Insurance Industry Challenges

Insurance Asset Growth Lags

Insurance company assets-under-management growth is weak compared to other global asset management.
By: | July 23, 2014 • 3 min read
Assets

Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.

One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.

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Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.

Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.

The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.

“The lower growth has likely contributed to the under-investment, not the other way around,” he said.

But clearly, this is an area that needs to be addressed, he said.

Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.

The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.

“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.

In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.

The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”

Insurers’ “exposure to high-growth specialties was similarly limited,” it said.

Regulatory and Organizational Inefficiencies

That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.

This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.

Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.

The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.

Insurers should move to a more global model to address those issues, said Schwetlick.

“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.

Third-Party Management Benefits

The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.

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“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.

“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.

“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.

Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at [email protected]
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Brokers

Global Connections

Nonprofit global brokerage network has transitioned to a for-profit corporation.
By: | July 21, 2015 • 2 min read
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Brokerslink, a global network of independent brokers and risk consulting firms, has transformed itself from a nonprofit association to a for-profit corporation.

José Manuel Dias da Fonseca, group chief executive, MDS, and CEO of Brokerslink

José Manuel Dias da Fonseca, group chief executive, MDS, and CEO of Brokerslink

The group was founded in 2004 by José Manuel Dias da Fonseca, group chief executive of MDS, a Portuguese brokerage that also has a big presence in Brazil and Angola. He currently serves as CEO of Brokerslink, which has its headquarters in Zurich.

The original business model was created so all of the broker members were able to protect already existing clients, Fonseca said. “We decided we should be more than that. We should be creating business, not just managing business.”

To further that aim, he said, required better financial alignment among Brokerslink members. Incorporating allows the group to have resources to finance a strong business development team, invest in reputation and branding awareness, and build the necessary infrastructure.

Brokerslink is in the process of offering shares to firms within the association, which are in more than 90 countries around the world and have written more than $20 billion in premiums and consulting services.

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The full transformation into a corporation will be finalized when the organization completes its private stock offering, said Paul Bitner, the organization’s managing director, who is based in Houston.

Initial stockholders are MDS of Portugal, Crystal & Company of the U.S., Nova Risk Services Holdings of Hong Kong, Filhet-Allard of France, and CGNMB of London.

Previously, the organization was funded by member fees and sponsorship from insurers, but fees and sponsorships are limited, Fonseca said. Raising money through the stock offer will allow Brokerslink to finance its business expansion.

Bitner said that mergers and acquisitions within the industry create opportunity for brokers within Brokerslink “because there is less choice.”

“We feel that there is a niche in the market for clients that don’t want to work with the big brokers,” Bitner said.

The organization offers other advantages as well, he said. In addition to size, Brokerslink has in-country expertise because its brokers are native to that country. The group also does not need to worry about the short-term investor demands that sometimes plague publicly held brokerages.

Paul Bitner, managing director, Brokerslink

Paul Bitner, managing director, Brokerslink

“Another component is our different structure. We are structured in a way that is not U.S.-centric or London-centric,” Bitner said. “Our ideas are not coming from the traditional centers of insurance. They are coming from around the world.”

The organizational structure limits participation to one broker per country. In the U.S., that broker is Crystal & Company, whose executive vice president, Jamie Crystal, serves as chairman and an executive director of Brokerslink.

Bitner said the brokers associated with Brokerslink are selected carefully, using qualitative and quantitative measures, including references from insurance companies and client retention data.

“They need to be strong and well-respected in the local market,” he said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]
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Sponsored: Lexington Insurance

Pathogens, Allergens and Globalization – Oh My!

Allergens and global supply chain increases risk to food manufacturers. But new analytical approaches help quantify potential contamination exposure.
By: | June 1, 2015 • 6 min read
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In 2014, a particular brand of cumin was used by dozens of food manufacturers to produce everything from spice mixes, hummus and bread crumbs to seasoned beef, poultry and pork products.

Yet, unbeknownst to these manufacturers, a potentially deadly contaminant was lurking…

Peanuts.

What followed was the largest allergy-related recall since the U.S. Food Allergen Labeling and Consumer Protection Act became law in 2006. Retailers pulled 600,000 pounds of meat off the market, as well as hundreds of other products. As of May 2015, reports of peanut contaminated cumin were still being posted by FDA.

Food manufacturing executives have long known that a product contamination event is a looming risk to their business. While pathogens remain a threat, the dramatic increase in food allergen recalls coupled with distant, global supply chains creates an even more unpredictable and perilous exposure.

Recently peanut, an allergen in cumin, has joined the increasing list of unlikely contaminants, taking its place among a growing list that includes melamine, mineral oil, Sudan red and others.

Lex_BrandedContent“I have seen bacterial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant.”

— Nicky Alexandru, global head of Crisis Management at AIG

“An event such as the cumin contamination has a domino effect in the supply chain,” said Nicky Alexandru, global head of Crisis Management at AIG, which was the first company to provide contaminated product coverage almost 30 years ago. “With an ingredient like the cumin being used in hundreds of products, the third party damages add up quickly and may bankrupt the supplier. This leaves manufacturers with no ability to recoup their losses.”

“The result is that a single contaminated ingredient may cause damage on a global scale,” added Robert Nevin, vice president at Lexington Insurance Company, an AIG company.

Quality and food safety professionals are able to drive product safety in their own manufacturing operations utilizing processes like kill steps and foreign material detection. But such measures are ineffective against an unexpected contaminant. “Food and beverage manufacturers are constantly challenged to anticipate and foresee unlikely sources of potential contamination leading to product recall,” said Alexandru. “They understandably have more control over their own manufacturing environment but can’t always predict a distant supply chain failure.”

And while companies of various sizes are impacted by a contamination, small to medium size manufacturers are at particular risk. With less of a capital cushion, many of these companies could be forced out of business.

Historically, manufacturing executives were hindered in their risk mitigation efforts by a perceived inability to quantify the exposure. After all, one can’t manage what one can’t measure. But AIG has developed a new approach to calculate the monetary exposure for the individual analysis of the three major elements of a product contamination event: product recall and replacement, restoring a safe manufacturing environment and loss of market. With this more precise cost calculation in hand, risk managers and brokers can pursue more successful risk mitigation and management strategies.


Product Recall and Replacement

Lex_BrandedContentWhether the contamination is a microorganism or an allergen, the immediate steps are always the same. The affected products are identified, recalled and destroyed. New product has to be manufactured and shipped to fill the void created by the recall.

The recall and replacement element can be estimated using company data or models, such as NOVI. Most companies can estimate the maximum amount of product available in the stream of commerce at any point in time. NOVI, a free online tool provided by AIG, estimates the recall exposures associated with a contamination event.


Restore a Safe Manufacturing Environment

Once the recall is underway, concurrent resources are focused on removing the contamination from the manufacturing process, and restarting production.

“Unfortunately, this phase often results in shell-shocked managers,” said Nevin. “Most contingency planning focuses on the costs associated with the recall but fail to adequately plan for cleanup and downtime.”

“The losses associated with this phase can be similar to a fire or other property loss that causes the operation to shut down. The consequential financial loss is the same whether the plant is shut down due to a fire or a pathogen contamination.” added Alexandru. “And then you have to factor in the clean-up costs.”

Lex_BrandedContentLocating the source of pathogen contamination can make disinfecting a plant after a contamination event more difficult. A single microorganism living in a pipe or in a crevice can create an ongoing contamination.

“I have seen microbial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant,” observed Alexandru.

Handling an allergen contamination can be more straightforward because it may be restricted to a single batch. That is, unless there is ingredient used across multiple batches and products that contains an unknown allergen, like peanut residual in cumin.

Supply chain investigation and testing associated with identifying a cross-contaminated ingredient is complicated, costly and time consuming. Again, the supplier can be rendered bankrupt leaving them unable to provide financial reimbursement to client manufacturers.

Lex_BrandedContent“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet. Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”

— Robert Nevin, vice president at Lexington Insurance, an AIG company


Loss of Market

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While the manufacturer is focused on recall and cleanup, the world of commerce continues without them. Customers shift to new suppliers or brands, often resulting in permanent damage to the manufacturer’s market share.

For manufacturers providing private label products to large retailers or grocers, the loss of a single client can be catastrophic.

“Often the customer will deem continuing the relationship as too risky and will switch to another supplier, or redistribute the business to existing suppliers” said Alexandru. “The manufacturer simply cannot find a replacement client; after all, there are a limited number of national retailers.”

On the consumer front, buyers may decide to switch brands based on the negative publicity or simply shift allegiance to another product. Given the competitiveness of the food business, it’s very difficult and costly to get consumers to come back.

“It’s a sad fact that by the time a manufacturer completes a recall, cleans up the plant and gets the product back on the shelf, some people may be hesitant to buy it.” said Nevin.

A complicating factor not always planned for by small and mid-sized companies, is publicity.

The recent incident surrounding a serious ice cream contamination forced both regulatory agencies and the manufacturer to be aggressive in remedial actions. The details of this incident and other contamination events were swiftly and highly publicized. This can be as damaging as the contamination itself and may exacerbate any or all of the three elements discussed above.


Estimating the Financial Risk May Save Your Company

“In our experience, most companies retain product contamination losses within their own balance sheet.” Nevin said. “But in reality, they rarely do a thorough evaluation of the financial risk and sometimes the company simply cannot absorb the financial consequences of a contamination. Potential for loss is much greater when factoring in all three components of a contamination event.”

This brief video provides a concise overview of the three elements of the product contamination event and the NOVI tool and benefits:

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“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet,” he said. “Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”

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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.




Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
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