1. Art and Diseño

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
1
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.
2
Munich Re Topics Magazine 1/2015
12
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.
26
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.
6
12
No calm after the storm
Weather-related natural catastrophes are proving
a major headache for insurers.
16
We want to make a bigger impact
Philipp Wassenberg, CEO of MROC, talks about
the challenges that lie ahead.
20
Living with the new normal Canadian insurers face challenges from
increasing exposures.
22
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.
32
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.
26
32
42
Editorial1
News4
Literature41
Column46
Imprint48
Munich Re Topics Magazine 1/2015
3
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”.
4
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
5
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.
6
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
7
Enterprise Risk Management
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.
8
Munich Re Topics Magazine 1/2015
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.
Enterprise Risk Management
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.
Munich Re Topics Magazine 1/2015
9
Enterprise Risk Management
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.
10
Munich Re Topics Magazine 1/2015
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not if, but how
Munich Re Topics Magazine 1/2015
11
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
13
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
14
2007
2007
2008
2008
2009
2009
2010
2010
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
15
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
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
17
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
18
Munich Re Topics Magazine 1/2015
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
Munich Re Topics Magazine 1/2015
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.
20
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
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
Munich Re Topics Magazine 1/2015
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
Munich Re Topics Magazine 1/2015
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.
24
Munich Re Topics Magazine 1/2015
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]
Munich Re Topics Magazine 1/2015
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.
26
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
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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Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
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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Munich Re Topics Magazine 1/2015
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]
Munich Re Topics Magazine 1/2015
31
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
33
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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Munich Re Topics Magazine 1/2015
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
Munich Re Topics Magazine 1/2015
35
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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Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
37
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
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
39
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.
40
Munich Re Topics Magazine 1/2015
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
Munich Re Topics Magazine 1/2015
41
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.
42
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
43
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
44
Munich Re Topics Magazine 1/2015
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.
Munich Re Topics Magazine 1/2015
45
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.
46
Munich Re Topics Magazine 1/2015
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.
What is it that makes reinsurance
so exciting?
You can find out the answers to this question in TOPICS ONLINE.
Our magazine for insurers takes you behind the scenes at Munich Re
and shows you what drives us. We will introduce you to interesting
people, address current topics in the worlds of insurance and finance,
and present the latest trends, solutions and services.
Have your say: use the comment function to start interesting
discussions with us.
www.munichre.com/en/topicsonline
not if, but how
Munich Re Topics Magazine 1/2015
47
© 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
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Not if, but how