2015 RendezVous: Smiles or Scowls?
Nikolaus Von Bomhard was not a happy man this time last year. The CEO of German reinsurance giant Munich Re — in line with its general policy — is rarely outspoken. However, ahead of the September 2014 Monte Carlo gathering of the reinsurance industry’s key personnel, he spoke of being “disappointed, exasperated and even rather appalled by what is happening in the market.”
It’s unlikely that the past 12 months have offered much to lift his spirits. Guy Carpenter reports that global property catastrophe rates were down by 11 percent on average at Jan. 1 2015, the same rate of reduction as the year before. “Reductions were sustained across all lines of business with few exceptions,” the group commented. “We continue to see rate reductions and easing terms and conditions at the various key renewal anniversaries during 2015.”
Attendees at the 59th annual RendezVous in the tiny European principality of Monaco next month will therefore be confronting familiar problems; indeed, the mood could best be described as “the same, only more so.”
Low inflation, minimal interest rates and meager investment returns have regularly featured on the RendezVous agenda since the 2008 global financial crisis broke. More recently, Europe has seen low inflation turn to deflation, while some corporates have followed the lead of its more confident governments and been emboldened to offer negative rates on bond offerings. This year also began with the European Central Bank (ECB) belatedly adopting the experiment applied by both the Federal Reserve and the Bank of England, to kick-start an economic revival by launching a quantitative easing (QE) program.
As for Munich Re, more recent pronouncements have employed milder language — although when the group issued its annual results in May, board member Torsten Jeworrek admitted that market conditions looked fairly certain to remain soft.
“The question for us is not how far the rates can decline,” said Jeworrek. “The question is how to manage the cycle and where to find new business opportunities. We are proceeding on the assumption that the market environment will not change significantly in the upcoming renewal rounds in 2015, unless extraordinary loss events occur, or there are any major changes in the market.”
New Channels for Excess Capital?
With what Aon Benfield describes as “too much capital and less opportunity to deploy it” prevailing, 2015 has seen an upturn in merger and acquisition activity with more defensive and strategic deals than in any year since 2007. Swiss Re’s chief economist, Kurt Karl, said recently that activity pointed to a squeezing out of the middle-tier specialist insurers and reinsurers. “Some firms do not have the scale or the breadth of services to differentiate their offering from more commoditized reinsurance capacity,” he noted.
The unsolicited takeover attempt launched by Italian investment firm Exor for PartnerRe is still grabbing headlines. This has threatened to overturn the reinsurer’s planned “merger of equals” with rival Axis Capital Holdings that was announced at the start of this year.
The resulting turbulence was recently commented on by XL Catlin’s CEO Mike McGavick, who cheerfully admitted: “We’re awfully happy to be able to take advantage of the confusion that mergers create for others.” Admittedly XL can display a degree of schadenfreude; the group’s $4 billion takeover of Lloyd’s of London underwriter Catlin went through relatively smoothly — announced in January, it had wrapped up by April.
“While both XL and Catlin were major reinsurers pre-combination, we are now the eighth largest P&C reinsurer in the world and have a larger suite of products and a broader geographic reach together,” said Greg Hendrick, CEO of XL Catlin’s reinsurance operations.
“This will be the main thrust of our meetings at Monte Carlo; we can entertain any P&C risk that a client faces anywhere in the world and we will be very focused on the overall relationship across products and geographies.”
It will take rather more major M&A deals to change Aon Benfield’s assessment. However, Bryon Ehrhart, CEO of Aon Benfield Americas and a regular speaker at the RendezVous, said that while the pronouncement remains valid, he sees grounds for optimism. “The growth in reinsurance capital continues to outpace the growth in demand for reinsurance,” he said.
“However, material new demand has emerged for U.S. mortgage credit risk and certain life reinsurance transactions. While the industry clearly has the capital to deploy in these areas, the industry’s skills are still developing and currently limit the ability of the industry to match the opportunity.”
Ehrhart also believes that the industry’s leading players have made “material progress” toward incorporating lower-cost underwriting capital into their value proposition. “Reinsurers have seen that they have and can sustain their significant competitive advantages when they optimize their underwriting capital structures.”
So what else will feature on the Monte Carlo agenda next month? Negative interest rates are likely to be a key topic, said Jean-Jacques Henchoz, CEO reinsurance for Europe, the Middle East and Africa (EMEA) at Swiss Re. “After large parts of European sovereign yield curves dipped into negative territory during spring this year, investors have certainly become aware that zero may not necessarily be the lower bound for bond yields.”
“I think the debate now is less about Solvency II content, but about how companies are going to live with it.” — Eric Paire, head of global strategic advisory, Guy Carpenter’s EMEA region
He believes that deflation fears may diminish: While the ECB’s bond buying program under QE had a major negative impact on bond yields over the first half of 2015, it is unclear whether it will remain the dominant driving force. “There are other forces which may push bond yields higher,” said Henchoz. “The U.S. Fed is likely to start hiking interest rates later this year. In addition, it is expected that inflation rates will increase in the second half as oil prices stabilize.
“Overall, the outlook for interest rates remains highly uncertain at this point in time. What is clear, however, is that insurers’ investment returns will not improve significantly anytime soon. This is because even if bond yields increase, existing higher-yielding bonds in insurers’ portfolios will need to be reinvested into lower-yielding bonds. So insurers’ investment returns will recover only slowly and with a time lag.”
Long-established players are also coming to terms with the fact that many of the market’s newer entrants have joined for the long-term. “We believe that alternative capital is here to stay and will be a part of the capital base supporting the reinsurance market,” said Hendrick.
“The only open question in our mind is what size and portion of the overall market will this capital source attain in the coming years. We are positioning XL Catlin to be able to utilize all forms of capital, our own and third party, to ensure that we match each risk profile with the appropriate capital.”
Ehrhart suggested two other topics likely to feature in many discussions. “Cyber [risk coverage] will recur as a topic that is driving demand growth,” he said. “The discussion of alternative capital will move from the debate over whether or not it is a good or bad thing to how best it can be incorporated into a reinsurer’s value proposition to its customers and shareholders.”
Solvency II issues
Just over the horizon is the European Union’s Solvency II legislative program, which introduces a new and harmonized EU-wide insurance regulatory regime in all 28 member states. As it takes effect from Jan. 1 2016, it might be expected to feature highly on this year’s RendezVous agenda. Conversely, having been in the pipeline for several years, is the debate over Solvency II — and the industry’s objections to the directive — now largely over?
“Not at all,” said Eric Paire, head of global strategic advisory for Guy Carpenter’s EMEA region. “I think the debate now is less about Solvency II content, but about how companies are going to live with it, and this includes topics such as internal model validation, volatility of capital requirements, and reconciling increased required capital with low prices and interest rates.
“Furthermore, with doubts about the readiness of some companies and indeed regulators, Solvency II is a long way from disappearing from the agenda.”
Henchoz agreed. “The focus is currently very much on implementation, on understanding how business operates under the new EU solvency regime as well as preparing for application,” he said.
“Many companies are still busy getting their systems ready by 2016, in particular on reporting, and the change towards an economic and risk-based regime has some wider implications which demand a different approach to strategy and products.”
RendezVous 2015 also poses the question of where delegates who usually check in at Monte Carlo’s five-star central Hotel de Paris will find a bed. The iconic venue began a major renovation program last October that won’t be completed until September 2018; until then many will have to settle for an address that is less prestigious — or located further out of town.
P&C Outlook for 2015
Rate increases that will slow or outright decline for the property and casualty insurance industry is just one of the major trends as we enter 2015.
Keefe, Bruyette & Woods analysts expect insurers’ operating earnings to improve modestly in 2015, mostly from the “earn-in” of 2014 rate increases versus still-benign loss cost inflation, partly offset by fading reserve releases and normal catastrophe losses.
KBW’s Managing Director Meyer Shields said workers’ comp and some other casualty lines, general liability and commercial auto liability will see rate increases, albeit at a slower pace, while property lines will continue to decline.
“There are a lot of insurance carriers and so it remains a very competitive marketplace,” — Meyer Shields, managing director, KBW
“There are a lot of insurance carriers and so it remains a very competitive marketplace,” Shields said. “Companies believe they can earn an adequate return and still price competitively, which should drag down prices” but he noted that pricing was “on a line-specific basis.”
KBW also expects loss cost inflation to pick up somewhat, “but not materially so,” as insurance loss cost trends has been very suppressed lately, he said. Moreover, given the decline in interest rates, there will be a continuation of lower investment income and overall returns will also come under pressure.
Potential Pricing Challenges
In a report released in December, KBW analysts wrote that two scenarios could disrupt the trend of decelerating or declining prices.
“First, a resurgence of claim cost inflation could quickly erode prior and current accident-year profitability, which would produce a year or so of weak earnings, but would also probably jump-start rate increases,” the analysts wrote.
“On the other hand, persistently low investment yields could drive the providers of third-party capital to expand their participation into other reinsurance lines beyond property catastrophe and similar short-tailed lines.
“We don’t think an expansion is imminent, both because it would tie up capital for longer, and because expected returns for most lines are much lower than was the case for property catastrophe almost two years ago,” they wrote.
“But we believe that the traditional industry players are rational and disciplined enough to avoid obviously destructive pricing, so it would probably take external forces to really disrupt pricing.”
The P&C industry’s underwriting performance continues to lag behind 2013, but remains favorable, according to A.M. Best’s Nine Month Financial Review of the U.S. P&C industry published Dec. 16.
The pure loss ratio increased by 2 points to 58.2 for the nine months through Sept. 30, 2014, primarily as a result of higher catastrophe losses and reduced benefit from favorable development of prior accident years’ loss reserves.
Favorable Commercial Lines Outlook
While net premiums written (NPW) grew, the pace of that growth has slowed. However, increased NPW has benefitted the underwriting expense ratio, as those expenses climbed at a slower pace than NPW, according to the rating organization.
The commercial lines segment posted another set of favorable results for the nine months ended Sept. 30, although some underwriting performance deteriorated somewhat year over year, according to A.M Best’s report.
Through the first nine months of 2014, the segment’s combined ratio was 97.6, compared with 95.6 posted the same period in 2013. Net income totaled $19.2 billion, down $9 billion from a year earlier.
A.M. Best’s analysts are seeing a continuation of the trends exhibited earlier in 2014, said Jennifer Marshall, an assistant vice president in the property casualty ratings department.
“We also now have a negative outlook on the reinsurance sector, but we have seen some solid results, so we expect the industry will post an underwriting profit for 2014.” — Jennifer Marshall, assistant vice president, property casualty ratings, A.M. Best
“Moderation in catastrophic losses continues, as it was yet another year without a major hurricane hitting the U.S. East Coast, which typically is a substantial driver of losses for third quarters,” Marshall said.
A.M. Best’s analysts are also seeing a slowing in premium increases, she said. They also believe the industry in general is well-capitalized, though they have concerns in the commercial line segment, specifically related to questions about reserves in recent years for companies that write a significant amount of long-tail business.
“We also now have a negative outlook on the reinsurance sector, but we have seen some solid results, so we expect the industry will post an underwriting profit for 2014,” Marshall said. Overall, “the industry seems to be performing in line with what we expected for this year.”
Morgan Stanley researchers believe that alternative capital such as catastrophe bonds is driving “secular changes” in the global (re)insurance ecosystem, according to a report released in December.
“We estimate that alternative capital currently accounts for 15 to 20 percent of global reinsurance capacity,” the analysts wrote. “We see it as a secular shift that disrupts balance sheet-based reinsurance models with a goal of directly matching risks with the most efficient capital.”
However, the trend also offers opportunities for primary insurers to re-enter markets and lines of business, to lower operating costs through lower-priced reinsurance, and to open up new revenue streams by managing third party capital.
“Those that adapt can not only survive but thrive, in our view,” the analysts wrote. “Longer term, we believe thriving reinsurers that adapt to this secular change should (1) maintain strategic relevance (size and breadth), (2) manage third party capital, (3) become closer to the end customers, or (4) focus more on investments (asset-manager-backed reinsurers).”
Managing Patient Safety in a New Health Care World
Much like regular screenings, exercise and a healthy diet, patient safety in health care institutions should be thought of as preventive medicine.
“Patient safety aims to relieve the burden of fixing mistakes by taking steps to prevent them from happening in the first place,” said Aileen Killen, head of casualty risk consulting, AIG.
With the right strategies and protocols in place, human error in delivering patient care can, to some degree, be factored out, mitigating the risk of things like falls or medication mistakes. And the outcomes-based reimbursement model enforced by the Affordable Care Act provides extra incentive to improve patients’ overall experience and reduce readmission rates.
Some challenges stand in the way, though, of achieving better safety.
For one thing, increased consolidation in the industry has brought risks associated with integrating disparate safety cultures and ensuring continuity of care if patients are moved to a new doctor. The trend of shifting more care out of main hospitals to ambulatory sites instead also creates concern that those outpatient facilities are not up to the same safety standards as larger organizations.
Finally, advancing technology — while offering great promise to eventually make health care more efficient and error-free — presents significant risks in its implementation while doctors, nurses and other health care professionals learn how to best use it.
Lexington Insurance, a member of AIG, is meeting the demand for more innovative tools to navigate the changing environment with a suite of safety assessment programs that identify problem areas and provide recommendations for improvement.
Assessing Safety Culture
The first step in overcoming any challenge is assessing the situation in order to create the best strategy.
“Every health care organization should aim to become a ‘high reliability organization,’ or HRO,” said Brenda Osborne, division executive, health care, Lexington. “It’s a term borrowed from the airline and nuclear power industries, in which any employee has the right to shut down operations if they spot a safety issue.”
Lexington’s Best Practice Assessment tool allows organizations to compare their own protocols against evidence-based best practices and identify weak spots in their safety culture.
“We survey employees and ask if they feel free to speak up to people in authority,” Killen said. “If they can all say yes, you’re on the road to a safety culture. Then we drill down into specific high-risk areas.”
Clients can conduct specific assessments for error-prone areas like the emergency department, obstetrical department and operating room.
We give organizations recommendations on how they can improve in areas where they are deficient, and we can benchmark their performance against the best practice as well as against other institutions that have done the same assessment,” Killen said.
Those benchmark comparisons are key for securing leadership buy-in. Executives often need to see what other institutions are doing in order to feel confident in their decisions to make changes or invest more heavily in patient safety measures.
If another competitive hospital has better staffing ratios, for example, benchmark stats will show that and support the C-suite’s decision to hire more nurses to achieve a similar ratio.
“What it basically does is give the risk management, patient safety and quality improvement staff a roadmap for which areas to focus their activities for improving patient safety and risk management at their organization,” Killen said.
Acquisitions and Physician Employment
The flurry of merger and acquisition activity in the health care industry creates new risks for large hospital networks that acquire physicians’ practices. The integration of different patient safety and risk management practices can prove difficult.
“You have to take multiple approaches and mindsets and meld them into one fluid organization,” Osborne said. “That has a big impact on physicians’ ability to treat patients and deal with the appropriate hand-offs.”
“Patient hand-off is one of the biggest safety challenges,” Killen said. “Assigning a patient’s care to a different doctor leaves room for gaps in communication, which is so critical to making the correct diagnosis and keeping a medication schedule.”
Lexington’s Office Practice Assessment tool scores acquired practices on 14 different domains, including risk management and patient safety, communication, infection control and prevention, incident reporting and medication safety, among others. Recommendations are provided for any domain that scores less than a perfect 100 percent.
“We’ve been able to go in and help these growing organizations benchmark each of these acquired physician offices to show where they are at in terms of their safety protocols,” Osborne said. “It helps risk managers know where they need to start.”
Another major challenge for patient safety is the movement of care away from main hospitals to ambulatory care settings, an area that previously did not concern hospital-based risk managers very much.
“Historically, there has not been a big focus from a patient safety standpoint on outpatient services,” Osborne said. “The office practice assessment that AIG’s been doing for the last two or three years has actually put us out in front. Few other resources out there can assist hospital-based risk managers in dealing with outpatient-type services.”
“Now more people are thinking about safety in ambulatory areas, and we have more knowledge and experience there,” Killen added.
The same office assessment tools that survey physician practices can also be applied to ancillary services like ambulances, blood banks, and outpatient surgery centers, though benchmarking is not yet available for these sites.
Adapting to new technology is an ongoing challenge for health care risk managers.
“Everyone thought electronic health records were going to solve all our patient safety issues, but they’ve come with some unintended and dangerous consequences,” Killen said. Employees may accidentally order medications for or even discharge the wrong patient, for example, if they have multiple records open at once.
The upside to technology advancements, though, is more streamlined documentation and more opportunities for communication between doctors and patients via telemedicine, which is slowly growing in popularity for remote and elderly patients.
“When we’re underwriting, we look at these areas of growth in technology and the many ways it can be applied,” Osborne said. “We consider all the pros and cons.”
Lexington’s dedication to improving safety in health care shines through in their thorough assessment tools, expert recommendations, and attention to insureds’ changing risk management needs.
“Our unique tools help insureds identify risks and minimize potential claims,” Killen said.
“These services are homegrown and developed by a lot of very knowledgeable people over a period of time,” Osborne said. “They’re not available out in the market, and only Lexington insureds have access to them.”
For more information about Lexington Insurance’s risk management services for the health care industry, please visit www.lexingtoninsurance.com.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.