There it was, in black and white. Perhaps the most astonishing statement I’d read in a decades-long analysis of how insurance works. The newspaper article began: “A $250 million payoff is on the table if the proposed $11 billion merger between Axis and PartnerRe fails to go ahead.” It continued: “Each firm will be liable to pay a break fee to the other if the deal … gets called off.”
You’re going to tell me that it’s alright to use the word “get” (or more likely, in what passes for modern grammar, “your going to tell me its alright …”) but I digress — that’s not the point I’m making.
Think about the second sentence. It clearly states that if the deal between the two companies goes down the drain, each company will pay the other $250 million.
That can’t be right, I thought. What would be the point? If each company were to cut the other a check for $250 million, the one would cancel the other out, quite obviously.
Yet senior executives and bankers had put the deal together, and they usually know what they’re doing. Understanding the words became what Sherlock Holmes referred to as “a three-pipe problem.”
Eventually, I worked it out: It had to be a tax dodge. If the two checks were issued in high-tax jurisdictions, then banked in no-tax jurisdictions such as Bermuda, hefty net income all round.
To confirm it, I’d have to study both companies’ financials to see if they had taxed subsidiaries somewhere that earn $250 million of profit in a year, but then thought better of it.
I was reminded of the two economists who meet on the street. One holds a cat. “Buy this cat from me for $100 billion,” he said, “and then I’ll buy it back from you for $100 billion.”
“And what will we have then?” the second economist asked.
“A $200 billion economy,” the first replied.
I next considered the notion that most mergers destroy more value than they create. Perhaps these cross-payments might somehow increase the companies’ top lines and, therefore, their desirability to other potential partners. That didn’t cut it for me, so I stopped thinking and researched the matter.
Ultimately, the explanation was simplicity itself. An industry publication, considered in equal measure accurate and scurrilous, had run this sentence: “Axis and PartnerRe would be required to pay the opposite party a $250 million break fee if they decide to (cancel the merger agreement).” It’s badly worded, but you sort of know what it means.
A reporter at the newspaper I had first read had picked up the story and rewritten it. The reporter, whom I know, has no business experience. His background is the crime beat. But his editor understands nothing of money, and only hires those who know less than he does, a classic strategy of weak managers.
The rewritten sentence should have read something like this: “If either Axis or PartnerRe were to call off their proposed merger, it would be required to pay the jilted party $250 million.”
I should have known that at the start, but when it’s in the newspaper, one tends to believe it. That way, of course (Risk & Insurance® excepted) lies madness.
And Back Again
The first time Hank Greenberg visited China, in 1975, there were few cars on the streets and seemingly thousands of wobbly bicycles crowding the roads. The high-rises that now dominate the skylines of China’s major cities were non-existent.
That was the way Greenberg remembered China in his 2013 book, “The AIG Story,” co-written with Lawrence Cunningham, a George Washington University law professor.
Following the opening of Communist China in 1972 by President Richard Nixon and his Secretary of State Henry Kissinger, Greenberg — then CEO of AIG — sought and cemented during that 1975 visit a reinsurance agreement between AIG and the state-owned People’s Insurance Co. of China.
Greenberg was infamously pushed out of AIG in 2005, after four decades spent building it into a company with assets in the hundreds of billions.
Over the years though, Greenberg’s love of China, particularly Shanghai, never ebbed.
“I have very warm feelings for Shanghai,” Greenberg told Risk & Insurance® during an interview in his Park Avenue office.
After all, the C.V. Starr Co. was founded by Greenberg’s mentor Cornelius Vander Starr in Shanghai in 1919.
“China is not without its problems, obviously. But it’s the second largest economy in the world. Think about that. The second largest economy in the world in a very brief period of time,” Greenberg said.
Last year, Greenberg’s Starr bought a former state-owned insurance company, announcing that it had acquired 93 percent of the Dazhong Insurance Co.
“It wasn’t a walk in the park. It took a lot of negotiation and a lot of time.” — Hank Greenberg, CEO and Chairman, Starr Companies
Starr purchased approximately 20 percent of the company in 2011 before increasing its stake to 93 percent in March 2014, according to published reports.
“Even though we had management, we didn’t have freedom of management — big difference — and so I spoke with the people in Shanghai and over time we were able to convince them that the company would do better over any period of time if we had not only operating control but financial control,” Greenberg said.
The purchase was not without its struggles, according to Starr’s chairman.
“It wasn’t a walk in the park. It took a lot of negotiation and a lot of time,” said Greenberg. But Greenberg believes that over time, the investment will be well worth it.
With a population of 1.4 billion, China is viewed by many industries, property/casualty insurers included, as a country with enormous potential.
Recent regulatory changes, in particular the decision three years ago by Chinese regulators to allow foreign insurers to underwrite mandatory third-party auto liability, are viewed positively by Western insurance and business executives.
And those observers think more good news is on the way. “In and of itself it is a very critical step and it is clear that the intent is to broaden that further,” said Mark Wheeler, London-based CEO of Ironshore International, of that milestone third-party auto liability change.
“It was a major positive development for foreign insurers,” said Dave Snyder, vice president of international policy for the industry trade group the Property Casualty Insurance Association of America.
“We are very encouraged by high-level statements and are anxious, as always, to see them implemented.” — Dave Snyder, vice president of international policy for the Property Casualty Insurance Association of America.
Snyder said the trade group, which represents more than 1,000 insurers, continues to be encouraged by statements from Chinese government officials that they intend to open the country further to foreign insurance carriers.
“I’m reluctant to use terms like positive or negative. It is what it is,” Snyder said.
“But we are very encouraged by high-level statements and are anxious, as always, to see them implemented,” Snyder said.
“We believe there is an environment of honesty, if you will, between the governments and the private sector and the private sector and governments. That has improved significantly over time with benefits for both China and the U.S.,” Snyder said.
“It would also be fair to say that the market isn’t opening as quickly as we would expect,” Ironshore’s Wheeler said.
“A good example of that would be the much-heralded Shanghai Free Trade Zone,” he said.
“There was a lot of press coverage around that 12 months ago, but there is little evidence to see that it has driven much traction,” Wheeler said.
Starr and Ironshore work in partnership in some lines and sectors. Ironshore CEO Kevin Kelley is an AIG alumnus who retains great respect for his mentor Hank Greenberg.
Kelley told Risk & Insurance® in 2013 there was “no doubt in his mind” that if Greenberg stayed as CEO that AIG would have remained whole during the crisis of 2008.
The Starr Aviation Agency Inc. is the underwriter for Ironshore’s aviation products, and the two carriers have joined forces in the Iron-Starr Excess Agency, a managing general underwriting agency that underwrites financial lines and specialty casualty with both carriers providing capacity.
Wheeler said it looks like the Starr Group has skirted some barriers to entry with the Dazhong acquisition.
“An acquisition like the one they made makes every sense to me in that context. Just because of the barriers to entry, having something that is already laid out on the ground, with distribution lines and speed to market,” Wheeler said.
Regulatory and cultural barriers in China are falling, but there are complexities for property/casualty insurers to consider there, as there would be in any economy.
“Whilst the opportunities are significant, there are a number of key challenges to overcome, including complex regulatory hurdles, disparity in value, fit with local partners and the need to operate flexibly in a rapidly evolving market,” wrote Joan Wong, a transaction services partner with KPMG China in an April 2014 report by KPMG on the Chinese insurance market.
For his part, Greenberg said he doesn’t see the regulatory hurdles in China as much more complex than those a carrier faces in the U.S., where a carrier needs the separate approval of regulators in 50 states.
“I don’t know if it’s any more difficult than the regulatory environment in the United States,” Greenberg said. “I don’t think so. I think they have their regulations like every country does.”
Greenberg said that since the March announcement, the process of combining the professional cultures of Starr and the Dazhong Insurance Co. is coming along, but will take some time.
“It has gone pretty well,” he said. “It’s not going to happen overnight,” he added.
Greenberg said he is devoting a lot of resources to training local hires as well as bringing in talent with experience working in the United States, London and elsewhere.
According to Alex Yip, CEO of Lockton Cos. for Greater China, the issues of regulatory compliance and integrating work cultures are of paramount importance for insurance companies that want to do business in China.
“It is, understandably, a challenge for a U.S.-based company to integrate its business with a local Chinese entity,” Yip said.
“The day-to-day differences are enormous, and include history, culture, corporate mentality, value propositions and ways of doing business, to name just a few common challenges,” Yip said.
“It is often underestimated just how different we can be from one another,” Yip said.
What’s also often underestimated, according to the analysts at KPMG, are the expectations of Chinese consumers.
According to KPMG, Chinese consumers are highly likely to use social media and other channels to communicate their expectations of and experience with service providers to their fellow consumers.
For the banking, general and life insurance sectors, around 70 percent of Chinese respondents to a KPMG survey recommended their banks and insurers to others. That’s compared to between 21 to 53 percent of those surveyed in other countries.
Although industry advocates hope for a day when foreign carriers can sell a variety of coverages to Chinese consumers and businesses online, Greenberg said there will always be the need for sophisticated underwriters and brokers in highly CAT-exposed China.
“It will never be adaptable to large, complicated risks,” Greenberg said of the online selling channel.
“That will still be done through the brokers and companies that have the sophistication to write those kinds of risks,” he said.
“But there is an awful lot of business that can be produced online and through social media.”
There are barriers to entry in China and insurance penetration there is in its beginning stages.
But according to Greenberg, once that country of 1.4 billion becomes more of a consumer economy, it will take off, and the insurance business right along with it.
“Once China becomes less dependent on exports and more dependent on the domestic economy, it’s going to soar,” Greenberg said.
2015 General Liability Renewal Outlook
There was a time, not too long ago, when prices for general liability (GL) insurance would fluctuate significantly.
Prices would decrease as new markets offered additional capacity and wanted to gain a foothold by winning business with attractive rates. Conversely, prices could be driven higher by decreases in capacity — caused by either significant losses or departing markets.
This “insurance cycle” was driven mostly by market forces of supply and demand instead of the underlying cost of the risk. The result was unstable markets — challenging buyers, brokers and carriers.
However, as risk managers and their brokers work on 2015 renewals, they’ll undoubtedly recognize that prices are relatively stable. In fact, prices have been stable for the last several years in spite of many events and developments that might have caused fluctuations in the past.
Mark Moitoso discusses general liability pricing and the flattening of the insurance cycle.
Flattening the GL insurance cycle
Any discussion of today’s stable GL market has to start with data and analytics.
These powerful new capabilities offer deeper insight into trends and uncover new information about risks. As a result, buyers, brokers and insurers are increasingly mining data, monitoring trends and building in-house analytical staff.
“The increased focus on analytics is what’s kept pricing fairly stable in the casualty world,” said Mark Moitoso, executive vice president and general manager, National Accounts Casualty at Liberty Mutual Insurance.
With the increased use of analytics, all parties have a better understanding of trends and cost drivers. It’s made buyers, brokers and carriers much more sophisticated and helped pricing reflect actual risk and costs, rather than market cycle.
The stability of the GL market also reflects many new sources of capital that have entered the market over the past few years. In fact, today, there are roughly three times as many insurers competing for a GL risk than three years ago.
Unlike past fluctuations in capacity, this appears to be a fundamental shift in the competitive landscape.
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them, through risk control, claims management and a strategic risk management program.”
— David Perez, executive vice president and general manager, Commercial Insurance Specialty, Liberty Mutual
Dynamic risks lurking
The proliferation of new insurance companies has not been matched by an influx of new underwriting talent.
The result is the potential dilution of existing talent, creating an opportunity for insurers and brokers with talent and expertise to add even greater value to buyers by helping them understand the new and continuing risks impacting GL.
And today’s business environment presents many of these risks:
- Mass torts and class-action lawsuits: Understanding complex cases, exhausting subrogation opportunities, and wrangling with multiple plaintiffs to settle a case requires significant expertise and skill.
- Medical cost inflation: A 2014 PricewaterhouseCoopers report predicts a medical cost inflation rate of 6.8 percent. That’s had an immediate impact in increasing loss costs per commercial auto claim and it will eventually extend to longer-tail casualty businesses like GL.
- Legal costs: Hourly rates as well as award and settlement costs are all increasing.
- Industry and geographic factors: A few examples include the energy sector struggling with growing auto losses and construction companies working in New York state contending with the antiquated New York Labor Law
David Perez outlines the risks general liability buyers and brokers currently face.
Managing GL costs in a flat market
While the flattening of the GL insurance cycle removes a key source of expense volatility for risk managers, emerging risks present many challenges.
With the stable market creating general price parity among insurers, it’s more important than ever to select underwriting partners based on their expertise, experience and claims handling record – in short, their ability to help better manage the total cost of GL.
And the key word is indeed “partners.”
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them — through risk control, claims management and a strategic risk management program,” said David Perez, executive vice president and general manager, Commercial Insurance Specialty at Liberty Mutual.
While analytics and data are key drivers to the underwriting process, the complete picture of a company’s risk profile is never fully painted by numbers alone. This perspective is not universally understood and is a key differentiator between an experienced underwriter and a simple analyst.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks — things that aren’t necessarily captured in the analytical environment,” said Moitoso.
Mark Moitoso suggests looking at GL spend like one would look at total cost of risk.
Several other factors are critical in choosing an insurance partner that can help manage the total cost of your GL program:
Clear, concise contracts: The policy contract language often determines the outcome of a GL case. Investing time up-front to strategically address risk transfer through contractual language can control GL claim costs.
“A lot of the efficacy we find in claims is driven by the clear intent that’s delivered by the policy,” said Perez.
Legal cost management: Two other key drivers of GL claim outcomes are settlement and trial. The best GL programs include sophisticated legal management approaches that aggressively contain legal costs while also maximizing success factors.
“Buyers and brokers must understand the value an insurer can provide in managing legal outcomes and spending,” noted Perez. “Explore if and how the insurer evaluates potential providers in light of the specific jurisdiction and injury; reviews legal bills; and offers data-driven tools that help negotiations by tracking the range of settlements for similar cases.”
David Perez on managing legal costs.
Specialized claims approach: Resolving claims quickly and fairly is best accomplished by knowledgeable professionals. Working with an insurer whose claims organization is comprised of professionals with deep expertise in specific industries or risk categories is vital.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks, things that aren’t necessarily captured in the analytical environment.”
— Mark Moitoso, executive vice president and general manager, National Accounts Casualty, Liberty Mutual
“When a claim comes in the door, we assess the situation and determine whether it can be handled as a general claim, or whether it’s a complex case,” said Moitoso. “If it’s a complex case, we make sure it goes to the right professional who understands the industry segment and territory. Having that depth and ability to access so many points of expertise and institutional knowledge is a big differentiator for us.”
While the GL insurance market cycle appears to be flattening, basic risk management continues to be essential in managing total GL costs. Close partnership between buyer, broker and insurer is critical to identifying all the GL risks faced by a company and developing a strategic risk management program to effectively mitigate and manage them.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.