The world is closing in

By Amir Sadiq

(L-R): Tobias Poensgen, Dominic Christian, Herbert Fromme

Not everyone will survive the digital revolution. That is the sobering reality that (re)insurers face as the world goes digital, and pressure mounts to deliver appropriate solutions.

“The change is so enormous that not everyone is prepared for it,” said Süddeutsche Zeitung insurance correspondent and panel moderator Herbert Fromme.

In a high-octane dialogue session that saw SIRC 2019 start with a bang, Mr Fromme highlighted how the main change the industry is facing will come from technology, driven by the pervasiveness of smartphones.

Insurers will face pressure not because of technology, but because society expects something different from them, he said.

An outside perspective

Insurance is often portrayed as a slow-moving industry that is averse to change, and Momentum Capital CEO Tobias Poensgen was on hand to confirm that this is a common perception.

“There is still a lot of inertia in the insurance business. An unwillingness to change,” he said. “You all think you have a wonderful business model that will outlast any attacks.”

He pointed out how the winds of change are blowing from all directions and that as people who cover risks, (re) insurers themselves need to be aware of the risks that are coming their way.

He said that looking from the outside, insurance seems to hold on to outdated views, and stressed the need for good product innovation in future in order to remain relevant.

Insurance industry still crucial

Despite all the challenges that the reinsurance industry has faced globally, Aon Reinsurance Solutions global chairman Dominic Christian said that he was unsurprised that the industry remains robust.

Referencing loss numbers from the 2010-2011 earthquakes in New Zealand, he showed how (re)insurance still has an important role to play in society as total insured losses from those events amounted to 18.5% of the country’s GDP.

At the same time, he reminded everyone that they need to “vigilantly embrace change” and that unlike the other sources of disruption, InsurTechs can help to advance the industry.

Mr Poensgen also said that while the basic need for insurance remains, insurers need to focus more on their customers instead of themselves.

Using data

Another accusation that has often been levelled at insurers is that they do not make the most of the data they have – an accusation that Mr Christian strongly refutes.

“We are good at using data,” he said, but added the caveat that big insurers with their legacy systems have a very difficult time building outside of those systems.

At the same time, Mr Poensgen also pointed out that there are InsurTechs that are more efficient with their data usage and are able to come up with many more policies with less capital, and these InsurTechs are sometimes able to offer lower premium products than incumbent insurers.

Too expensive?

That then raises the question of whether insurance is too expensive – and whether the cost base of insurers is too high.

Mr Poensgen said that cost reduction will continue to be critical. Even though not all InsurTechs are able to offer lower premium products, new ones will eventually be able to do so.

Mr Christian agreed, and said that it is not sustainable for insurers to operate with such a high cost base. Instead, they should aim to operate with a cost base that is about 5% lower than that which they currently have to be more sustainable.

Five tech trends reshaping insurance

By Ahmad Zaki

Digital ecosystems

Digital ecosystems have existed in the tech world for several years, slowly infiltrating people’s lives until they have become second-nature. Apple’s ecosystem is famous for keeping its users entrenched in an environment that encourages them to purchase only Apple products. China’s WeChat has also made its name as the world’s first ‘superapp’, allowing its users to do practically everything under the sun, from sending money, to sending memes.

For insurance, the idea is the same. In combination with other technologies such as Blockchain, digital ecosystems may allow for a complete unbundling of services. For instance, the main functions of a bank such as lending, money transfer and safekeeping of assets, could be offered by a group of separate providers in a digital ecosystem.

According to a Munich Re report, there has been a shift in the business model to a “layer player” pattern. This means that one step in the value chain is offered to a large number of customers. For example, collaboration with specialists for the underwriting of exotic risks or for more efficient claims handling.

Open APIs

An API allows one piece of software to interact with another piece of software, whether in one system or in a network or distributed environment. Open APIs are published on the internet and shared freely. A company might publish the API of their software to encourage external developers to figure out new ways of using it.

According to Munich Re, the open API system would ideally create a win-win situation for insurers. The external developer can make money by licensing a new service with advanced functionalities, such as an innovative use of the service in ways the originator hadn’t thought of. And the company benefits from more widespread use of their service.

Open APIs increase competition between providers, since everyone can integrate their systems and contribute to better products and services. Consumers are thus likely to benefit from cost-effective services tailored directly to their demands.

Robotics and data

Robotics is a catch-all term for AI, machine-learning and automation. Data and robotics go hand-in-hand, as data is what helps an AI learn to do its job and AI is required for insurers to make sense of the oceans of data they can get access to.

AI can also play a bigger role than just process optimisation. Several insurers, such as Singapore’s NTUC Income, have launched a Facebook-embedded chatbot that helps people purchase travel insurance. The chatbot even automatically comes online when the user is logged in at an airport, and the transaction takes minutes.

Companies can also implement AI to dig further into their claim trends and get more granular in determining what interventions will really drive better outcomes.

IoT

Wearables and telematics provide insurers with a wealth of data that helps them accurately assess risk and reduce cost. Beyond that, IoT data helps insurers all across the organisation.

For actuaries and underwriting, IoT provides rich new data to more accurately assess and price risk. From a claims perspective, IoT can power automated loss notification based on sensor data. For marketing executives, IoT brings opportunities for unprecedented insights into customer behaviour.

The risks behind IoT are also well-documented – most IoT devices are insecure, due to the need for a smaller physical profile, which puts user data at risk. In the day of stringent regulations on data privacy and protection, organisations utilising IoT must take extra precautions to ensure customer data remains secure.

Blockchain

Blockchain is a digital ledger that can be shared but not altered. This technology enables better information-sharing, especially sensitive information such as contracts. The potential reduction in administrative costs that come from reviewing claims and checking payments by third parties is high, as the blockchain ensures all of this information is shared, fraud-protected, and easy to verify.

According to PWC, blockchain could particularly benefit reinsurers – reducing the steps involved in the process and leading to potential savings of $5-10bn worldwide. For example, reinsurers in healthcare could cut costs and save time using smart blockchain contracts to quickly verify consumer data and insurance history, reducing the back and forth that’s commonly involved.

Several blockchain initiatives and platforms already exist in the insurance industry, such as InsurWave, a collaboration between EY, Guardtime and various insurers servicing the marine sector.

A wake-up call on typhoon risks in Japan

By Swiss Re head P&C underwriting Asia, Australia and New Zealand Sharon Joanne Ooi and Swiss Re head CAT perils Asia hub Vineet Kumar

Figure 1: Japan typhoon loss experience over the last 85 to 100 years

Typhoon Jebi, which hit the Osaka region in September 2018, was Japan’s costliest typhoon since typhoon Mireille (1991), with insured losses estimated at about $12bn - double the $6bn that catastrophe models had initially estimated.

Jebi was a wake-up call for the industry to review the adequacy of underwriting for this peak peril in Japan. It is a reminder that as an industry, we need constantly to monitor the various physical and socio-economic factors that can influence losses for large events, which may not be well-addressed by current CAT-modelling technology.

Large events such as Jebi continue to surprise the industry

The storm’s adverse loss developments surprised the industry in 2018, but this was not an isolated incident. This phenomenon has been repeatedly observed globally resulting in optimistic bias for large events. Secondary effects of primary perils, changes in land use with urbanisation, climate change, demand surge and social inflation are not well captured in catastrophe models.

In the case of Jebi, a mix of factors potentially led to the initial loss underestimation. One possible factor was the low wind speeds estimated just after the event when the uncertainty was high.

Typhoon Jebi also took place at a time when Japan had yet to recover from the impact of earlier catastrophes. A magnitude-6.1 earthquake hit Osaka in June and in early July, torrential rains ravaged western Japan. These events resulted in stress on resources and impacted claims settlement practices.

A recurring theme

With large-loss weather events like Jebi, Faxai, Hagabis and Prapiroon, it is tempting to point to climate change as a driving risk factor. However, a look into Japan’s typhoon history tells a rather different story. The irony is that typhoon Jebi is not an unexpected event. Over the last century, there have been at least three events of similar scale in Japan (Muroto 1934, Vera 1959, Nancy 1961). In fact, typhoons Muroto, Nancy and Jebi took very similar tracks impacting the Osaka region.

The irony is that typhoon Jebi is not an unexpected event

Figure 1 shows the modelled loss estimates for the major events in the past century. Where available, trended original insured loss data (1991 and later) were used, and for earlier events, physical hazard characteristics have been matched to events of today, and remodelled in our risk-assessment model. Assuming an 85 or 100-year observation window, at least four events have exceeded the JPY1tn level – making this a 1:20 or 1:25 years observation.

An adequate risk view is an enabler for insuring resilient societies

One in three natural disasters in the world takes place in Asia, and they can bring societies to their knees. Asia, a region with large catastrophe protection gap, provides an important opportunity. Underwriting catastrophe business sustainably means having an adequate risk view that accounts for long-term historical experience and ongoing physical and socio-economic trends.

More importantly, as an industry, this is a wake-up call to review our underwriting assumptions and develop more robust modelling tools, so we can provide the right protection at the right price, to ensure sustained resilience of our societies.

Adding value to the reinsurance model

By Paul McNamara

There seems to be a tug-of-war between Munich Re and Swiss Re for the title of the world’s biggest reinsurer. Who is the winner depends on whether the measure is gross or net reinsurance premiums written. On a net basis Munich Re comes just ahead of Swiss Re with a figure for 2018 of $34.5bn compared to $34bn, according to data from AM Best.

Either way, it’s a lot of money and one man who is in a good position to give an overview of the whole behemoth – with a special emphasis on Asia Pacific – is Munich Re member of the board of management Hermann Pohlchristoph.

Mr Pohlchristoph joined Munich Re in 2002 as a project manager in the Group CFO division, rising to chief financial officer reinsurance between 2006 and 2017 at which time he was appointed to the board, with responsibility for the Asia Pacific and Africa division as well as the central division’s central procurement and services.

Not for the faint-hearted

Many reinsurers have had a rough few years, as Mr Pohlchristoph acknowledges, but he does see light at the end of the tunnel. “In the primary insurance market we are seeing noticeable price corrections,” he said. “There is consolidation and more discipline in global reinsurance overall. After about four years of significant deterioration, we are now seeing some positive momentum from a reinsurance perspective.

The picture in Asia is also looking more positive. “This is also true for Asia in general,” Mr Pohlchristoph said. “But we do see some significant differences with regard to price levels. Some markets are clearly more challenging than others. We suffered from very significant Nat CAT losses in Japan last year. Typhoon Jebi cost the industry a lot of money and Munich Re was significantly affected. But it also led to price corrections afterwards and this year as the loss costs have been creeping up we expect this hardening in pricing for Japan to continue.”

Improved service offering

Tougher conditions have caused Munich Re to reassess its product suite. “In Southeast Asia and China, price levels are still rather low,” Mr Pohlchristoph said. “But what we are trying in the region is very much a strategy of differentiation - enriching our offerings from pure capacity to more service-related, innovation-related services. We’re doing a lot on the digital side, starting with cyber where we are the market leader worldwide.”

And the reinsurer is capitalising on these early wins. “We are partnering with start-ups all over the world and we also try to bring new ideas to our traditional cedants to help them build up their digital experience. We invest a lot into consulting services - cyber again, data analytics, mobility solutions - and we are trying to generate business which would otherwise not be placed in the market,” he said.

China remains hard to crack

Like many others, Munich Re is still puzzling over the best way to tackle China. “China is a key market in Asia for us,” said Mr Pohlchristoph. “For reinsurance it has been very difficult. We had a much bigger portfolio in China a few years ago but we had to reduce it significantly just because of price. The primary insurance market is growing very significantly but until recently mainly in motor. A lot of growth now is happening in health business and we are also looking at that and participating to some extent in those covers.”

But looking on the positive side, there is a lot to play for. “On the digital services side we have established an innovation lab in China. We are partnering with Plug and Play and we have built up a consulting firm in China, which is purely focused on digital solutions. In China, when you find a solution and gain some traction, numbers can be pretty big. So it is still a very interesting market for us although the experience of the past few years hasn’t been overwhelming.”

In China, when you find a solution and gain some traction, numbers can be pretty big. So it is still a very interesting market for us although the experience of the past few years hasn’t been overwhelming

Exciting India

Meanwhile, India and agriculture offer different kinds of opportunity for Munich Re. “Our ambition is not only to participate in the existing treaties, but also help to shape the approach of agriculture insurance,” Mr Pohlchristoph said. “We have developed our own pricing tool that we provide to our cedants so they can use our pricing methodology for their tenders. “India is possibly the most exciting growth market for us as we started basically from scratch.”

Mitigating the cost of climate change for properties

By Ahmad Zaki

The big challenge in climate change is to figure out what natural hazards are changing, and which ones will stay the same. Due to the potential for significant costs, this becomes a highly technical decision, said FM Global VP and manager of research Dr Louis Gritzo.

The foundation of all issues arising from climate change starts with water – either from the skies or from the seas. “If you look at temperature – and there is very sound data for this – it has been increasing. Over the past 50 years or so, Singapore’s temperature has increased by one degree (Celsius), and it’s about the same for the rest of the Southeast Asian region,” he said.

What this means is that the air can hold more water and that rainfall increases in intensity. For Singapore, this single degree increase in temperature has resulted in roughly a 20% increase in rainfall over the past 40 years.

As for the sea level, Singapore is only looking at 2mm of increase each year, which is about the same as New York City or Boston. Jakarta is also expecting the same increase, although the city is at a higher risk due to groundwater extraction, which causes the island to sink. Bangkok, on the other hand, is looking at 17mm of increase every year.

This, said Dr Gritzo, is due to the ocean currents around Bangkok and the wind patterns that move all the seawater towards the city.

“The challenge then, for businesses, is to think about where they are and what they need to do to be able to position themselves not only for the property they have yet, but for the access to that property, and for the flow of their products in and out,” he said. And business in Asia are in for the long-term, he added, looking at timelines of 30 to 50 years at the minimum.

Risk mitigation and minimising losses

There are tiers of cost to climate change, the highest being to do nothing and endure the consequences. The second tier would be to deal with the issue when it is at your doorstep, which in the case of rising sea levels, means sealing off the building and moving everything off the ground floor and basement levels.

The third tier is to take some inexpensive preliminary measures to deal with the impact of climate change. “Let’s focus on the rising sea levels – we look at retrofitting a building. I have my structures and I look at what I can do just within the footprint of my building, and what can I do to address the potential for water to be in that footprint,” he said.

The cheapest solution would be to keep the water away. “If you can do that with landscaping, with, you know, different ways of changing the topography, that’s the best thing. The benefit of this is the ability to do it over time, at your own pace and leisure.” The next tier would be to make long-term plans that assume you will eventually have to deal with climate change hazards. “That might be reallocating your operations in different sites. It may be repositioning your operations to be more streamlined in the face of rising seas. Reconfiguring drainage on rooftops, reconfiguring landscaping to be able to address the fact that more water is going to come out of the sky and more water is going to be at your doorstep, if you’re in a coastal area.”

In short, the cost of climate change is highly dependent on the timeframe in which businesses are making their decisions – the shorter the timeframe, the higher the cost.

Beyond these steps, Dr Gritzo also suggested that insurers and businesses work with local governments on large civil works projects that reorient the water, citing the Netherlands as a good example of private-public partnerships to this end.

A night of glory

The 23rd Asia Insurance Industry Awards announced its winners last night, celebrating their achievements with glitz and glamour. The gala dinner coincided with the first day of the 16th SIRC, and 17 winners took their well-deserved spot on the honour roll, having beaten out almost 800 of their competitors.

As mobile and digital technologies pervade every corner of the insurance sector, it was not a surprise to see many new award winners being credited with solving major industry challenges through the effective use of technology.

The Technology Initiative of the Year title went to KYOBO Life Insurance Company for its AI-powered underwriting system named BARO (Best Analysis & Rapid Outcome).

On a more societal level, Digit Insurance was conferred the General Insurance Company of the Year in view of its efforts in accelerating the insurance penetration rate in India through its online presence and processes. Established in 2016, the insurer is one of the youngest winners in this category.

And given its comprehensive wellness programme and achievements in making healthcare accessible for customers, pan-Asian insurer AIA picked up the inaugural Health Insurance Company of the Year award.

This year, the awards also honoured Mr Teddy Hailamsah, an industry veteran and visionary leader who has contributed to the development of the insurance sector in both Indonesia and the wider Asian region. Throughout his career, he has been actively involved in regional insurance groupings including as the secretary general of the Asean Insurance Council for more than a decade.

As the insurance industry improves its diversity and inclusion efforts, another notable individual recognised for her professional accomplishments was Green Delta Insurance Company CEO Farzanah Chowdhury who was conferred the Woman Leader of the Year Award.

For the full list of award winners, click here