There is to be a vigorous shake up of the Slovak private health insurance industry. So vigorous in fact, that it’s actually going to disappear altogether.
The Slovak government has reached a decision this week that it wants to bring all health insurance under a single state run system. A move the government feels will save the Slovak state some money by stopping the flow of precious state funds into private corporation’s profits and channeling them back into the system instead.
Prime Minister Robert Fico has charged the Slovak health care ministry to work out a plan of action by the end of September. The process is currently set to be completed by 2014, although Slovak officials do not expect the current insurers to go without a fight.
Slovakia can force a buyout of the two private health insurers, a move Fico said would have to be very carefully planned and executed to prevent any chances of backlash in the courts.
Fico has stated that, “”It would be ideal if we could reach an agreement on the buy-back.”
It appears that Fico is determined to see this measure implemented fully, regardless of opposition. “In case we will not reach an agreement, we will use the expropriation measure. This is a standard procedure written down in the constitution and known also elsewhere in Europe.” He added later that, “This (expropriation) is in the public interest.” However, the Prime Minister was not prepared to venture an estimate of the value of a buy-back or eventual nationalization, saying that the value would have to be determined by independent auditors.
The current health care system in Slovakia is a form of private-public partnership, where all Slovaks pay a healthcare tax of 14%, and can choose cover provided by one of the three providers, who provide cost-free treatment. The two private health insurers, Union, a unit of Dutch Achmea B.V., and Dovera, controlled by Slovak-Czech private equity group Penta Investments, provide cover for about 1.8 million of a total 5.4 million Slovakians. The state owned General Health Insurance Company, or VsZP, provides cover for the remaining 3.6 million citizens.
Katarina Kafkova, head of the Slovak Association of Health Insurers, said on Wednesday that, “We don’t consider re-installation of a single health insurer is the best possible option,” and made it clear that investors were not interested in ending their operations in Slovakia.
Martin Danke, a spokeman for Penta Investments, stated that, “We’re taking the plan into consideration. We don’t know any details of how the government wants to carry it out. It still holds that we want to be active in the sector of health insurance long term. There have been no talks with representatives of the government about its plans.”
Achmea was very direct in its reply: “If necessary, Achmea will take all steps necessary to protect the business interests of Union,” adding that it was not interested in selling Union or its portfolio to the state.
It is quite understandable that the private investors would fight this reform. Q1 profit for the entire health insurance sector in 2011 was almost EUR 13.5 million (USD 16.5 million), from a gross aggregated revenue during the quarter of EUR 871.1 million (USD 1.1 billion). Dovera’s share of the profits was EUR 6.6 million (USD 8.1 million), down from EUR 10.9 million (USD 13.35 million) for the same period the year before, Union only posted a profit of EUR 400,000 (USD 490,000), for Q1 2011, compared to a small loss for Q1 2010. At the same time, EUR 7 million (USD 8.6 million) can go quite a long way when channeled back into the health service especially in light of the current state of EU finances.
This is not the first time Prime Minister Fico has taken on the private healthcare industry in an attempt to save his country money. He banned private insurers from making a profit during his previous stint as Prime Minister between 2006-2010. This was later overruled by the Slovak Constitutional Court.
While the Prime Minister obviously has noble intentions, the Slovak Health Care Ministry will have its work cut out for it. Firstly to successfully evict Union and Dovera without prolonged legal battles, and then to build the national health insurance service in such a way that it has the capacity to offer cover to all Slovaks, while remaining profitable. Public healthcare systems are notorious for effectively draining blood out of the healthiest economy, Slovakia’s General Health Insurance Company is currently on the right track, let’s hope it will stay that way. This is definitely a story that will not be over soon.
There have been a number of notable changes in International Private Medical Health Insurance in the last few weeks, while not as earth shattering as the Libor scandal or the crop failures in the US, the progressive and continual changes reveal an industry that is currently very dynamic and competitive. While Bupa is launching products to fill gaps it sees in the IPMI market, US healthcare giant UnitedHealth Group is steadily working to increase the scope and quality of their international healthcare cover. Medicare International has been tuning their products to keep them competitive, and have made efforts to keep premium increases down to a minimum.
Bupa, one of the world’s largest insurers, has recently announced a new range of international private medical insurance products called Bupa Flex. Until now, international health insurance policies were only available for a minimum of one year, but Bupa Flex aims to provide the benefits of traditional long term international medical cover without the usual 12 month minimum duration. It is aimed at international travellers and expats who are planning to be abroad for a period of between 3 to 11 months. Now, people moving abroad for short term transfers can tailor the duration of their policy to their exact needs. It offers benefits above short term travel insurance because policyholders can increase the duration of their cover at any time, and even convert to long term health insurance without a loss of or break in cover.
An innovative aspect of Bupa Flex is that it is managed online. Bupa has created a secure online portal called Membersworld, through which subscribers can manage almost every aspect of their insurance cover. The portal allows clients to access their policy documentation, request pre-authorisation for planned treatments, submit claims and access live 24 hour webchat with experienced advisors. The service also uses email and SMS alerts to notify members of the status of their claims, or to alert them that there are documents online which require their attention.
Bupa Flex comes in two flavours; Bupa Flex and Bupa Flex Plus. The basic plan covers inpatient and day care treatment, local air and road ambulances costs, and outpatient surgical operations. Bupa Plus adds a full range of out-patient coverage as well. Because of the short term nature of the products, there are no options to add maternity, newborn care or cancer benefits. Both plans have a total limit of GBP1 million (USD 1.7 million) and do not offer cover in the United States.
NIB and Unitedhealthcare International Join Forces in Australia
NIB, Australia’s fifth largest health insurer, and UnitedHealthcare, based in Minnesota, have signed a strategic partnership whereby NIB will support UnitedHealthcare’s international health insurance members in Australia. The deal gives UnitedHealthcare International customers access to NIB’s network of healthcare providers in Australia, which includes more than 500 hospitals. It extends UnitedHealthcare’s customers direct settlement options at a wider range of healthcare facilities in Australia, like dentists and opticians.
UnitedHealthcare sells international expat medical insurance, under their Global Solutions brand, to employers with employees based internationally. “UnitedHealthcare International’s clients are benefiting from our expanding global health care network, providing their employees with seamless access to high quality health care. A growing number of our clients have operations in Australia, and they now will have access to top hospitals and care providers there,” said Simon Stevens, president of Global Health at the UnitedHealth Group.
The company recently set up a similar alliance with Dubai-based Al Sagr National Insurance Company, to expand their Global Solutions coverage to seven countries in the Middle East. Through this alliance, UnitedHealthcare members have access to local services in the Kingdom of Saudi Arabia, UAE, Jordan, Qatar, Oman, Bahrain, Lebanon and Kuwait.
NIB currently provide healthcare cover in Australia to about 20,000 international customers, and are aggressively working to position themselves for expansion into the international healthcare market. “We have a view that increasingly people will need global health insurance cover and that if we don’t have an involvement in this phenomenon we could be missing an enormous opportunity,” said Mark Fitzgibbon, CEO of NIB.
UnitedHealth Group serves 75 million people worldwide through its family of US and international health and well-being businesses and are the market leaders in supporting employers with international workforces.
While there is no reciprocal agreement in place for NIB customers in the USA, NIB may be hoping to expand their international healthcare coverage through partnerships of this kind.
Medicare improves international health cover
Medicare International has made a number of improvements to its international health insurance products.
Organ transplantation and HIV/AIDS benefits will now be included in their International and International Plus policies at no extra cost, with the transplantation benefit carrying a limit of USD 170,000 for the International, International Plus and Executive plans which rises to USD 340,000 with the Executive Plus plan. The HIV/AIDS benefit will be subject to a two year waiting period, and will have a lifetime limit of USD 17,000 across all plans.
Maternity and complicated or abnormal pregnancy cover available on the Executive and Executive Plus packages will no longer be subject to an excess of 20% and 30% respectively. and the 20% co-payment on newborn care has been scrapped. The reduction in out-of-pocket expenses may be a welcome change, as simplifying and streamlining the process at a stressful time may increase the perceived value to policyholders.
Claims are also no longer subject to a USD 5100 limit for group and individual claims, but claims are now fully recoverable and without any cap, subject to the policy limits of USD 1.7 million per annum.
Price rises for 2012 have also been well below the expected annual medical inflation rate of 12-14%, with an average increase of 8% for individual plans and just 5% for group policies. With the current state of the economy, it is a welcome change to see policies undergo significant improvement while still keeping premium increases in check.
The competitiveness of the International Health Insurance market, the rising demand and scope for growth into developing parts of the world, like East Asia, are keeping insurers on their toes. We can expect a continuing stream of innovative products and new solutions as insurers contend for market share.
As the European financial situation becomes more uncertain with each day passing, Vhi Healthcare, Ireland’s largest health insurance company must raise €300 million (US $368.55 million) which could affect the premiums of over 2.2 million Vhi policyholders.
Vhi, short for Voluntary Health Insurance, is generally referred to as “The VHI” by residents of Ireland and is traded under the brand Vhi Healthcare. With headquarters in Dublin, Ireland, VHI is a state-controlled corporation which has been accused of being given preferential treatment above its primary competitors. It is regulated by the Health Insurance Authority which is the private health insurance regulatory board, monitoring activities in Ireland.
The issue at hand is that Vhi Heathcare is guaranteed by the State, meaning that it is not required to keep specific reserve amounts on hand in the event there is a spike in the number of claims. In addition to the guarantee, it cannot be declared bankrupt.
Competition experts and analysts say that preferential treatment towards Vhi needs to end in order to restore balance to the private healthcare market.
The preferred status for Vhi has allowed to it borrow funds at advantageous rates, in addition to the lack of need to keep a reserve balance. Lenders are happy to oblige to Vhi’s requests as the loans were essentially risk free due to the fact that the government would pick up the bill if Vhi defaults. However, the likelihood of Vhi defaulting and going bankrupt is almost impossible as it is a statutory body.
The European Commission has called for an end to the preferred status of the company, and has proposed that the government end the guarantee by the end of 2013. Vhi Healthcare was receptive to the proposal; however it made note that a risk-equalization plan will need to be implemented.
Initially, there had been plans to privatize Vhi Healthcare back in 2010. However, the new coalition government decided to retain Vhi when it entered office, making it a pillar of the universal health insurance system which is scheduled to be rolled out in 2016. Under this plan, all citizens will be required to purchase health insurance from an insurance provider, not exclusively Vhi, and the government would provide a subsidy of some sort for those who meet the low income criteria.
Currently, Vhi is required to raise €300 million (US $368.55 million) in capitalization and one of their options to do so include raising the premiums of its 2.2 million clients. This €300 million (US $368.55 million) is to increase the solvency ratio of Vhi, ensuring the insurance company has enough money on hand to cover any unexpected spike in claims. Should Vhi decide this is the best way for it to raise capital, clients of Vhi can expect to see their premiums to be raised by up to €135 (US $165.85) this year. Moving forward, Vhi will have to retain 40 cents to the euro in income to safeguard itself as per regulations.
Meanwhile, competitors welcomed and encouraged the move to abolish the guarantees and preferential treatment for Vhi. Specifically, Aviva stated that the clients of Vhi should not be negatively affected by the increase in premiums due to an external cause from the government. Aviva called on the government to provide more details as to how it plans to handle the solvency requirements of Aviva.
In related news, the government of Ireland has recently hired a new CEO for Vhi. The coalition government, however, breached the salary limitations which are imposed on maximum salary limits for new CEO’s of Vhi. Vhi’s new chief is John O’Dwyer, and his annual income will be €238,727 (US $293,276.12); this represents almost €50,000 (US $61,425) more than the limit.
Despite the limits in place, Minister Brendan Howlin stated the need for exceptions in specific cases, especially in the case of Vhi due to some of the substantial changes that are about to take place.
This comes at a time full of volatility for the European financial industry. With Euro prices falling and shrinking, or failing, economies, Vhi’s deregulation will need to be handled with care. If safeguards are not in place, many individuals who hold policies may no longer be able to afford their current plans. If they choose to move away from their current plans, they may not receive adequate coverage as competitors may not want to offer the same plan for the same price, which could cause greater uncertainty into the lead up to the introduction of the universal health insurance system.
Insurance Companies Mentioned:
A report released on Monday by the Healthcare Reform Office in China announced that the 3 year plan to improve some of the fundamental parts of China’s healthcare system completed its objectives on schedule. The Chinese Central Government spent almost US$71 billion between 2009 and 2011 in efforts to improve healthcare services to the public, build primary care medical facilities and new hospitals. Much of the effort was focused on extending coverage and providing medical services to the rural population, and the report claims that 95% of Chinese are now covered by public medical insurance.Read the rest of the Healthcare in China: The Overhaul that Underwhelmed article.
In recent announcements, AXA, the Industrial and Commercial Bank of China Co Ltd (ICBC) and Minmetals declared the launch of their foray into the China insurance market for life insurance. Officially branded as ICBC-AXA Life, the company recently received official approval from China’s State Council and all other relevant governing bodies to do business in the country. This follows the acquisition of 60 percent of the equity stake in AXA-Minmetals by ICBC.
ICBC-AXA Life represents AXA’s long term commitment to the Chinese market, according to Henri de Castries, Chairman and CEO of AXA. By partnering with ICBC, AXA stands to gain significantly in terms of expertise and experience, bringing diversified and comprehensive insurance coverage for the Chinese market.
Prior to the partnership, AXA and Minmetals formed the venture known as AXA-Minmetals and was established in 1999. In October of 2010, ICBC acquired a 60 percent equity stake in AXA-Minmetals, resulting in an equity split of 60 percent ICBC, 27.5 percent AXA, and 12.5 percent Minmetals. The equity stake was purchased for 1.2 billion yuan by ICBC and prior to the acquisition, the equity split was 51 percent-50 percent AXA-Minmetals.
With headquarters in Shanghai and operations in over 20 major cities and provinces, ICBC-AXA intends to service a vast majority of China. Beijing, Shanghai, and Guangzhou will serve as major service hubs. Some of the products which ICBC-AXA will offer include education, family protection, wealth management, and retirement insurance advice and services.
ICBC-AXA will be leveraging ICBC’s 282 million clients and expertise in the Chinese financial industry. The strategic move on both parties should prove to set a new precedent as China’s power player teams up with Europe’s largest insurer. Ambitious plans are in place as ICBC-AXA strives to be the leading provider for insurance in China.
In recent statements, Mr. Castries was quoted as saying that Europe looks like Chernobyl before the explosion, indicating forecasts of tumultuous times ahead. The development of ICBC-AXA represents a diversified move for AXA and a new area of opportunity for ICBC. As financial woes continue to haunt the financial industry, the insurance industry represents a stable move despite the large gains that can be achieved through it.
The Chinese market is difficult to penetrate due to strict Chinese government oversight and regulation. As such, China represents a significant opportunity due to its sheer size of population. Previously, AXA utilized Minmetals’ network and Chinese state-controlled status to break into the Chinese market. However, as Minmetals is a mineral and metal company, AXA stands to gain much more through the help of ICBC’s broad reach within the relevant sector.
The Chinese market is expected to grow at an average rate of 12 percent per year between 2010 and 2020, according to analysts. Chinese national companies maintained a 95 percent market share on life insurance and 99 percent in damage products, while more than 50 foreign players were struggling to win more of the market for general lines. AXA aims to bypass regulatory brakes which have restricted the company’s ability to compete in the past. ICBC has agreed to distribute AXA’s product in over 16,000 branches. AXA remains dedicated to the Chinese market and is actively trying to withdraw from activities within Australia and New Zealand.
Appointed as the Chairman of the Board of ICBC-AXA Life is Mr. Sun Chiping and President Mr. Jamie McCarry will oversee the day-to-day business operations of the newly formed joint venture.
While AXA is attempting to significantly increase market share in China, ICBC is actively trying to increase their market share in Europe. It is understood that ICBC will leverage AXA’s connections and expertise within the European market to help ICBC expand.
ICBC is the world’s largest bank by market capitalization and is looking to diversify its holdings outside of banking. ICBC is one of China’s four state-owned commercial banks and was initially founded as a limited company in 1984. It entered two stock markets simultaneously, Hong Kong and Shanghai, in the world’s biggest initial public offering at the time, featuring $21.9 billion US in public funding.
As Europe’s second largest insurer, AXA Group is a worldwide leader in insurance and asset management. With over 101 million clients in 57 different countries, AXA boasts revenues of over 86 billion euro and earnings of over 3.9 billion.
Minmetals, officially China Minmetals Corp, is China’s largest metal trader. Minmetals specializes in the production and trading of metals and minerals, namely copper, aluminum, tungsten, tin, antimony, lead, zinc, and nickel. As a state-owned enterprise, Minmetals is under the jurisdiction and laws of China.
Insurance Companies Mentioned:
AXA the global insurance group in Paris
Aviva Indonesia is introducing an International Health Insurance product offering to the Indonesian market in response to a growing number of expats and well heeled local Indonesians.
The portfolio offers international health insurance coverage with limits between US$1-2 million, depending on the product, and will allow holders of a policy to travel internationally in order to receive qualifying medical treatment.
According to Aviva Indonesia’s vice president, Albert Wanandi, the products are targeted squarely at the wealthy Indonesian and expatriate market, with premiums starting at around US$ 1,360 per annum.Read the rest of the Aviva Indonesia Targets Affluent Indonesians and Expatriates with International Coverage Offerings article.
A vote planned for October by EU lawmakers will most probably be postponed following the failure to reach an agreement on a final draft of the strict new set of rules proposed for regulating the insurance industry, known as Solvency II.
EU officials and lawmakers failed to come to an agreement before the beginning of the European Parliament’s annual summer break, and will now have to try and squeeze even more into the already busy post-break timetable in September.
The likelihood of making the original deadline will be “very challenging, to say the least,” according to Olav Jones, the Deputy Director General of Insurance Europe.
Solvency II deals mainly with new rules governing the level of capital insurers must have to cover their risks, largely increasing the current requirements. As negotiations continue to drag on, insurers are facing uncertainty over their future capital requirements, and prolonging this uncertainty is having a negative effect on the confidence of potential investors. The industry is frustrated by the delays, and are doing their utmost to help the talks reach a conclusion as soon as possible. However, no one wants an unacceptable compromise passed into law. “Nobody amongst the parties negotiating wants a delay but at the same time we do not want to deliver something that is wrong,” stated European Parliament Economic and Monetary Affairs Committee Chair, Sharon Bowles.
Originally planned to come into force later this year, the current start date of January 2014 for Solvency II will most probably be pushed back again, unless an agreement can be reached in order for it to be voted on in October. This will then give national governments until June 2013 to adopt the legislation, and giving insurers 6 month to comply, before the deadline of January 2014.
Differences between EU member states regarding the methodology for calculating the required capital buffer for long-term life insurance contracts have repeatedly served to frustrate any attempts at reaching a deal. Thursday’s round of talks were no different, after Germany insisted on wider testing of some proposed calculation methods.
A proposed solution to the delays, which is gaining more support all the time, is to implement the new regulations in phases, with the parts that are agreed upon being implemented while elements that require further discussion and modification would be implemented when finalized.
Solvency II regulations have been under consideration for 10 years, and will lead towards higher capital requirements and other more stringent regulatory requirements for insurers. Most of the bigger insurers are thought to be well prepared for this, but there have been fears expressed about the possible negative effect on overseas competitiveness.
Meanwhile, Oracle has announced the availability of Oracle Insurance Solvency II Analytics, software aimed at helping insurers quickly understand how best to make their businesses compliant with Solvency II requirements, as well as to more accurately assess and manage risk using a single, unified platform. The software comes with a host of out-of-the-box reports designed specifically to aid compliance with the proposed new legislation. While the entirety of Solvency II has not been set out, many companies, whether in the insurance industry or those providing services to insurers, have long been trying to be prepared for the new requirements. However, with the current atmosphere of uncertainty they need to be prepared to respond to new developments as well.
Low interest rates “an enormous stress”
The current European economic climate, created by efforts to try to stimulate economic growth and rescue an ailing banking sector, is placing the insurance industry under “enormous stress”. This according to Nikolaus von Bomhard, Chief Executive of Munich Re, one of the world’s largest investors with a portfolio of more than €200 billion (US$245 bn).
While the low interest rates in Europe are a boon for consumers and those looking for cheap credit, large investors are feeling the pinch as their ability to make money on large capital investments is being severely hampered.
The value of money over time is especially critical to insurers, since they receive most of their money up front, in the form of policy payments, and then are liable for servicing those policies later. In an environment where the interest rates are extremely low, it is very hard to remain profitable when many annuity and life insurance products guarantee returns significantly higher than the current interest rate.
The interest rate on 10 year German bonds is currently around the 1.24% mark, well below the 1.6% classified as “extreme” and “unsustainable” by Joerg Schneider, CFO at Munich Re, during an interview in May. The rate hit a record low of just 1.21% in June 2012.
von Bomhard also expressed his view that banks should be allowed to go bust and creditors be made to carry a share of the losses. This might be unavoidable, should economist Nouriel Roubini’s recent prediction prove true and the European debt crisis spirals out of control.
Fortunately, there is some good news to offset the the increased pressure resulting from low interest rates.
Global losses due to natural catastrophes have been moderate for the first six months of the year.
2012 is off to a good start as far as insuring natural disasters are concerned, with a total insured loss valued at around US$12 billion, well below the ten year average of US$19.2 billion. Worldwide, the total loss has also been well below the average of US$26 billion for the first 6 months, which is significantly lower than the ten year average of US$75.6 billion. This is according to a recent publication by Munich Re, a leading global reinsurer.
Deaths due to natural disasters in the first six months of the year are also well below the ten year average of 53000, at 3500.
2011 was marked by massive losses suffered during the disasters in Japan and New Zealand, with the total loss for the first half of 2011 stood at US$300 billion of which US$82 billion was insured.
Almost 85% of worldwide insured losses and 61% of total losses were incurred in the USA, mostly due to an earlier than usual tornado season and out of control wildfires. Since 1980, the USA has had an average of 65% and 40% respectively, but the first half of 2012 has seen near record levels of tornado activity.
The most severe single event was a line of thunderstorms that crossed several states, including Ohio and Tennessee, between the 2nd and 4th of March. More than 170 tornadoes were counted in this period, and the storm left 180,000 homes damaged, with total losses in the region of US$4 billion.
In Europe, natural disasters caused lower losses than usual, with only 10% of insured and 16% of overall global losses incurred on the continent. Winter storm Andrea, which brought heavy snowfall and winds gusting up to 200km/h caused the most damage, incurring US$700 million worth of losses, of which about US$400 million was insured. Earthquakes in the sparsely populated area of Modena in Italy caused damage to many historically important buildings.
Aside from some serious flooding in China in May, causing almost US$2.5 billion in overall losses, the Asia Pacific region has had no significant, major loss events to date.
While the mildness of 2012’s weather so far is certainly welcome news, Torsten Jeworrek, a board member at Munich Re, pointed out that, “It is in line with expectations that extreme and more moderate years will balance each other out in the course of time.”
Some success in efforts to deal with Somali piracy
There has been some significant progress made in the fight against piracy, especially off the Somali coast, with a decline of more than 50% in incidents involving Somali pirates. In the first half of 2012, there were 69 Somali-related piracy events, compared to 163 for the same period in 2011.
According to a recent report by the International Maritime Bureau (IMB), global incidents of piracy fell to 177 reported attacks in the first half of 2012, down from 266 for the same period last year. This improvement is mostly as a result of increased naval activity, including preemptive action, as well as improved security measures put in place by shipping operators and the hiring of private security contractors. “Naval actions play an essential role in frustrating the pirates. There is no alternative to their continued presence,” said IMB director Pottengal Mukundan.
While there is a marked improvement in the situation off the Horn of Africa, there were still 11 vessels and 218 crew being held by Somali pirates, some in unknown locations on the mainland.
The Gulf of Guinea, on the West coast of Africa, has seen an increase in piracy, with 32 incidents reported in the first half of the year, up from 25 in the same period in 2011.
Globally, a total of 20 vessels were hijacked worldwide, with 334 crew members taken hostage. Another 80 vessels were boarded, 25 fired upon and 52 vessels reported attempted attacks. Somali pirates still present the most serious threat and ships should continue to take measures to protect themselves.
Elsewhere in the world, attacks are mainly armed robberies, with almost 20% occurring in Indonesia, however, guns were only reported on one occasion.
Bank Danamon Indonesia has announced that, in partnership with Asuransi Jiwa Manulife Indonesia, the bank will be offering new insurance and wealth management products.
The bancassurance deal, which is set to run for ten years, is a follow up of a partnership agreement between the two companies in October 2011. The agreement was to grow bancassurance in Indonesia, and has now come into effect a little under a year later.
Speaking about the new partnership, Alan Merten, the CEO and President of Manulife Indonesia was quoted as saying: “I am very pleased that the partnership between Danamon and Manulife is now officially launched! This is another significant step Manulife is taking towards realizing our vision to provide strong, reliable, trustworthy, and forward-thinking solutions to our customer’s most significant financial decisions.”Read the rest of the Bank Danamon Indonesia Partners Up With Asuransi Jiwa Manulife Indonesia article.
As the London Interbank Overnight Rate, or Libor, scandal continues to boil into a deep and ugly stew, insurers around the world are left with an ominous premonition that the industry could be hit by billions in losses. In order to fully understand the situation, and the potential hit to the insurance industry’s bottom line, it is important to know more about the background of Libor and the situation at hand prior, to looking at how and the scope of potential damage to insurance companies.
The London Interbank Overnight Rate, or Libor, is the primary lending rate which is set in London every day. The rate is calculated by Thomson Reuters representing the British Bankers’ Association. This rate determines how much it would cost a bank to borrow from another bank. The Libor fluctuates day-to-day and is set by amalgamating the offered deposit rates from the largest of banks. The top rate and the bottom 25 percent of rates are both discounted and the rest are averaged to determine the Libor rate daily.
As a rate that is publicly and widely used, the Libor holds a lot of significance in the financial world and affects many real world prices. The Libor is used as a benchmark rate for many variables, including currencies, variable mortgages, and futures. The Libor plays a role in liquid asset markets and has a large influence in these areas.
With such a high dependency on the Libor, it would be assumed that a high scrutiny be placed on the calculation and the validity of its calculation.
However, big banks, including leading UK institution, Barclays, and traders have an incentive to manipulate the rate, and even slight movements by a few basis points could have a significant financial effect.
One case in which the Libor could be manipulated is by the way which big banks report their rates to Thompson Reuters. A bank indicating that it charged higher rates could signal the fact that the bank is not as healthy relative to its competitors. This could, in turn, impact that specific bank’s own borrowing rates, causing it to borrow at higher costs. The big bank, therefore, has a high incentive in some cases to understate their rates in order to keep the cost of borrowing low.
Another case in which it is being manipulated is direct collusion and price fixing between traders and bankers. As the Libor rate is set on a daily basis, there stands a lot of opportunity for malpractice by knowing the direction in which the Libor is going to change in. Mentioned earlier, each basis point change could represent a significant amount of profits or losses for those who are caught on the right side of it. Advanced knowledge of the Libor rate change puts a trader at a considerable advantage. Traders lobbied rate submitters and banks in order to achieve a favourable rate.
Information about this kind of price setting broke in 2008 due to a Wall Street Journal article. Slowly, information became more available after investigations were put in place. Finally, significant fines were levied upon those responsible for the rate manipulation.
At this point in time, the damage that is done publicly is difficult to predict. However, many have begun to speculate the amount of damage in which insurers will have to face. As insurance companies insure the banks and financial institutions, these organizations are in turn responsible for their actions. They could be facing the brunt of the cluster of storms heading their way from regulators, shareholders, investors, and more. Insurers may have to honour policies and provide the collateral for this disaster.
The real worry for insurers is the proof of Libor fixing and evidence of its negative effects. If an investor was adversely affected by the manipulation of the Libor rates, the investor must prove its case. If successful, then insurers may be on the hook for the financial institutions’ transgressions under the Directors and Officers (D&O) cover.
With each passing minute of the Libor scandal comes more revelations and evidence towards Libor manipulation by financial institutions. From email conversations to testimonies, it is becoming more apparent with proof that the Libor was manipulated. Insurers could be looking at billions of pounds in damages.
Currently, most of the litigation filed establishes the institutions as defendants, rather than directors and officers themselves. The scope of the damage could also bring forth a class action suit on the purchasers’ of Barclays-sponsored American depository receipts behalf. Naming institutions as the defendants is the more strategic move as the institutions have the means to pay off any settlements that might result from the litigations. As litigation is filed, more D&O implications can arise as stock prices will be affected negatively. When stock prices are reduced, shareholders’ value decreases, instigating incentives for litigation against directors and officers to recoup losses. The overall effect on insurance companies backing the financial institutions at hand is significant and is still growing as many financial instruments are pegged directly to the Libor.
In addition to D&O claims from investors, more litigation surrounding errors and omissions claims are coming to light as the scandal progresses. A class action suit against banks could arise if customers of the banks believe they were adversely affected as a direct result of interest rate-related losses.
Despite the possible negative effects for insurers in the Libor scandal, some salvation is available. Policies include a long list of terms and conditions, as well as exclusions, surrounding the coverage available to corporations in light of possible claims. As each new lawsuit surface, every case is scrutinized to ensure that it falls within the coverage of the policy. Experts are recommending a complete analysis of each situation in order to avoid or to minimize the effects of the scandal. In addition, policies are often restricted to a maximum payout amount in the event of a payout, protecting insurance companies from massive compensation to policy holders.
Analysts agree that regulatory fines and penalties which arise from the Libor scandal are unlikely to be covered. In addition, costs incurred by investigations are also unlikely to be covered. Insurance companies sometimes offer themselves a veil of security by naming the investigative agencies for which the investigation originates from. Any investigations from agencies outside of those listed will likely not be covered.
Libor rate manipulation could also affect insurance companies themselves. As the Libor is a widely used rate, insurance companies and their investments as well as funds under management represent a significant amount of assets which could be negatively affected. Insurance companies themselves could be on the plaintiffs themselves in some of the litigation. However, the burden of proof again lies with the plaintiff to indicate they were adversely affected by the manipulation of the Libor.
As revelations continue to surface surrounding the Libor manipulation and the parties involved, a complex situation is at hand for insurance companies as they could stand on both sides of possible litigation. Insurance companies may be hit hard with liability claims while they potentially realize they were adversely affected by falsely reported rates.
Price Reduction With Insurance Competition
As a direct result of competition and strategic partnerships, prices for insurance in multiple areas are decreasing throughout the world. Originating out of public outcry for lower prices, or companies aiming to provide better services to their clients, insurance seekers are experiencing lower prices and are contributing to increased profits for companies.
In New Zealand, two insurance companies have engaged into a partnership which will lower insurance costs in the building trade industries. The companies under discussion are HazardCo, a provider of health and safety insurance in the construction industry, and Plus4 Insurance Solutions (Plus4), an insurance brokerage and financial advisory group, who are working together to lower the costs of accidental insurance and to provide protection of income for self-employed workers in the building trade.
HazardCo has been in operation since 2006 and operates out of New Zealand and it boasts over 7,500 construction business clients. Plus4 has been established since 2008 and now operates out from 10 different locations and has over 25 advisors. Both have expanded significantly over the recent years, bringing innovation to the industry, such as HazardCo’s online training system, Learner Management System.
Utilizing the expertise of both of these companies, building trade workers are able to reduce the average cost of their premiums. Premiums in this industry are required under regulation and can be a significant cost to workers.
Due to Plus4′s knowledge in financial advisory, this agreement allows the insured to have direct access to Plus4′s financial advisors to review compensations and insurance coverage levels. As a result, insurees have experienced substantial savings and increased coverage. Workers in the building trade are required to have insurance, protecting workers from illness or when accidents strike.
Some workers are eligible for a 10% discount on their ACC Work Place Cover Levy with HazardCo, which represents significant costs savings. Under the partnership with Plus4, HazardCo’s clients are able to restructure their insurance coverage, tailoring it to their specific needs which suit their current situation and requirements.
HazardCo’s Mark Potter states that “The partnership with Plus4 has meant that many of our clients have made substantial savings on the cost of their ACC and, as a result, now have in place more comprehensive and appropriate insurance cover.”
In a separate case of lower insurance costs, competition is the main driver of lowering car insurance for residents of the United Kingdom, with price reductions in almost £100 (US$100) on average.
Utilizing the Confused.com and Towers Watson car insurance index, it is shown that prices are decreasing as a result of competition within the industry. A reduction of 7.1% is reflected within the index between Q2 of 2011 and Q2 of 2012.
The car insurance index receives a substantial amount of quotes, allowing for an accurate depiction of the market’s current condition. The index is comprised of over four million quotes, making it one of the most comprehensive indicies in the world for car insurance.
Due to historical statistics, car insurance companies have been offering asymmetries in insurance premiums. However, the European Union have decided that this type of price discrimination is not desirable and have decided to ban this practice. This order is to be enacted later this year and will see that women pay more for their premiums and men will see their premiums reduced.
Despite the EU gender directive soon to be enacted, United Kingdom is still seeing a disparity between price quotes, with men paying on average £110 (US$171) more than women.
Part of the outcry from the gender discriminatory prices had contributed to lower prices. However, sites like Confused.com have also contributed significantly to the lowering of insurance premiums. These sites amalgamate prices from various insurers, allowing competition to force prices lower. Customers have access to various providers, causing no one provider to have a domineering selling power.
In addition to lower prices, online insurance comparison sites have witnessed increase in profits due to higher competition. With higher prices, consumers look elsewhere to find alternatives that suit their budgetary needs, and they find their solutions online. As a result, online comparison sites such as GoCompare have seen double digit profit increases because of their wide array of offerings from various companies. This level of competition has allowed both companies and consumers to benefit, as well as allowed the insurers to service consumers they would have lost without pricing changes.
Both GoCompare and Confused.com offer quotes and showcase insurance policies to consumers from various insurance providers. Like many comparison sites, GoCompare and Confused.com are able to offer lower, on average, insurance premiums because of direct competition that is clearly visible to the seeker.
Consumers will experience progressively lower prices as competition continues to emphasize the need for companies lower their prices as a response.
Insurance Companies Mentioned
HazardCo provides health and safety resources, in addition to systems and support to the New Zealand residential construction trade. HazardCo has expanded significantly since it’s creation in 2006, with over 7,500 construction business clients. Many of HazardCo’s clients are top performing housing companies. HazardCo also provides online training for heath, safety and compliance related subjects.
Plus4 Insurance Solutions operates on a national level in New Zealand as an insurance brokerage and a financial advisory group. Since 2008, Plus4 have grown to 10 locations throughout New Zealand and has over 25 professionals servicing top clients. Plus4 offers an unbiased consultation to small and medium sized enterprises, as well as individual and small business clients.
Insurance Australia Group (IAG) is planning to expand its presence in Asia following successful initial investments worth around US$735.5 million in five countries including India and Thailand. The expansion is part of IAG’s long term goal to have 10 percent or more of its premiums come from Asia by 2016.
IAG’s CEO, Mike Wilkins was confident that building on the company’s investments was the right decision, stating that: “The Asian opportunity is here and now. Over the past couple of years we’ve quietly gone about our Asian strategy and are now getting real traction. We are entering an exciting phase of our Asian ambitions as we shift from a market entry focus to one of driving operational performance from our enlarged regional presence”
Despite his confidence, shareholders are wary of investing even more money into Asia as it brings back memories of the company’s last offshore investment; a costly and damaging expansion into the UK market. The company expanded into the UK in 2006 with the purchase of motor insurer, Hastings Insurance. The investment was considered a failure after the Hastings posted losses which in turn brought down IAG
Some IAG shareholders have expressed that they want the company to focus on domestic markets rather than going abroad. Portfolio manager at Tyndall Investment Management Jason Kim said on his company’s stance: “[Asia] might be exciting but it’s very, very long term. They’ve got such a great business in Australia and New Zealand, and it would be really good to focus on that and harness that.”
Wilkins said IAG will be relying on the ever expanding middle class in Asia to ensure that the company’s latest investments prove to be successful as it is expected that middle class consumption will experience a 200 percent increase by 2020.
The investments that IAG has already made in Asia, including a venture with the State Bank of India and Malaysia’s AmBank have contributed approximately 6 percent to the group’s total premiums and it is next looking to expand into Indonesia.
While a merger in Indonesia is still some ways away as no official deal has been reported, IAG does have a number of possible merger partners. Citing a number of reasons including Indonesia being a “very-high growth market” with “very low insurance penetration” Justin Breheny, Chief Executive of IAG’s Asian operations said: “Its [Indonesia's market] got the characteristics which are very attractive to us.” If a deal occurs, the company will be leaning towards a bancassurance model, teaming up with a bank to provide insurance products through the bank’s existing sales channels.
It is expected that the Asian businesses will collectively lose US$50 million over the short term, however it’s not something that IAG executives will be losing sleep about. This is because by 2017, it is anticipated that the investments will bring in return rates of up to 17 percent, further cementing the point that the expansion into Asia is very much for the future rather than the present.
One of IAG’s three “developing businesses” is its joint venture with the State Bank of India. The venture resulted in the creation of the SBI General Insurance Company Limited, which IAG are hoping will be profitable by 2015.
Despite existing laws stating that IAG cannot immediately add on to the 26 percent of SBI General it already owns, it still expresses hopes that in the future a change in regulations would allow it to increase its stake to 49 percent. In the meantime IAG are hoping that the joint-venture’s plans to set up more distribution channels (including Bancassurance) will increase the amount of money it brings in.
The other two ‘developing businesses’ in China and Vietnam have both initially been successful. In China, IAG own 20 percent of Bohai Property Insurance. China’s insurance industry is dominated by domestic players, with foreign investors only holding 1 percent of the market, and as a result, one of IAG’s big goals for the future is to increase Bohai’s market share.
In Vietnam, IAG own 30 percent of the country’s 6th largest motor insurer, AAA Assurance. Much like China, the industry is dominated by local insurers, and through AAA, IAG are aiming to become the first foreign entrant to gain a meaningful market position by becoming one of the top 3 motor insurers.
With investments in China, India and Vietnam still in their infancy, it’s IAG’s ventures in Malaysia and Thailand that have been the most successful for the company. In Thailand, the company owns 98.6 percent of Safety Insurance, the sixth largest general insurer and one of the top three auto insurers in the country. In the future, IAG expect to increase Safety Insurance’s national presence and achieve a top two position in the motor insurance industry.
While IAG only has a 49 percent stake in its joint-venture in Malaysia, it also has proven to be a good investment up till now as the product of the venture, AMG Insurance, has become one of the top ten insurers in the country. In a couple of months the company is also expected to acquire Kurnia Insurans, a merger which will make AMG Insurance the largest auto insurer in the country.
In response to the seemingly positive investments made, Breheny attributed the success to a couple of elements: “Our extremely disciplined approach to market entry has resulted in an attractive portfolio of businesses, with differing stages of market development and associated growth and return profiles, but all with a clear ability to create value for the Group.”
Insurance Companies Mentioned
Insurance Australia Group
Insurance Australia Group was founded in 2000 and owns a number of smaller insurance companies around the world. It specializes in all sorts of insurance including general, commercial and auto.
SBI General Insurance Company Limited
SBI General Insurance Company Limited is a joint-venture between the State Bank of India and Insurance Australia Group. It has a presence in 20 cities in India and specializes in the retail, corporate and SME insurance industries.
Bohai Property Insurance
Bohai Property Insurance is partially owned by Insurance Australia Group. It has 25 provincial agencies and more than 200 municipal and county agencies and sepcializes in a wide variety of insurance.
Established in 2005, AAA Assurance is part owned by Insurance Australia Group. It boasts more than 30 branches in Vietnam and specializes in motor, property and other types of insurance.
Safety Insurance, a Thai insurer is 96% owned by Insurance Australia Group and deals predominantly with Motor Insurance.
AMG Insurance is 51% owned by AmBank Group and 49% IAG. It is Malaysia’s fourth largest motor insurer and has 2,900 insurance agents.
Kurnia Insurans is a Malaysian company that was formed in 1978. It is one of Malaysia’s top auto insurers and is expected to merge with AMG Insurance in the near future.
The National Bank of Fujairah (NBF) and the Oman Insurance Company (OIC) have signed a lucrative strategic agreement that will pave the way for the bank to release a number of new insurance products in the near future.
The latest deal comes a month after Oman Insurance Company signed a similar agreement with another leading bank in the United Arab Emirates, Commercial Bank International. It comes as no surprise that OIC have signed two major deals that should offer its products to more customers in quick succession This is because at the beginning of the year OIC CEO, Patrcik Choffel, announced that the company would pursue a goal of offering their products to an even great number of people across the Middle East, exactly what these agreements have achieved.
Oman Insurance Company’s stature as one of the biggest and most stable insurance companies in the region was cemented after being rated ‘A’ by rating agency, AM Best and ‘BBB+’ by Standard and Poors. However, their main competitor, Gulf Insurance Company, was given two ‘A-’ ratings from both agencies, and was announced as the ‘Best Insurance Provide in the Middle East 2012′ meaning that for now at least, OIC remains the second biggest local insurer in the region.
OIC’s deal with the National Bank of Fujairah should see the bank offering customers new bancassurance general and life insurance products. According to Sharif Mohamed Rafei, the bank’s Head of Retail Banking, the products “will strengthen our [NBF] efforts to become a one-stop destination for our customers’ financial and security needs.” He went on to say that the new bancassurance products will be “convenient and competitive products to meet their [the customer's] needs.”
It’s a high profile merger in the UAE, not only because Oman Insurance a leading company in the region, but also NBF recently picked up awards for the Best Commercial Bank, Trade Finance and Treasury Management at this year’s Banker Middle East Industry Award.
The Middle East insurance sector is becoming an increasingly lucrative industry. As insurance penetration is estimated to be lower than 10 percent in the region, there is still a large segment of the local market which is not adequately being served – pointing to significant upside if OIC is able to capitalize on the existing coverage gap. A low level of penetration is part of the reason why teaming up with banks and expanding reach can be extremely beneficial for OIC and other Gulf insurers.
Speaking about the agreement, National Bank of Fuajirah’s CEO, Dane Cook, explained that the deal signified the banks desire to expand into new areas of banking products: “NBF has traditionally focused on its core strengths in corporate and commercial banking, trade finance and treasury, and we now see an opportunity to deepen our longstanding client relationships with a wider range of personal banking products.”
The insurance market in the UAE, where the deal will have the greatest impact, is expected to grow at a double digit rate from 2010 to 2015. As OIC are the biggest insurer in the country, they are expected to benefit greatly.
One area of rapid growth that will not benefit Oman Insurance Company is the huge expected increase in the number of people purchasing Takaful (Islamic Insurance) products. In the past, the UAE’s Takaful industry alone has experienced an astonishing 135% increase in growth. However, laws specifying that Takaful operators cannot also offer conventional insurance, lead OIC to opt out of offering Takaful products, as they would risk losing huge amounts of customers with conventional coverage.
Insurance Companies Mentioned
Oman Insurance Company
Oman Insurance Company was founded in 1975 and is one of the leading insurers in the Middle East. They specialize in a whole range of insurance products including life, health and small business insurance.
Gulf Insurance Company
Established in 1962, the Gulf Insurance Company is the largest insurance company in Kuwait, and one of the largest in the Middle East. GIC specialize in a variety of insurance products ranging from life and health to marine and aviation insurance.
German insurance company Talanx has recently scaled Poland’s insurer rankings to sit comfortably as the second largest German insurance company.
Within the past month, Talanx has made several core acquisitions that helped it expand in size and quality. After cooperating with Japanese insurer Meiji Yasuda to acquire Wroclaw-based Europa Group, Talanx went on to complete the acquisition of Belgium-based KBC Bank subsidiary, TUiR Warta, no more than a few weeks later, securing its position among Poland’s top insurers.
Talanx has a history of providing comprehensive insurance services in Poland with its two subsidiaries, HDI-Gerling Zycie and HDI-Asekuracja.
The Europa Group experienced a solid 2011 business year, with a a net profit of EURO42 million (USD51.5 million) from premiums totaling EURO173 million (USD212.2 million).
Also, the acquisition of Warta contributed an additional Zloty649 million (USD194.4 milion) of non-life premiums, and Zloty599 million (USD175.14 million) of life premiums to Talanx during quarter one 2012, amounting to an overall premium increase of 8% at EURO7.6 billion (USD9.32 billion). Meiji-Yasuda Life is set to by 30 percent of Warta’s shares from Talanx.
Compared to last year, Talanx almost tripled its first quarter results, earning a net profit of EURO211 million (USD268.3 million), as opposed to only EURO77 million (USD85.87 million) for the first quarter of 2011.
Currently, Talanx is the 11th largest insurance group in Europe. It is already moving several of its insurance lines and retail to the international market. Therefore, judging from the successful year Talanx has had so far, it should come as no surprise that the insurance group is close to having its initial public offering (IPO).
Originally, its IPO was unofficially due for June or at the latest, early July. Though this date has been postponed because of the European debt crisis and stock market developments, everything is in place for the big change.
Talanx has already confirmed Citigroup, JP Morgan Chase, and Deutsche Bank as bookrunners, switched to quarterly reporting, and formed an investor relations department.
The German insurance giant apparently worries about receving a low valuation at its IPO, as the majority of German insurance companies are currently being traded at 20 percent less than book value.
Although Talanx is fully owned by mutual HDI-V.a.G., which is intent on maintaining a majority of the firm, plans to go public will not change as the extra financing is crucial to the Talanx’s international expansion. During the past year, the group already made 5 global acquisitions.
Talanx plans to offer no more than 25 percent of its capital to the stock exchange at first, valuing roughly EURO1.4 billion. Meiji-Yasuda, which has partnered with Talanx before, already bought EURO300 million in convertible bonds for the German insurer.
In addition to its own IPO, one of Talanx’s subsidiaries, Hannover Re, had its IPO in 1994, which was the largest insurance IPO in Germany to date. At the moment,Talanx holds 50.2 percent of Hannover Re, and is also restructuring its entire reinsurance service.
By solely using HDI Reinsurance (Ireland) as a major internal reinsurer, Talanx is attempting to bring up its retention rates, a part of its new strategy to improve profitability. However, Hannover Re, Talanx’s largest reinsurer, will not supply retrocession to HDI Reinsurance (Ireland).
Overall, significantly improved results so far this year are partly because of the good claims development, which suffered greatly last year. Additionally, Talanx managed to increase its investment income to EURO961 million (USD1.18 billion), a 15 percent jump. This was largely due to sales of assets.
Herbert K. Haas, CEO of Talanx, said that the group was able to come out of the year 2011 in good health, and is only continuing the positive progress it began last year. Haas ended with confirmation that Talanx’s premium growth in the global market is a clear signal that their strategy is working well.
German Insurance Companies Mentioned
Meiji Yasuda Life
Established in 1881, Meiji Yasuda Life Insurance was the first life insurance company established in Japan. Headquartered in Tokyo, Meiji Yasuda Life now has over 40,000 employees in Japan, as well as 81 regional offices, 22 group marketing offices and over 1,000 agency offices. The company also has 8 subsidiaries or representative offices oveseas.
Europa Insurance Group
Based in Poland, the Europa Insurance Group is a leading provider of bancassurance and all finance related insurance products. For nearly 17 years, Europa has been actively influencing the Polish financial market, and creating innovative products to adapt to the needs of each customer.
Talanx Group and all of its subsidiaries are managed by the financial and management holding company Talanx AG, based in Hannover, Germany. Talanx Group is a multi-brand provider in many prominent lines of insurance and in the financial services industry. In the year 2011, Talanx Group earned over EUR23 billion in premium.
With history as far back as 1920, WARTA guarantees stability and experience in its services. WARTA Group provides motor, property, personal, and life insurance, and has been the recipient of many prestigious awards in theinsurance sector.
HDI-Gerling is one of the largest German property & casualty insurers, serving private customers to commercial and industrial clients. HDI-Gerling offers tailor-made insurance and retirement plans.
HDI-Asekuracja has operated in the Polish property & casualty market for over 20 years. HDI-Asekuracja TU SA, Poland is wholly owned by the management group Talanx AG based in Hannover, Germany.
Hannover Re is the third-largest reinsurer in the world, with a gross premium of EUR 12 billion. It has branches on all continents in the world, supporting roughly 2,200 staff. Hannover Re maintains very strong financial strength ratings (S&P “AA-” and A.M. Best “A”).
Moody’s Japan K.K., a Japanese based ratings agency, recently upped the outlook of Japan’s property & casualty insurance industry from negative to stable.
The established ratings company predicts that ongoing restructurings within the industry will lead to increased earnings within the next year or two.
Last year, according to Swiss Re sigma data, Japanese non-life insurers earned a 2.8 percent growth in premiums at USD131 billion, while life insurers earned a 6.5 percent increase in premiums at USD525 billion.
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Insurance brokerages across Europe expressed frustration towards the European Commission’s (EC) latest revision of the Insurance Mediation Directive (IMD II), and specifically the component that makes remuneration disclosure in a transaction mandatory.
While not all of the regulations introduced were negative, broking organizations will not give up pressure on the EC to modify the rules until the IMD II is officially finalized and published sometime next year.
The European Federation of Insurance and Financial Intermediaries (BIPAR), and one of its members, the British Insurance Brokers Association (BIBA), were pleased to see their lobbying efforts recognized through the incorporation of other insurance distribution methods, such as travel agents or price-comparison websites.
However, BIPAR and BIBA along with various other European brokerages are not so happy with the EC’s plans to create a “level playing field”, by requiring all brokers in the general insurance line to disclose their commissions, before the end of a 5 year transition period. They claim that these rules ignore all of the advice and recommendations from the Financial Services Authority, HM Treasury, the European Insurance and Occupationla Pension Authority (EIOPA), and all leading insurance brokers in Europe.
The mass disappointment is supported by the fact that insurance companies selling directly to customers will not be subject to the same mandatory disclosure.
Head of Compliance and Training at BIBA, Steve White, expressed that his organization is happy with a number of areas of concern the EC addressed in the IMD II. Yet, the main concern lies with the rules mandating disclosure for brokers only, and the importance of establishing a “level playing field” when comparing to insurance companies selling direct.
David Strachan, Co-head of the Deloitte Centre for Regulatory Strategy, also shared White’s skepticism about the ability of IMD II to carry out its purpose. Strachan noted that the IMD II is meant to clear up any conflicts of interest among different sales modes. However, the difference between intermediated and direct insurance sales should be stressed to customers, because remuneration varies between the two services. Consumer clarity on the issue is vital to ensuring that the IMD II is a successful in its goal.
In the meantime, the Chief Executive of BIBA, Eric Galbraith, said that his association will cooperate with BIPAR to voice their perspectives as the Council of Ministers, European parliament, and European Union co-legislators, near the final publishing processes of the document.
On the other hand, other means of insurance distribution will also be affected, to many European brokers’ satisfication. After the implementation of the IMD II, sales channels such as price-comparison websites will also be under stricter regulation, in the EC’s attempt to provide greater transparency through all methods of purchasing insurance.
Currently, the IMD focuses on intermediaries, but the IMD II will incorporate a much wider scope.
Norton Rose LLP partner David Whear said that the most promising changes revolve around the kinds of groups and organizations that the new directive will regulate, such as loss adjusters, claims managers, and price-comparison websites. This ensures that much attention will be diverted from intermediaries, which may have been unfairly monitored before.
According to the EC, the revised directive will allow customers to receive complete transparency from the seller when purchasing insurance products. It claims that the purpose of the IMD II is to enhance customer rights and protection within the insurance sector, by implementing set standards and honest advice among insurance sales. In this way, business for intermediaries across borders will not be as much of a hassle, and therefore encourage an internal insurance services market to develop.
Although the revised IMD cannot be called a complete flop, European insurance brokers are about to enter a period of significant struggle, as the looming EC regulations threaten to hurt and complicate future business.
The developing Green Energy Sector requires new products and increased funding from insurance companies in order to reach its full potential, say Mainstream Renewable Power Chief Accounting Officer Eimear Cahalin and Vestas Chief Specialist James Barry.
While some of the more prominent energy systems are sufficiently insured, such as wind and solar power, there have yet to be services to insure the less established technologies, as well as adapt to the growth of existing technologies.
Types of needed developments include multi-year products and weather derivatives, according to Cahalin. Currently, the biggest struggle for insurers regarding weather risk is to determine a proper balance between cost and level of risk transfer.
In broad terms, weather derivatives are a particular type of contract that insure renewable energy businesses against unfavorable weather conditions, which could potentially negatively affect production. For example, with wind and solar energy these conditions would primarily include wind speed and duration of sunshine respectively. A weather derivative product in the Solar energy sector, for example, would therefore offset risk of lowered solar energy production associated with periods of unduly cloudy weather.
Both traditional insurance and weather derivatives act to transfer risk in exchange for premium payment. However, traditional insurance entails high risk-low probability events, while weather derivatives entail low risk-high probability events.
Overall, Cahalin would like to see insurance companies create a “fund for innovation”, and invest in the renewable energy industry without expecting immediate return.
At the Green Power renewable energy risk-management conference she commended underwriters for the health and safety concerns introduced to the industry. Nevertheless, she pointed out that it would be great to see more innovation and products that cover losses during adverse conditions, with coverage paid back through premiums during favorable conditions.
Such services could be a potential solution to European investor’s, for example, reluctance to shoulder the high risks involved with renewable energy investment. In this way, insurance plays an essential role to both initiate successful financing for beginning stages of projects and protect future potential losses.
Besides a current lack of innovative products, many green energy companies have also been forced to shift their focus from banks to institutional funds (held by insurance companies) for financing, due to the erosion of banks’ financial strength resulting from the economic crisis. Institutional capital markets on the other hand, provide secure and long-term loans, generally spanning from 5 to 20 years, which is exactly the sort of investment up and coming renewable energy companies need.
James Barry, Chief Specialist at Danish wind turbine manufacturer Vestas, noted that in the United States they are beginning to use capital markets instead of the banking market to fund projects. Pension and life insurers investment funds are two potential sources of financing for renewable energy projects, because risks can be structured for these types of investors. However, if these funds are to invest in such projects, governments will have to provide some sort of financial security to them.
According to PricewaterhouseCoopers (PwC), many European insurance groups have already displayed interest in renewable energy projects.
Previously, the auction of energy firm E.ON’s gas transmission company, Open Grid Europe, attracted the likes of Germany-based Allianz and France-based CNP Assurances. The final acquisition, however, was made by a Macquarie Infrastructure and Real Assets (MIRA) association, which includes Munich Ergo Asset Management (MEAG). MEAG is the investment-management firm of reinsurance giant Munich Re and insurance group ERGO.
As the renewable energy industry continues to develop, insurers need to adapt their existing products, innovate, and look to invest in green technology. However, recent events like the Solyndra scandal have caused potential investors to rethink their current positions.
But looking at the facts, it is evident that energy-loan guarantees are not a flop, the private market is under-investing in energy technology, and solar is not a “doomed industry”. The reasons are as follows: The U.S. Energy Department’s loan-guarantee supported close to USD38 billion in loans to 40 projects all over the country ever since its inception in 2005 – Solyndra is only 1.3% of the entire project, and so far is the only investment that has failed; an American Energy Innovation Council’s (AEIC) report resolves that “Energy innovation should be a higher national priority,” and also encouraged increased public spending for “all aspects of the innovation process.”; and finally, one year ago an Ernst & Young report indicated that within a decade, cost-competitive, commercialized solar power could emerge – not to mention ever improving solar storage technologies (molten salt storage) and a projected 24 Gigawatts worth of operations underway in the United States.
While PwC stated, quite correctly, that renewable energy assets are “stable, long-term and predictable returns,” especially in a time of poor interest rates and investment ambiguity, a change in attitude of institutional investors towards the growing industry is crucial if it is to move forward.
Insurance Companies Mentioned
Allianz is a leading financial service provider worldwide. It maintains its leading position in the German market and strong international presence as an insurer through its 142,000 employees worldwide, and 78 million customers in over 70 countries.
CNP has lead France in personal insurance since 1991 with over 150 years experience. It strives to provide each of its 24 million customers high quality services to protect them against risk.
Munich Re offers all lines of insurance with roughly 47,000 employees globally. The company centers itself around a business model that comprises of three key aspects – Reinsurance, primary insurance, and Munich Health.
ERGO is one of the largest insurance groups in Germany and Europe. With focus in Europe and Asia, ERGO still has representation in over 30 countries internationally. ERGO is a part of reinsurance giant Munich Re.