and sales. A further challenge for the industry may be the fact that, in future, homeowners’ comprehensive insurance will no longer provide the stable and reliable revenues it did in the past. According to a study carried out by the Canadian Property and Casualty Insurance Compen sation Corporation and the Institute for Catastrophic Loss Reduction, the loss ratio in this segment has become much more volatile over the last two decades. The difference to the margin of fluctuation in the tra ditionally vulnerable motor insurance segment has steadily fallen. Insurance providers are concerned by this trend. They can no longer rely on homeowners’ comprehensive insurance acting as a reliable buffer to cushion them in difficult years for motor insurance business. In response to the higher loss susceptibility of resi dential buildings, individual insurers have begun to rate individual perils in the all-risks policies sepa rately. They are now adjusting premiums, deductibles and sublimits to the risk in question – whether this be windstorm, hail, or sewer back-up. It remains to be seen how the supervisory authorities will react to this development, and whether such products will prove acceptable enough to customers.

Fig. 3: Breakdown of non-life premiums

Motor

General liability

Property

Other

Source: Munich Re

However, the continuing low-interest-rate environ ment and the latest natural catastrophes underline the fact that there is no room for complacency and that assessing risks correctly in underwriting is becoming increasingly important. The experts at Munich Re of Canada are the partners of choice for the assessment of individual risks and the evaluation of portfolios and accumulations. Underwrit ing faces various challenges from increasing exposures and new and more complex risks. More in-depth enterprise risk management and efficient capital management are becoming increasingly important. Munich Re can also provide valuable assistance with meeting the rules for ORSA, as set out in the Directive from the Office of the Superintendent of Financial Institutions Canada (OSFI), which have applied since the start of 2014.

Companies with a good capital base Falling returns have again had an impact on the investment side. Investment income for Canadian P&C insurers fell by 9.4% in 2013 to CAD 4.048bn. Overall, the return on equity fell to 7.77% (previous year 11.3%), the lowest level since 2010. In spite of this, the companies managed to broaden their capital base further, and rating agency A.M. Best upgraded seven companies over the course of the year.


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Canada

Caught in nature’s grip Canada is exposed to a range of different natural catastrophes, including winter storms, droughts and floods. And the earthquake risk is also not to be underestimated. The frequency of these weather-related hazards is increasing. Find out more in the article starting on page 22.

Beaufort Sea

Mackanzie Riv

er

A l as k a

Yukon Territory

Whitehorse

Earthquake

Zone 0: MM V and below Zone 1: MM VI Zone 2: MM VII Zone 3: MM VIII Zone 4: MM IX and above

Juneau

Probable maximum intensity (MM: Modified Mercalli scale) with an exceedance probability of 10% in 50 years (equivalent to a return period of 475 years) for medium subsoil con ditions.

Yell

British Columbia

Tropical cyclones Colu mbia Rive r

Zone 0: 76–141 Zone 1: 142–184 Zone 2: 185–212 Zone 3: 213–251 Zone 4: 252–299 Zone 5: ≥ 300

Typical track directions

* Probable maximum intensity with an exceedance probability of 10% in 10 years (equivalent to a return period of 100 years).

Vancouver

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The effects of wind, arson and fire-prevention measures are not considered.

ca

r

Edmonton

Saskatchewan

Calgary

Regin

Hazard No hazard for bodies of water, areas of urban development and areas without vegetation Zone 1: Low Zone 2 Zone 3 Zone 4: High

s ba ha At er v Ri

Victoria

Wildfires

Source: Munich Re, NATHAN World Map of Natural Hazards

Peace River

ALBERTA

Peak wind speeds (in km/h)*

Northwest territories

USA

Canada

Venzuela Dec Overal osses*:US$3,200 Insured

Canada

USA

G reenland

Top: Huge icicles formed after the great ice storm of 2014. Bottom: The residents of High River, a town in Alberta close to Calgary, had to be evacuated from the floods in June 2013. nunavut

Iqualuit

lowknife

CA N A DA

Hudson Bay manitoba Chu

rc h

ill R

quebec iv er

newfoundland

askatchewan

ontario

Winnipeg

Charlottetown Quebec L. Superior

Montreal

Toronto tario L . On

L.

Halifax

Ottawa

L. Huron

L. Michigan

na

St. John’s

Er

Atlantic ocean

ie


19

Canada

We want to make a bigger impact TOPICS talked to Philipp Wassenberg about the special features of the Canadian insurance market and his first experiences in his new home.

Topics: How was your relocation from Germany to Canada?

So general conditions are becoming more difficult?

Are there big differences between the Canadian and US markets?

Philipp Wassenberg: A move like this is exciting, but it can be fairly turbulent as well. My family and I gave up our old life in Germany to start afresh in the metropolis of Toronto and you should not under estimate the impact that such a change can have.

For a long time, the Canadian market has benefited from its special posi tion. Because of its size (the volume of reinsurance per annum is only around 1.5 billion Canadian dollars), the market was not on the radar of many global players. Conditions were fair up until 2013, but since then Canada has been flooded with capacity, because of still-adequate margins compared to the US market. We quickly realised that we needed to take a new direction if we were to maintain our leading position and expand in certain areas.

Generally speaking, the way relevant market players deal with each other is somewhat fairer and more respect ful in Canada. Companies don’t try to get one over on each other at all costs, or to marginalise competitors. There is a sort of “entente cordiale”, where you expand in a new niche market with a new product rather than squeezing others out. Of course, not all of the new competitors on the market follow these principles, and that is now a topic of discussion at industry events. Also, personal con tacts are even more valued in the Canadian market. Once a client rela tionship has been established, it is not quickly severed. There are certain advantages to this, but it also makes it difficult to grow. Another topic to be mindful of is the existence of diverse cultures merged within one country. These differences, however, make this country so interesting and the marketplace fascinating. If you want to build up connections and relation ships, it is important to understand those and act accordingly.

What are the biggest challenges on the business front? First of all, I had to get used to the fact that the focus of my activities had fundamentally changed, from purely operational responsibilities to managing a company. One major challenge we face at the moment is to mesh more closely with Head Office in Munich so that we can make more effective use of Group know-how and resources. This will allow us to make a bigger impact on the local market. Even though we are the number one reinsurer in the country, the competition never rests.

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What strategic changes have you already initiated? The paramount topic is innovation: we need to broaden our horizons to take on new ideas, new clients, new markets, while also keeping a closer eye than before on turnover. We have introduced a client-centric approach where we analyse the client in its entirety. In the future, we also want to concentrate more on the province of Quebec. Admittedly, conditions there are more difficult than in the rest of the country, and this is espe cially true for earthquake exposure which calls for some degree of cau tion. But my belief is that this large part of the country deserves our full commitment.

Canada

As Head of Munich Reinsurance Com pany of Canada since the spring of 2014, Philipp Wassenberg is in charge of our non-life operations there.

How has the industry responded to the devastating natural catastrophes in recent years? The changes are unmistakable, par ticularly on the subject of flooding. Until now, there has been no personal lines flood insurance. Now, as a first step, the country is to be divided into flood zones. This is an enormous undertaking, and we intend to bring Munich Re’s expertise in this area into the discussion. Today, home owners are only able to protect them selves against water damage from sewer back-up. More frequent heavy rainfall, in combination with the trend towards costly renovations of base ments and their use as additional liv ing space, has led to a sharp increase in claims. As a result, more and more insurers are moving to agreements on sublimits.

Because, with an eye on the MCT, insurers are paying closer attention to their capital resources. We analyse clients’ balance sheets and consider together how to strengthen their c apital position. We are also acting as consultants on ORSA, which comes into effect in January 2015, at the same time as the new MCT. This again helps to open the doors for us to top management. What we have found is that there is a keen interest, particularly from CROs and CFOs, in gaining capital relief through pur chasing appropriate reinsurance products. So to that extent, I am very optimistic that we can offset declining margins in traditional business with creative offers and new products.

When the new mandatory minimum capital test (MCT) is introduced in January 2015, insurers in Canada will have to meet new requirements. To what extent can Munich Re benefit from this? Regulatory changes, like the new MCT calculation or the implementa tion of ORSA, the own risk and sol vency assessment, are important changes for all of us in the insurance industry. In this instance, we can pro vide our clients with added value, and demonstrate our expertise as a service and solution provider.


21

Canada

Living with the new normal In contrast to the hurricane-afflicted USA, Canada has remained largely unaffected by severe natural catastrophes. However, 2013, with its extreme weather events and floods, turned into the most costly in the country’s history.

Canada is susceptible to a variety of natural catastro phes, including winter storms, heatwaves and droughts, forest fires, floods, hail, tornadoes and hurricanes. In addition, the earthquake risk should not be underesti mated, as illustrated by the Great Alaskan Earthquake half a century ago in 1964. At that time, considerable damage was caused by tsunamis that reached parts of the west coast. According to a study carried out by Natural Resources Canada, there is at least a 30% risk of a destructive earthquake striking southwest British Columbia in the next 50 years, which would therefore be likely to hit the provincial capital, Victoria, or the metropolis of Vancouver. The regions in the east that are considered at risk extend from the Saint Lawrence River Valley to the Ottawa Valley – an area that includes the cities of Quebec, Montreal and Ottawa. There is at least a 5% to 15% probability of a major event occurring here.

Extreme weather on the rise Until just a few years ago, the claims situation for weather-related natural catastrophes was relatively peaceful, with one or two exceptions, such as the ice storm of 1998 and isolated flood and storm events. However, that all changed in 2009. Since then, Cana dian insurers have paid out at least CAD 1bn each year for claims – in 2013, they posted the record sum of CAD 3.2bn. Overall, extreme weather events between 2009 and 2013 have cost insurers around CAD 7.7bn. The biggest event, with insured losses of over CAD 1.7bn and overall losses of CAD 6bn, were floods following severe storms in the province of Alberta in June 2013. These resulted in landslides, flooded build ings and roads, power outages and two oil pipelines being shut down. Around 100,000 people had to evacuate their homes. A short time later, record rain fall caused flooding in Toronto. With insured losses of just under CAD 1bn, this was the second most costly

Fig. 4: Loss events in Canada 1990–2014 Number of events

40

30

20

10

0

4 0

Climatological events (extreme temperature, drought, forest fire)

30

Hydrological events (flood, mass movement) Meteorological events (tropical, extratropical and convective storm, local storm)

20

Geophysical events (earthquake, tsunami, volcanic activity)

10

* Forecast

0 1990

22

1992

1994

1996

1998

2000


2002

2004

2006

2008

2010

2012

2014 *

Source: Munich Re, NatCatSERVICE

Canada weather catastrophe of 2013. It was followed by severe storms in Ontario and Quebec, and an ice storm in eastern Canada that caused damage of around CAD 200m, largely from falling trees and power outages.

floods in Alberta, insurers faced the problem of how to interpret the insurance contracts with such a wide variety of loss causes. Basements were frequently flooded through the sewers, and soon after devas tated by surface flooding. Where it is even possible, it is extremely expensive to determine what portion of damage is due to what cause.

The Institute for Catastrophic Loss Reduction at the University of Western Ontario now expects that higher annual losses (albeit not always in the billion-dollar range) will be the order of the day in Canada. This trend will be exacerbated by the increasing concen tration of values, primarily in the large cities, by age ing public infrastructure and by the higher frequency of extreme weather events. More floods than forest fires If one takes events since 1990 as a yardstick, meteor ological events pose the greatest risk, followed by floods and heat/drought/fire (see Fig. 4). Practically every region in Canada has been affected by floods in the past, including the major cities of Toronto, Calgary, Montreal, Vancouver and Ottawa. Over the last few decades, there has been a sharp rise in losses from sewer back-up. Non-life insurers now have to pay out more than CAD 2bn a year for water-related claims, a larger amount than they pay out for fire claims. The reasons include the growing population in urban set tings and overloaded waste water systems that can no longer cope with the more intense rainfall. Whereas commercial property can generally be insured against floods with either sublimits or a higher deductible, depending on the risk, this option is not available for residential property. However, insurers of residential property often offer cover against damage for sewer back-up. Following the

If one bears in mind that Canada has by far the longest coastline in the world, there is also an increasing risk of flooding on the coast as climate change progresses. Many communities close to the sea in British Colum bia are heavily populated, and key infrastructure is located in low-lying areas. In the eastern regions on the other side of the country, the risk of storm surge, for example from a severe hurricane, is increasing in tandem with the rise in sea level. Fire hazard mainly in the north Canada is not only one of the most heavily forested countries in the world (one-third of its land area is covered by trees), but also has the biggest risk of forest fires. Each year, an average of 9,000 fires, which are generally triggered by lightning strikes, eat into the growing stock by destroying an area of 2.5 million hectares. In the vast northern expanses, the fire risk is 100 times higher than in the more populated south. Even though the Canadian provinces have made sub stantial investments in protecting against and combat ing forest fires, around 7,500 residents have to abandon their homes to the flames each year.

Fig. 5: Economic and insured losses 1990–2014 US$ bn 9.0

9000

Overall losses in 2013 values2

Floods1

7.5

Insured losses in 2013 values2

7500 6.0

Costliest event(s) in the respective year 2 L osses adjusted to inflation based on Canadian CPI 1

6000

4.5

Winter damage1

4500

Floods1

3.0

3000

Ice storm1

Severe storm/ tornadoes/ floods1

Wildfirefloods1

* Forecast

1.5

1500 0

0 1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014 *

Source: Munich Re, NatCatSERVICE


23

Canada

Surfing in the rain: A man holding an umbrella “surfs” on his skateboard during the 2013 floods in Alberta.

The most devastating fires occurred many years ago, when there were no fire-fighting aircraft to combat them. In more recent times, the fires at Slave Lake, Alberta, in 2011, and in the Okanagan Mountain Park in British Columbia in 2003 hit the headlines. These two events accounted for over 90% of the total build ings lost to forest fires over the last three decades. Changes to the climate, stocks of trees that are dam aged by disease, and increasing settlement close to wooded areas are likely to further increase the fire risk, in line with a growing trend that has been observed over the last 30 to 40 years.

Despite the fact that as many as 28 (the record level in 2005) tropical storms can form in a year in the Atlantic, Canada is generally spared any severe hurri canes. Exceptions to this were the Category 3 Hurri cane Juan, which swept over Halifax in 2003, and the Category 1 Hurricane Igor over St. John’s in 2010. As well as southern Ontario and Quebec, the four eastern provinces of Atlantic Canada are also at risk of flood ing from tropical storms. Over 60% of Canadian resi dential dwellings and companies are situated in regions where tropical storms have caused water damage.

Storm risk dominated by tornadoes

In the context of blizzards and the other winter storms that occur at regular intervals, major events like the ice storm of 1998 are a rarity. For many years, this event remained the most costly natural catastrophe in Canadian history. At the time, an ice sheet formed in many areas that was twice as thick as during any ice storms previously experienced. 28 people died, and insured losses came to over CAD 1bn. Over five million people had to brave the freezing conditions without electricity for as long as 28 days.

Between 60 and 80 tornadoes occur each year in Canada, and many experts believe that a large num ber of additional storms in unpopulated regions go unregistered. So the actual figure could be two or three times bigger, which would make Canada one of the countries with the highest tornado frequency after the USA. The areas worst affected are southern Ontario, Manitoba, Saskatchewan and Alberta. The overwhelming majority of tornadoes (80%) are of low intensity, with a strength of F0 and F1. Intensities of F4 or F5, as witnessed in 2007 in Elie, Manitoba, account for less than 1% of all cases. However, these cause the most fatalities and substantial property damage.

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Both insurers of residential buildings and providers of motor insurance policies can be seriously hit by winter storms. The difference in loss figures compared to years with little activity can be significant.

Canada Adaptation to climate change required Since climate change is also making its mark in Canada, extreme weather events with personal inju ries and property damage are likely to escalate over the next few decades. In particular, more frequent and more intense precipitation will be experienced throughout most of the country. It is unclear whether the frequency of severe storms will increase, although intense hurricanes over eastern Canada can be expected more often. The total area affected by forest fires is also likely to get bigger, thus increasing the risk of fires raging out of control. With global warm ing, even though the number of winter storms should decrease, there is an increased risk that ice storms, which have so far only afflicted the north of the USA, will increasingly shift to southern Canada.

>> Munich Re also transacts life insurance busi ness in Canada. Find out more in our online magazine interview with Mary Forrest, Head of Munich Re’s life reinsurance operations in Canada/USA. www.munichre.com/en/topics-online

These hazards are manageable provided the correct measures are taken to adapt to climate change. Poss ible options include a greater awareness of storm risks, more effective safety measures for buildings, and increased public funds to make infrastructure more robust. In tandem with these, insurance remains a key tool with which homeowners and companies can protect themselves against damage from extreme weather events. The NATHAN (Natural Hazards Assessment Network) Risk Suite from Munich Re can provide valuable assistance with the assessment of natural hazard risks. This unique product shows the degree of expo sure to storms, floods, earthquakes and hailstorms and other natural hazards at any point on earth, thus enabling users to identify and assess complex natural hazard risks more effectively. In addition to natural hazard assessment, NATHAN also offers a wealth of loss information. Munich Re’s NatCatSERVICE – the most comprehensive natural catastrophe loss database in the world – forms the basis for a broad spectrum of analyses and evalua tions in the field of risk management and risk research.

Our Experts Till Heydel is Vice President of Client Management and also leads MROC’s marketing activities. [email protected]

David Flikkema is responsible for the arketing activities of Munich Re m of Canada. [email protected]


25

Motor market

UK: A trendsetter Low interest rates, claims on the increase, thin margins: for years the UK motor market has been in a challenging situation. At the same time, developments in the UK potentially point towards the future for other markets. Klaus Wilkens and Mike Ayrey discuss developments and trends.

Klaus Wilkens (right), Executive Client Manager for UK and Irish clients, and Mike Ayrey, Senior Consultant with Munich Re’s Motor Consulting Unit.

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Motor market Topics: How would you characterise the UK motor insurance market? Mike Ayrey: The market is large, with premiums of around £15bn, and highly competitive. We recently had a period where results were better, but now we are already seeing rates going down again. Klaus Wilkens: As in most other markets, it is mandatory to buy thirdparty motor insurance in the UK, and hence this segment is of great importance for the industry. However, its historical performance shows that, on average, the UK motor market’s profitability is worse than most of the other large motor markets. This makes it rather challenging for us as a player to generate positive results for our own portfolio. Another characteristic of the market is that it is a precursor for many other areas. One example is the high importance of price comparison sites. About two-thirds of all new business in the UK is sold via such sites. That is far more than in other markets for private motor business.

The impact of price comparison sites Topics: When it is all about the price, how do companies stand out in such an environment? Ayrey: The consumer is indeed basically looking for the cheapest price. There is very little difference in cover between insurers. Policy covers are pretty much standard. From our clients’ perspective, the price comparison engines have changed the rating environment tremendously. If there is any problem in their rating structure, it will get exploited. Insurers have had to get used to this very tough environment and some companies have coped better than others. A number of companies have been quite impressive in the way

About two-thirds of all new business in the UK is sold via price comparison sites. That is far more than in other markets for private motor business. Klaus Wilkens

they have operated on price comparison websites and have quickly adapted to the new dynamics. Wilkens: UK policyholders are more price-sensitive than customers in other markets. An insurance com pany’s brand does not seem to be as important as in Germany or some other European markets. The UK customer tends to switch carriers more quickly and the risk carrier (i.e. the insurance company) is often not well known. Interestingly, the price comparison sites have been very successful in developing their own brand and are often perceived as the risk carrier rather than as a pure distribution channel. Customers in the UK trust a price comparison brand more than a well-known insurance company? Ayrey: To be fair, the price comparison engines have been very successful in establishing their brands. Customers in the UK do seem to trust them a lot. But on price comparison websites there are not only insurers: you also have brokers selling insurance products and other affinity schemes using supermarkets’ brands and those of other retail outlets partnering with an insurer. Often customers are not even aware that they have bought a policy from a particular insurer, but rather identify with the brand selling the policy. With this environment, the market is certainly very competitive, and it is difficult for companies to make a profit. But fortunately some of them do.

Wilkens: Despite the fact that the market average is hardly profitable, the spread between the various individual companies is wide. Some companies are constantly outperforming the market; they are sustainably profitable, even during softmarket phases. We are following the market closely to see who is successful and who will be profitable in the future; who we can work with to provide reinsurance capacity and support. Ayrey: The other option is that we work with an underperformer and help them correct their account. In both cases, it is important that we know what the performance of the market is, the direction it is heading and how the individual insurer compares to the market performance. Of course, it is much easier if we start partnerships at a time when the market is slightly more benign than normal. So if we are going into a phase where results are improving, it is a much better time for us than when results are deteriorating. We spend a lot of time looking at the cycle, collecting information from the market and feeding those findings into our projections.


27

Motor market

PPO: Risk of change increasing What other trends do you currently see in the UK? Ayrey: Price comparison websites are clearly driving the premiums. The premiums respond to a number of factors. Ordinarily, you would think that claims inflation should be the biggest driver behind them. Recent legal changes have led to negative claims inflation. However, long term it has to be assumed that there will be continual upwards pressure on the average claims cost. This is particularly due to bodily injury claims, which also have been influenced by a rising number of small injury claims and an increased number of claimants per claim. The other factor is frequency, and in that respect the UK is, similar to most western European markets, following a slightly downward trend. In recent years, we have had the issue of an increased number of small injury claims, which was driven by claims farming. Before then, we suffered from credit hire claims, which extensively affected the cost of third-party property damage claims. It was seen that the end customer was paying a lot of money because of these developments. As a result, there has been a desire both in the insurance markets and at governmental level to see some sort of action against these trends. The reforms in the upcoming Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) are designed to tackle some of these developments. It is expected that the reform will deliver claims savings; insurers have already responded to it in many cases by cutting their premiums. The exact impacts remain to be seen, but there are various estimates in the market. The range seems to be from 0% to nearly 10% savings. We project a fairly cautious 3–4% of savings.

Wilkens: With all these changes, it is quite a challenge to come up with an accurate projection about the market’s future development. Another very important topic in the UK is periodical payment orders (PPOs), the annuity-based indemnification of a bodily injury. In the UK, this is a relatively new concept, but it is quite well established in other Continental European markets. For the risk carrier, PPOs result in an increasing risk of change, particularly for the reinsurer participating in a loss on a nonproportional basis. PPOs will increase the volatility of results. Currently, there is a lot of uncertainty in the market about future developments in terms of frequency and also about the severity of those cases. Finally, besides these changes in the legal and regulatory environment, you have to consider the current economic climate with low interest rates. The investment income of insurers and reinsurers is at a very low level and is forcing the players to focus on technical profits.

OGDEN rate: High financial impact Are there other developments? Wilkens: Another issue in the UK market is the pending decision on the OGDEN rate – the discount factor applied for any bodily injury claim which is not indemnified by a periodical payment order but on a lumpsum basis. The indemnifiable costs like healthcare and loss of income are discounted to the current date. The factor also reflects the interest rate in the market at the time. The OGDEN rate has been under review for some years now. While currently there are no concrete indications for an adjustment, this could change in the future. If the OGDEN rate is reduced, this could have quite a heavy financial impact on the entire industry, because all unsettled bodily injury claims would be affected. Ayrey: When acting in such an environment, every risk carrier should be very well informed about all the drivers and carefully choose its strategy.

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For a reinsurer in general, it is important to identify those cedants that can be supported. There are a number of factors that come into it: certainly the technical rates, but also soft factors such as profile changes, and how profile changes have an impact on the frequency of large claims. Wilkens: The UK motor reinsurance market is somewhat dislocated. Before the introduction of the PPO concept, the losses were settled more quickly and hence carried a much lower risk of change. This has now changed, and the new environment particularly affects excess of loss reinsurance. As a result, reinsurance prices have increased, and the market capacity for this segment has decreased quite significantly. This reaction is also fuelled by reserve increases reported by some reinsurers. The situation calls for new ideas to provide the protection needed by the insurance companies. How do you support your clients in such a situation? Wilkens: As a reinsurer, we provide products and services in various forms to our clients. On a very selective basis, we provide excess of loss covers, which help by reducing the volatility of the insurers’ results. And we are active in developing alternative product structures. Here we benefit from our experience as a leading global reinsurer. We are also seeing an increase in demand for reinsurance as a capital management instrument, which requires a different perspective. In this case, the reinsurance capacity is an integral part of the business model, reducing the client’s capital requirements. Less diversified and smaller companies have a particular need for this support, and the diversified balance sheet of a big reinsurer like Munich Re can be very helpful.

Motor market

The experience that we gain in the UK can be of value elsewhere in the world. Equally, we can take lessons from other markets and apply them in the UK. Mike Ayrey

Telematics – A game changer for the industry? How will telematics change the game? Ayrey: Telematics brings a host of additional data into play, at both the underwriting and the claims handling stages. It is still a niche product, because the cost of fitting the box is still quite high. Right now, it would not make sense to sell a telematics product in client segments with low premiums. But with costs coming down and the possibility of using other devices such as smartphones to collect data, these niches will grow. The gender directive gave telematics insurance products an added push. Since insurers are no longer able to differentiate by gender in their rating – and previously gender had quite an influence on the premium charged – telematics offers the opportunity to see how someone really drives. Hence, you get products now that are designed to reward better drivers, regardless of their gender. The likelihood is that, certainly at the younger end, more of the better drivers will be female. Wilkens: Prior to this, the insurance industry had only rated a motor risk on the basis of indirect criteria, such as gender, age and area of residence. There is a huge potential in using all the data collected with the help of telematics technology. Companies now have the IT capacity to collect and to explore data, using real-time data as a direct rating criterion.

The controversial aspect of this is the privacy of the individuals – certainly a cultural issue. In the UK, the interest in telematics insurance is currently higher than in other markets. The customer’s decision to opt for a telematics policy appears to be a reliable indicator for a better risk. The better customers think they drive, the more relaxed they should be about the transparency they allow with a box in their car. Ayrey: When it was introduced some years ago, companies tended to focus on pay-as-you-drive, which was not really successful because most people preferred to know the premium that they were going to be paying over the year. Recent evidence also suggests that curfews and other restrictions are not popular either. The focus now is more on how the customer drives, to select the better drivers through telematics.

But it will be interesting to find out if telematics insurance can also help people to improve their driving. In the early stages, people who want a box are likely to be better drivers. The question is: as the decision becomes more marginal and if there is a big premium saving, will there be more people pushed to consider telematics ? And if so, it will be interesting to see whether you can encourage people to drive more safely and hence reduce claims.


29

Motor market

The situation calls for new ideas to provide the protection needed by the insurance companies. Klaus Wilkens

How will telematics affect claims management? Wilkens: The impact on claims management is another interesting de velopment to consider. From a policyholder’s perspective, the box can be helpful in an emergency call. In the event of an accident, an immediate automatic notification can be sent to the insurer, who can then initiate instant emergency measures. From an insurer’s perspective, tele matics can support fraud detection and help identify when, where and how the accident happened. Not all data will be usable, but some will be useful for processing the claim and indeed for future underwriting. Ayrey: In “ordinary” claims handling, telematics could be helpful as well. As an insurer of a telematics risk, you have a very clear indication as to where the accident happened and the driver’s response immediately before the accident. Hopefully, that would mean that if you identify that your policyholder was at fault, then you can settle the claim quickly. That’s better in terms of service. Equally, if you know that your policyholder is not at fault, it will give you more arguments for countering a claim from the third-party insurer.

The influence of big data Big data is about IT. Are bigger, established companies with large legacy systems ready for telematics ? Or is it just for start-ups, starting from scratch? Ayrey: In the UK, all large players are at the very least piloting or looking at telematics. Very few companies are not considering it at all. There will be companies that do it well and companies that do it less well. The data brings opportunities, but there will be a lot of companies that will have a problem coping with this data and be unable to take decisions based on it. This is something that we need to take into account, because we always find that those companies that have better data and, more importantly, are able to use that data effectively are likely to outperform the market. How can Munich Re assist in evaluating big data? Ayrey: We can assist with our know ledge and experience. If a client is committed to doing something and is building a team, then there will be areas in which we can help their thinking. We see ourselves as a sounding board. Wilkens: You have to have the right process in place in order to learn from an ever-increasing amount of data, by collecting new types of data and exploiting them in identifying reliable correlations. We can provide support in terms of the methodology and how to approach such challenges. This can be helpful in tapping into unknown areas.

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Long-term trends: When cars talk to each other What other long-term trends do you see? Ayrey: The talk is that at some point there will be self-driving cars that will not cause any accidents. So if that happens, I will be out of a job! However, I think many years will pass before we get there, if at all. There will be some more development in that area – in parking, for example. There are already cars that park themselves. That would save a number of accidents. All these developments will have an influence on the insured premium, because if claims are reduced, then logically the insurance premium must also come down. Personally, I do not believe that motor insurance will no longer be required, because many people enjoy driving actively and do not want to be driven around. Wilkens: When searching for longterm trends in motor insurance, one should look at mobility as a megatrend and the various inherent challenges and questions. Let’s assume the future will bring a self-driving culture and that the importance of motor insurance might diminish. We will still have to deal with the challenge of a potential faulty design of safety devices. This could result in totally different claims scenarios with a significant impact on the market structure, e.g. shifting exposures from motor insurance to product liability insurance.

Motor market

How clients worldwide can benefit from Munich Re’s experience in the UK As a long-term reinsurance partner, you need to understand markets and the demands of market players. How can clients worldwide benefit from that? Ayrey: The experience that we gain in the UK can be of value elsewhere in the world. Equally, we can take lessons from other markets and apply them in the UK. One example is PPOs. This is an area where Munich Re has been able to help with the debate based on our experience in other markets. It has been helpful for our clients to learn about trends that happen elsewhere.

What can you offer clients? Wilkens: We have an experienced team in the UK that understands the client’s needs and demands. The client is at the centre of all our work. Thanks to our vast experience and our enormous skill-set we are able to develop tailored solutions and create sustainable partnerships. This is all supported by the financial security of Munich Re. Ayrey: For some companies, the consulting services that we are able to offer may be of interest. Another important factor within the UK is our claims team in London. They have an unparalleled knowledge regarding large claims, and a lot of our clients find this to be invaluable.

Wilkens: Because of our experience with PPO in some Continental European markets, we were able not only to have a theoretical discussion about the potential development of PPOs in the UK, but we were also able to outline how the market can develop if it takes the same route as in the other markets. There are other areas where the UK is at the forefront of development. Take price comparison engines: it is a global development you can’t stop; more policies will be sold online. Other markets can learn from the experience gained in the UK. Ayrey: Of course, you have to consider each market in its own right. There will be cultural differences and legislative differences between the markets. One big difference between the UK and the German market, for example, is that in Germany most customers renew their policies on 1 January. This presents very different marketing and administrative challenges, and perhaps influences the distribution chain. Another example comes in the performance of young male drivers. In the UK, they are markedly worse than young female drivers. This difference is usually apparent elsewhere, too, but it isn’t always exactly the same level in other markets. You can take the lessons you have learned, but you need to combine them with local knowledge of other markets.

OUR EXPERTS Klaus Wilkens, Executive Client Manager, has been responsible for UK and Irish clients for five years. Prior to this, he had several underwriting roles. [email protected] Mike Ayrey, Senior Consultant with Munich Re’s Motor Consulting Unit, has been working at Munich Re for 12 years. Before joining Munich Re, he spent over 20 years working for motor primary insurers. [email protected]


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Big Data

An immense challenge The amount of data worldwide is exploding. Analysing these data could improve many business processes in the insurance industry. But how can we best take advantage of these opportunities?

Fabian Winter

The World Wide Web is growing at a phenomenal rate as people and machines constantly feed it with data. Whereas around 0.1 zettabytes (ZB) of data had been produced in the period leading up to 2005, the amount of data available globally could well reach around 8 ZB in 2015. And forecasts predict that it could increase fivefold to 40 ZB by 2020. This immense mountain of data is now generally referred to as “big data” (see Fig. 1). Many companies, including insurers, pursue a busi ness model that would simply not be possible without thorough analysis of the underlying facts, i.e. data. However, the volume of external data now far exceeds the amount captured within a company. These data stem from a whole variety of sources, such as com ments on social media or video clips, and are largely unstructured. The big challenge for companies is to filter out the relevant data, give them a structure and make them usable. This can be achieved with the aid of “image/video mining” and “content analytics” – a method which uses a linguistic search to identify empirical correlations between comments on internet forums, social media platforms and a company’s own database, for instance. Information on customers’ needs can be obtained in this way. The results can

then serve as the basis for targeted sales or service activities. Clearly, the data protection laws in each respective jurisdiction need to be observed at all times (see interview on pp. 39/40). Analysis is key The analysis of data is key, as real benefit can only be derived if the immense mountain of data can be ana lysed and the various sources combined. At present, that is only possible for a small portion of the infor mation available. Yet impressive results have already been achieved in some sectors: in the mail-order business, for instance, inventory management has been optimised by analysing the order data – around 300 million data records per week – resulting in savings worth tens of millions. Banks and credit card firms also trawl through data to detect patterns of criminal behaviour so that they can identify fraudulent transactions – a process that is of great advantage to their customers. As with the prod uct recommendations shown when buying a book or similar item, clients normally welcome this transpar ency of data. However, they tend to be more cautious in an insurance context, but attitudes do vary: in the United States, for instance, all or at least some data are openly presented in the vast majority of Facebook profiles, as compared to roughly half in Germany.

Corridor in the Pionen Data Center in Stockholm, Sweden, which is housed in a former nuclear shelter. Munich Re Topics Magazine 1/2015

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Big Data Fig. 1: Characteristics of big data

Volume

Quantity

Virality

Velocity

Rate of propagation

Viscosity Variety of sources

Rate of creation

Variety

Structural variety

Big data can be characterised by at least three Vs: their volume, i.e. the sheer number of data, their variety and the velocity at which they are gen erated. Source: Munich Re

Big data can support the underwriting of business interruption risks Alexander Schmidl, Senior Underwriter for global facultative industrial risks, discusses a pilot project for analysing supply chains with the aid of big data.

Topics: You head one of five pilot pro jects being conducted by Munich Re to find out how big data can optimise risk assessment and pricing. How did this come about? Alexander Schmidl: We, the big data teams in the business units, began in spring 2014 to compile all the appli cations which we thought could improve business. Initially, we were looking at almost 78 cases. Out of this total, 37 are now being imple mented and five were picked as pilot cases, which were launched in the autumn. Our “supply chain case” analyses supply chains and aims to more accurately identify interdepend encies between global industries. What is behind this project? Manufacturers of electronics and other hi-tech companies no longer produce their own components, but

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have instead outsourced this almost completely to external firms. And while companies have gone to great efforts to make their supply chains more transparent since the 2011 earthquakes and floods in Japan and Thailand, the information available to us for assessing interdependency and contingent business interruption risks is still usually not enough to make an adequate evaluation of the effects of reciprocal influences in the supply chains. Do the policyholders not have this information? Unfortunately, the policyholders themselves are often not in posses sion of the data we need, or they are prevented from disclosing informa tion for competitive reasons or on account of confidentiality agree ments, for instance in the case of patents. We aim to fill these gaps

as far as possible with the aid of big data and thus reduce our under writing uncertainty. Can you describe the scenario in more detail? Our test scenario aims to make the supply chains of hi-tech electronic industry risks more transparent, such as those of smartphone manu facturers. The interdependencies in this sector are often extreme: in many cases, a single company pro duces one special component which it then supplies to several OEMs (original equipment manufacturers). If a supplier suffers a disruption in supply, for any reason whatsoever, this could affect production at a number of OEMs. Our aim is there fore to identify critical products and suppliers, as well as such interde pendent relationships. Ideally, if we can improve our understanding

Big Data The basic statutory conditions also vary from one country to another; the legal frameworks for potential analyses are currently being discussed throughout the world (see pp. 39/40). It remains to be seen whether and to what extent customers will be pre pared, in the long term, to disclose health data via iPhone health tracking, for example; this will no doubt also depend on whether or not they see a personal advantage for themselves. Business analytics is the key to structuring and using data However, the immense data volumes are only of value to a company if the right conclusions can be drawn and the right actions derived from all this knowledge. The aim is to identify previously unknown patterns,

of these networks, we will ultimately know how high our policy holders’ business interruption risks may be. What sort of information do you analyse? We want to use information that is already freely available on the inter net, but not structured. The trick is to pick out the relevant data, scruti nise them more closely and link them with our own internal data. A technical challenge. Indeed. In order to trawl through these vast volumes of data, you need to develop intelligent knowledge models and special search engines that optimise themselves over time. The plausibility of the results natu rally has to be validated in detail. When are the first results expected? The projects are scheduled to run until the second quarter of 2015, i.e. a little more than a year after the first interdisciplinary kick-off including the orientation phase. Basically, however, it is a feasibility study. First of all, we must see what can really be achieved and what cannot, and which solutions could be imple mented in the long term. The ratio of costs and benefits must naturally also be appropriate. If a scenario

to subdivide the community of policyholders into smaller and more homogeneous groups, and to assess risks even more accurately with the aid of additional data. Improvements in data analysis and incomparably larger data volumes also make it more likely that previously uninsurable risks can be insured, thus creating new business opportunities. The variety of potential applications is enormous (see Fig. 2). Modern data analysis methods are essential, as rele vant information can only be filtered out of the vast volume of data with the help of business analytics. Examples of new statistical models include proce dures for reducing data dimensions so that a small number of new parameters can be calculated on the basis of several hundred pieces of information, using most of the available data; other possibilities include

does prove to be impossible or un economical, it is discarded and we move on to another case. Which other industries could be examined in this way? We have defined three streams with our IT consultants. The first refers to the scenario outlined above. The second refers to cloud services and their providers – here too, there is a considerable accumulation risk should a provider fail or be attacked by hackers. These dependencies must be made more transparent in our risk assessment. The third stream scenario relates to both the oil & gas industry and the pharma ceuticals industry. Both are so highly specialised that it is not always pos sible to obtain the full picture as regards important delivery streams and their values, so analysing the data available on the web could also prove useful here.

unprofitable business, we estimate that this could yield a potential equivalent to revenue in the order of several tens of millions. How will our clients benefit from these activities? We will naturally share the findings obtained from our analyses with them. The better the data, the more accurate we can make our risk assessment – and theirs, too. This, in turn, will enhance the accuracy of our pricing. What’s more, we can position ourselves as a premium risk and solution partner, because we are better able to understand the com plexity of the issue and offer highly customised solutions – a clear com petitive advantage for our clients and for us.

What added business value do you expect, if all goes according to plan? If all four scenarios can be imple mented successfully, i.e. if risk selec tion, capacity setting and pricing in both facultative and treaty business, as well as accumulation control in treaty business, can indeed be com prehensively improved through big-data-based underwriting, and if we can also avoid losses due to


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Big Data complex trees, modern regression methods or neural networks that enable individual events from the past to be explained using correlation analyses, and to pre dict their recurrence in the future. It is these individualised forecasts using “predictive modelling” or “predictive analytics” that result in opportunities for improved real-time control of indi vidual processes. In sales, for example, the cross-selling probability of an existing client can be predicted. This is then con solidated into an individual business case for that client, together with the forecast of the best possible sales channel, the acquisition costs involved and the expected revenues for the new product. The optimum procedure in economic terms is then determined on this basis for each client. Using new analytical models such as these requires the relevant know-how. Yet statistical skills are in short supply in the labour market and the few resources available are highly sought after. In the Anglo-Saxon world, the increased demand was noted early on and opportunities were provided for university education in this field. In Germany, however, this was not the case and demand for statistics know-how now already exceeds the supply available on the labour market. In response to this situation, Munich Re has been hosting an annual information day for statistics students in collaboration with LMU Munich since 2011.

Touch display in a hi-tech plant: Even machines now generate huge volumes of data and feed them into the web.

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Big data and business analytics in property and casualty insurance Applications in property and casualty insurance are numerous and include web-based analysis of supply chains (see pp. 34/35). When modelling crop yields for insurance, for example, country-specific data of georeferenced fields are collated with weather and satellite data in order to calculate corresponding risk scenarios based on agronomic knowledge. In future, data on personal driving styles (key word: “connected car”) will also play a major part when developing new motor insurance tariffs (see the interview on p. 26). Using statistical methods to systematically observe global data streams can also help in the timely detec tion of potentially relevant losses. This information can then be checked against a company’s own port folio, serving as a kind of early-warning system and enabling loss minimisation measures to be taken at an early stage.

Big Data Fig. 2: Potential applications in the insurance industry

Pricing and product development – Verifying the pricing of existing products – Pricing new products – Product development based on social media data

Sales and marketing – Winning new clients – Identification of cross-selling and up-selling potentials – Preventing termination

Underwriting

Claims management

– Improving and automating underwriting

– Medical quality control

– Process optimisation

– Identifying opportunities for winning back clients – Calculation of client value

– Designing disease management programmes – Improving detection of fraud – Optimising claims handling

– Optimisation of sales channels

The opportunities presented by big data encompass the complete value chain. Major increases in information, for instance, can optimise product

Big data and business analytics in health insurance Strictly speaking, big data has already played a key role in many business processes for years. When opti mising sales and marketing measures, external infor mation is linked with data available internally in a CRM database. Using sophisticated statistical mod els, sales campaigns are then launched to acquire new clients and combat premium erosion. As the fol lowing examples show, new applications arise in claims management, healthcare management, risk assessment, product development and process opti misation. However, they may vary depending on the statutory and regulatory market environment. Claims management: Detecting fraud and abuse The financial risks and opportunities of automatic processing and improvements in fraud and abuse detection have been topics of discussion for some time. The development of rule-based medical assess ment systems enables automatic claims handling in real time, reducing assessment costs. Rule-based systems, however, require considerable maintenance, and they can only partially recognise systematic behaviour across a large number of invoices. In 2011, Munich Re began complementing the rule-based pro cess with analytical procedures in medical insurance. Every new claim is assigned a fraud or abuse proba

development, improve the detection of fraud and speed up claims handling.

Source: Munich Re

bility (“score”). Depending on the score, a decision is then made on whether to have the claim investigated more closely by a fraud department. Similar models are also used in motor insurance. Disease management programmes: Improving patient selection and measuring success An increasing number of healthcare or disease man agement programmes (DMPs) are being offered spe cifically for common diseases such as diabetes, back pain or chronic cardiac insufficiency. The objective of DMPs is to improve the quality of care received by those affected by such ailments and to reduce insur ance companies’ costs. On the one hand, business analytics helps insurance companies to select pro gramme participants by evaluating numerous patient data, such as real-time weight and blood pressure. At the same time, it allows for a valid and undistorted measurement of the economic effects. To this end, Munich Re has developed an analytical procedure for improving patient selection, which was presented in the journal “Health Care Management Science”. It adds a regression-based component to the classic rule-based approaches, thus permitting individual estimates of the subsequent costs.


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Big Data

40,000,000,000,000,000,000,000 Zettabyte

Exabyte

Incredibly large numbers: 43 zettabytes of data will probably be generated by 2020 – 300 times the volume in 2005.

Petabyte

Terabyte

Megabyte

Kilobyte

The New York Stock Exchange alone generates 1 terabyte of data on every single trading day.

Product development: Mass individualisation with big data In product development too, the combination of internal and external data plays a key role in design ing customised products. Intelligent use of social media data through content analytics, i.e. the analysis of unstructured text and filtering of core data, increases knowledge of consumer behaviour. These data, which can be extracted free of charge, are then combined with internal data on the basis of a statistical similarity term. This provides information on demand behaviour and the insurability of existing and poten tial clients. Policyholders are divided into homogene ous population groups that are, however, as hetero geneous as possible with regard to their interest in insurance products. Possible demand for new insur ance products and the preferred sales channels are then determined for each group/cluster. This paves the way for perfectly customised offers. Process optimisation: Improved management of claims and new business processes In underwriting and claims management, business analytics offers the possibility of optimisation. Employed in the past in what was really a more quali tative basis, techniques such as Six Sigma can make a quantitative contribution to process improvements by using more complex statistical modelling approaches. As a result of the high level of manpower required in underwriting and claims management, business ana lytics offers opportunities for major improvements, particularly in this field. In claims settlement, for example, the trade-off in each individual loss between operational and medical costs or possible savings in treatment, which is determined by the accuracy of the inspection, can be calculated. While the operating costs based on the inspection period are fairly simple to calculate, a complex, data-based approach is required for the correlation with medical savings. Irrespective of its complexity and the probabilities of fraud and abuse already discussed, the optimal inspection effort can be defined for each claim and the overall process therefore made more efficient. 38

Gigabyte


Byte

Source: IBM

Business analytics: Data-protection compliant and discrimination-free Statistical procedures allow large data volumes to be filtered and evaluated automatically. It goes without saying that the applicable (data protection) laws are strictly observed and there is no inadmissible discrim ination of individual groups of people. The statutory rules governing the use of scoring models have been revised on account of possible discrimination, such as when granting loans. Every insurer needs a big data and analytics strategy The enormous increase in additional data can prove to be a decisive competitive advantage. Pricing, underwriting, claims management and client service can in all cases be optimised. A purposeful combina tion of big data and business/predictive analytics helps to identify and predict individual risks, client behaviour and clients’ needs more precisely, so that customised insurance products can subsequently be offered. It is therefore imperative for insurance com panies of every size to define their own individual big data strategy.

Our Expert Fabian Winter has a degree in statistics and works on big data analytics in Munich Health. [email protected]

BIG Data

Caution, data protection! The desire of many companies to use new opportunities for their business can easily clash with the personal rights of individuals. Companies must be wise to the issues involved if they don’t want legal constraints to scupper all their efforts.

Topics: Data protection has been hotly debated since the NSA affair. Have people in Germany and Europe become more aware of the subject? Wolfgang Mörlein: People in Ger many have been aware of the subject since the 1980s, when discussion raged over whether or not the census was admissible. Considering the immense volume of data today, how ever, people are more worried about becoming totally “transparent”. Despite their volume and dispersion, it is now relatively easy to correlate data to an individual person. A fairly complete picture of a person is quickly drawn. This is why the laws in Europe are relatively strict. What are the principal regulations? In the European Union, Directive 95/46/EC has governed the process ing of personal data since 1995. It lays down standards which must be maintained in all member states. As a rule, personal data may only be pro cessed if the person concerned has explicitly approved such processing for a specific purpose or if this is stip ulated by law. In the coming years, the Directive is to be replaced by a General Data Protection Regulation, which is currently being negotiated at European level. Its purpose is to modernise the rules governing data protection and to bring them in line with today’s challenges, such as those associated with use of the internet. It will no doubt introduce stricter rules in certain areas.

What about the conditions in other countries? The United States, for example, is taking a different approach. Atten tion there focuses mainly on domes tic privacy, while professional data are excluded from protection alto gether. Many countries in Asia, and South Africa, where a new data pro tection law recently came into force, are tending to follow the European example. What does the strict European regulation now mean for big data projects in the insurance industry? The processing of most personal data which are publicly accessible on the internet is permitted at present, at least in Germany. That at least is the case as long as we may assume that the details have been actively disclosed by the person concerned and not posted against his wishes by a third party on social networks, for example embarrassing photos. EU law may well become decidedly more restrictive here in future. Some of the data which we receive from our cedants concerning their policyholders or claimants in cases of bodily injury are extremely sensitive, particularly when medical details are involved. In addition, they are exclu sively provided for a specific purpose, namely processing a claim. If we wish to use them for other purposes, this is simply not permitted. We must always be aware of such limits in order to remain within the bounds of

the law. In some cases, the compila tion of data for new technical sys tems and products can be achieved with the special consent of the party concerned, as in the case of the black box in motor insurance. In many cases, however, this remains a diffi cult matter, particularly for us as a reinsurer, as we are normally not in direct contact with the persons affected. So how can you conduct an analysis despite these constraints? Anonymisation, i.e. the omission of such personal particulars as name and date of birth, is one conceivable method. Data protection laws do not apply in the case of anonymous data. However, care must be taken to ensure that the combination of socio graphic data does not permit any clear conclusions to be drawn about individuals. Take, for instance, the combination of profession and post code. In a sparsely populated region, there may only be one dentist or other professional whose name can then be easily established from other sources. The larger the volume of dif ferent data – and this brings us back to big data – the greater the probabil ity that a specific person can be iden tified. However, anonymous data cannot be used for all analyses. The informative nature of the findings may suffer or be lost completely if a trend is to be observed over a longer period of time, as in the case of an illness.


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BIG Data

Wolfgang Mörlein is a lawyer and has been Chief Data Protection Officer at Munich Re for many years. Monitoring the latest developments in European data protection legislation is one of his primary activities.

In this case, I need to know which data items belong together and con sequently relate to one person. I do not, however, need to know who exactly that person is. Pseudonymi sation may help here. Which rules apply for pseudonymisation? In this case, I could use a consecutive number as the classifying criterion instead of the name. This procedure is applied when we analyse cedants’ portfolios for them from a certain point of view. The insurer replaces the name of the policyholder with a number. For us, these data are anonymous, provided that we do not have access to the attribution code, i.e. we do not know which name cor responds to which number. However, some regulatory authorities take a more critical view, based on the very existence of the code. In connection with so-called dynamic IP addresses, the European Court of Justice (ECJ) is expected to issue a landmark deci sion on this controversial issue before long. As planned at present, the new European regulations will follow the opinion of the regulatory authorities and generally consider pseudonymised data to be personal if just one person is in possession of the attribution code.

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What would such a change mean for the insurers? It would be extremely problematical. Particularly in the case of medical data, every single person concerned would explicitly have to give their consent before an analysis could be undertaken. The people concerned have no particular interest in such a procedure and above all, they are under no obligation to cooperate. At best, no more than a very small per centage would presumably give the insurer their consent. The resultant incomplete data base would then be of little use for an analysis. Does this mean that the new European regulation is in need of improvement? Absolutely. Munich Re and the Asso ciation of German Insurers (GDV) have already recognised the impor tance of this. We are therefore lobby ing to obtain a secure legal basis ensuring that (re)insurers can actu ally make use of all the personal data, including medical data, which they require for their work. For example, it is absolutely essential that the appraisals for pricing and risk man agement be based on statistical empirical values. As basic data, pseudonymised data at the very least are required in the relevant areas.

The new regulation must explicitly permit such use of the data and must not make their use contingent on the consent of the parties concerned in each individual case. If not, the informative value of the statistics would also be eliminated. In short: the new data protection provisions must strike an even finer balance between the legitimate protection of personal data and the companies’ need to process such data.

LITERATURE

Mass torts in Europe – Cases and Reflections Ina Ebert

Mass torts are a phenomenon which used to be associated primarily with the US legal system. However, in recent years Europe has also begun witnessing lawsuits filed by hundreds or even thousands of injured parties against the same defendant. The traditional European legal systems were never set up to deal with this type of litigation, however. This study by the Vienna-based European Centre of Tort and Insurance Law (Ectil) shows how the various European legal systems have been attempting to come to terms with this new challenge, and with what level of success. The study follows two approaches in order to deal adequately with both theory and practice. It first presents the relevant legal frameworks and their recent developments theoretically: what measures have been introduced to aggregate claims and make it easier for courts to cope with such mass litigation? How are the questions of what national law applies, and which courts have jurisdiction, determined ? The second approach is to present nine case studies from legal practitioners in various European jurisdictions, to illustrate how this “law in the books” is applied in real life. The cases under study range from compensation for victims of mass accidents (e.g. the Eschede or Costa Concordia disasters) to initial experience with class actions (against Italian banks), and model case proceedings brought by shareholders (Deutsche Telekom). These examples demonstrate the types of mass tort scenario that Europe has been having to deal with for some time now. The reforms in Europe are continuing: in 2013 the EU issued recommendations to its member states encouraging them to introduce collective redress mechanisms; in 2014 both France and Belgium introduced class action procedures. Anyone interested in the potential consequences for European markets will find that the Ectil study provides a good overview of the experience with mass torts in Europe to date.

Willem H van Boom/ Gerhard Wagner (eds): “Mass Torts in Europe – Cases and Reflections” De Gruyter


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Marine

We can achieve most in the growth markets John C. Wilkinson spoke with Topics about the objectives of Munich Re’s restructured marine business and the advantages it offers clients.

Side by side – Know-how and capital are the key factors in the marine market.

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Marine

Topics: What were the main reasons for restructuring marine business? Wilkinson: We all know just how tough competition is in the marine market. Traditionally, Munich Re’s marine reinsurance experts were spread around the company in their respective regional divisions. As you can imagine, this was hardly the ideal structure to network our tremendous know-how in all subclasses and optimally service the market. Consequently, in autumn 2013 the Board decided to bring its marine expertise under one roof with the objective of enhancing underwriting excellence, improving service for clients and driving forward product development.

Where is this reorientation most evident? We have spent a great deal of time in recent months considering the direction we should be taking. Despite our global orientation, we nevertheless want to operate locally in order to be closer to our clients. We have therefore decided to set up two large underwriting units outside Munich, one in Asia-Pacific and one in North America. So you are focusing strongly on Asia?

Technical know-how is now the key structural feature. Overall, this has made Munich Re’s marine operations more akin to a centre of competence with a market- and client-oriented organisational structure. It reinforces our underwriting excellence and improves the quality of service for our clients. In addition, we can now define and thus manage our risk appetite and our capital deployment more holistically and effectively.

Yes. The Asia-Pacific region has tremendous potential both in overall economic terms and for the insurance industry. Many Asian markets have traditionally been driven by exports, but domestic consumption is now steadily increasing among a growing middle class – accompanied by an increased need to safe guard their new-found affluence. What’s more, nine of the world’s ten biggest ports are located in Asia, including six in China alone. To meet that growth, we need to be present locally and to proactively support our clients with innovative solutions. This is where we can achieve most with our expertise; together with our cedants, we can launch products that are still lacking in these growth markets.

How many people throughout the company make up the Global Marine Partnership?

Your own knowledge of the Asian region is of course considerable.

There are roughly 70 of us here in Munich, with a further 500 or so spread around the world.

These are markets close to my heart, as I lived and worked there for many years. Before assuming my new role, I was responsible for Munich Re’s business in Greater China for 13 years, I also worked for a primary insurer in Southeast Asia and Australia for six years. I believe Munich Re has a great deal to offer in the growth markets. We have a long tradition in Asia and a profound understanding of the specifics of these local markets.

What has changed as a result?

These also include the Watkins staff and their global network. What are the advantages of such collaboration for our primary insurance clients? The advantage of combining primary insurance and reinsurance know-how in a single unit is enormous. For example, to be successful in innovation, it helps to be close to the end client. In addition to its proximity to clients, Watkins has enormous expertise in such special fields as terrorism, war risks, offshore energy and fine art insurance. As reinsurers, we can make use of this know-how to develop suitable solutions for our clients. I think the special lines have been adopting a different approach for some time now and the market is increasingly evolving into a capital and know-how market. Munich Re can offer both.


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Marine John C. Wilkinson assumed respon sibility for Munich Re’s reorganised marine business in July 2014. Before that, he was responsible for the company’s business in Greater China.

You mentioned your experience in primary insurance: does that help you in your new job? It is of course very useful to know your way around both ends of the business. But the best thing about my new job is that I can make use of my professional experience to the full extent. Particularly the early years at Lloyd’s of London helped me to gain some understanding of how a syndicate works. And viewing the business from different vantages heightens your awareness of the opportunities on offer. Meaning that all concerned must work towards the same goal ? Yes. If we are to provide effective protection from the risks in our increasingly complex world, we must all collaborate in a spirit of partnership. This also played an important part in our choice of the name “Global Marine Partnership”: we want to show that we are a community and at the same time express our scope and competence. What’s more, we want a spirit of partnership to pervade all our dealings – in respect of both the collaboration in our organisation and our relations with clients. We intend to nurture every facet of this partnership. What was the biggest challenge in the latest round of renewals ? We knew that we were operating in a soft market and did not have to fundamentally change our basic strategy in the first joint round of renewals. In line with our cycle management strategy and our client segmentation, we have forgone business in areas which, in our

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opinion, yield unduly low prices, such as the highly volatile offshore energy business. However, we have the flexibility, nimbleness and market penetration to move back into attractive segments once prices in marine and energy business return to a suitable level. Which lines of business stand out particularly? Hull business is a striking negative example: IUMI statistics indicate that it has been unprofitable for the past 18 years. Our risk appetite is therefore tradi tionally very low in this line and we only write it in certain regions. On the other hand, we spontaneously took advantage of an opportunity in the subclass “aviation war” in 2014. Due to the special expertise available there, this is traditionally written in the marine market at Lloyd’s of London. After several lossfree years, a number of major losses in the previous year have caused prices to pick up strongly again. Where do you see Munich Re’s particular strength? We especially excel in energy business: the individual values involved for new production facilities and conveying systems are soaring in this domain. At the same time, they are subject to the risk of considerable nat cat accumulation. Safeguarding this risk calls for a great deal of expertise in risk assessment, as well as in modelling natural hazards – along with the ability to make considerable capacities available.

Marine

How does technical progress in general influence marine business?

Are present efforts in respect of prevention not good enough?

The influence is immense. What makes marine business so interesting is its diversity. And that is why it is influenced by so many different developments. The fact that insured values are constantly moving poses a fundamental challenge and makes effective accumulation control more difficult. The ships of the future will have a capacity of up to 18,000 containers – and their growth is unlikely to stop there. Assuming a value of €50,000 to €70,000 per container, the sums involved are astronomical. And when they are all located side by side in gigantic ports, we have an immense concentration of values. GPS tracking, for instance, could help us to control accumulation in the future. We could be much more precise in our pricing if we always knew exactly which risk was located where and when.

I think awareness of safety and risk management has only really increased noticeably in the last few years, particularly in shipping, and can definitely be improved further. Just think of the Costa Concordia: how could it happen that one man on a ship decided to depart from the usual, safe route? When it comes to safety precautions and decision-making structures, shipping can still learn a great deal from cockpit management in aviation.

Does big data also play a part? Yes, of course. We have launched a project allowing us to analyse shipping routes in more detail to give us a better knowledge of the risks involved. Collisions are just one problem that could be avoided more effectively if we had more detailed information. There is a great deal of room for improvement when it comes to prevention.

Which trends will occupy marine business in the coming years? Logistics is an important topic as world trade continues to grow. Cyber risks will also play a considerable role, as the unmanned ships of the future could become a target for cyber terrorism. Computercontrolled installations are also increasing in many areas, such as oil rigs. Things are changing fast and we cannot afford to take our eye off the ball.


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COLUMN

Economics from a risk perspective

Canada: Great potential, even in far-away Europe Michael Menhart, Chief Economist at Munich Re [email protected]

Aside from the debate on the CETA free trade deal, Canada tends to receive little media attention in Europe. A member of the G7 and one of the world’s major industrial nations, Canada is certainly a player in the global political arena, but the country’s importance and potential is often overshadowed by its larger neighbour, the USA. Yet Canada is well worth a closer look. After all, the Canadian economy weathered the 2008/2009 financial and economic crisis much better than any other G7 country. And in the aftermath, too, it picked up steam at a faster rate than the economies of other large industrial nations. However, the good growth rates were largely fuelled by private consumption and construction activity on the residential property market, which sent both private debt and property prices soaring. Canada’s investment rate is well above the average for industrial countries (23% of its GDP in 2013, as opposed to an average rate of just under 20%), though investment growth has been rather subdued of late. However, favourable financing terms and solid corporate balance sheets are expected to renew Canada’s willingness to invest. Indeed, this would be key in safeguarding the country’s economic prospects in the years to come. Relatively healthy public finances also mean that Cana da has more room for manoeuvre than most industrial countries, despite the need to consolidate budgets.

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A pick-up in investment activity benefiting the export sector so that foreign trade (raw materials exports, but also manufactured goods) regains its strong impact on GDP growth would further lay the ground for sustainable economic growth.

Canada is an attractive partner for Europe in the long term, and not just as an energy supplier. This positive outlook is dimmed by Canada’s continuing pronounced dependence on economic developments in the US. For instance, a sudden hike in US interest rates could have a knock-on effect on Canada’s interest rates, which would presum ably spell trouble for the property market and the (relatively high) level of private debt. One reason for the country’s continued direct dependence on the US economy is the fact that the USA is Canada’s most important trade partner by far. Conversely, however, this dependence could prove beneficial, should the US economy grow more strongly than expected. Canada’s dependence on trade with its neighbour is particularly evident in energy, where the US remains the only buyer of note. And while Canada has managed to boost its crude oil exports over the last decade (it now accounts for around a third of all US imports), gas exports have dropped sharply in the wake of the shale gas boom in the US. If the forecasts hold true and the US develops into a net exporter of gas by the year 2020, Canadian energy imports are likely to suffer a further setback.

Canada’s plans to build an oil pipeline to the west coast and install LPG terminals are just one of the country’s responses to these challenges. This move would enable Canada to export to energy-starved Asian markets. This project certainly puts Canada’s plans to boost its energy exports to Europe in the shade. However, the plans to intensify trade between Canada and the EU could offer an opening for a significant mediumterm increase in the supply of gas, in particular, to Europe. This would be beneficial to both parties: Europe could reduce its dependence on Russian natural gas while Canada would gain a reliable buyer and would be able to diversify its energy trade partners to a greater extent than if it were only to increase exports to Asia. Although Canada is frequently overshadowed by the USA, it is an attractive partner for the rest of the world, particularly in the raw materials and energy sectors.

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© 2015 Münchener Rückversicherungs-Gesellschaft Königinstrasse 107 80802 München Germany Tel.: +49 89 38 91-0 Fax: +49 89 39 90 56 www.munichre.com Münchener Rückversicherungs-Gesellschaft (Munich Reinsurance Company) is a reinsurance company organised under the laws of Germany. In some countries, including in the United States, Munich Reinsurance Company holds the status of an unauthorised reinsurer. Policies are underwritten by Munich Reinsurance Company or its affiliated insurance and reinsurance subsidiaries. Certain coverages are not available in all jurisdictions. Any description in this document is for general information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product.

Picture credits Cover: Mischa Keijser/Corbis p. 1: Robert Brembeck pp. 2, 15: picture alliance/Tone Koene pp. 3 left, 7–10, 26, 29, 31: Oliver Soulas p. 3 right: Lluís Real/age fotostock Spain S.L./Corbis p. 4 left: Getty Images p. 4 middle: Convent Kongresse GmbH p. 11: NASA pp. 12/13: David Cooper/Getty Images p. 19 top: Handout/Reuters p. 19 bottom: Mike Sturk/Reuters/Corbis p. 21: David Flikkema, Munich Re p. 24: Melissa Renwick/Reuters pp. 25, 34, 38: Foto Meinen p. 32: Percy Feinstein/Corbis p. 36: Getty Images/Cultura RF p. 40: Andrea Stärr, Munich Re p. 42: Dan Barnes/Getty Images pp. 44, 45: Orla Connolly p. 46: Kevin Sprouls

Responsible for content Group Communications Editor Beate Brix Group Communications (address as above) Tel.: +49 89 38 91-38 36 Fax: +49 89 38 91-7 38 36 [email protected] Editorial deadline 12 December 2014 Printed by Kastner & Callwey Medien GmbH Jahnstrasse 5 85661 Forstinning Germany

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© 2015 Münchener Rückversicherungs-Gesellschaft Königinstrasse 107, 80802 München, Germany Order number 302-08466

Not if, but how