Sure! KOSTER International Insurance Digest

Sure! - Summer 2013

Sure! is a compilation of press reports as well as market research conducted by KOSTER verzekeringen b.v. and Europe House, Inc., in order to gain more insight into the developments concerning the insurance industry as it relates to the overall global economic climate, social structure and the political environment. The information published in Sure! does not necessarily reflect the viewpoint or the opinion of KOSTER verzekeringen b.v., or Europe House, Inc.

Content of this issue
You are reading the Summer 2013 issue of Sure! This issue looks at global trends in the insurance industry. How does this industry react to the new possibilities of mobile technology and the dangers of climate change? Other insurance news from Europe and the United States is also included.

Global Trends Insurance Industry

  • The future for insurance carriers is mobile technology
  • Allianz SE : "Living on credit is never a sustainable strategy"
  • Insurance Industry and climate change: Not much is done in America while Europe seems to be more aware of climate change

European Union

  • A Moody's report says volatility of regulatory ratios to impact European insurers
  • Britain: Is the British insurance industry ready for the EU Solvency II rules?
  • France: As a major actor in the economy, the insurance sector has been impacted by the follow-up from the financial crisis and its repercussion for the Eurozone
  • Gibraltar: Has become a major EU insurance domicile
  • Netherlands: Outlook remains negative for Dutch insurance industry
  • Poland: Biggest insurer PZU interested in Croatia Osiguranje insurer

International Insurance Industry Highlights

  • Russia: Voluntary Medical Insurance and food vouchers losing popularity as incentive
  • Turkey: domestic insurance market slow to react to nation's economic growth
  • USA: Obamacare: America's most radical health care reform to be launched on January 1, 2014
  • USA: Medicare Reform: Spending growth fix depends on the pain
  • USA: Poll: Most Americans want the option of less health insurance coverage and more take-home pay

The future for insurance carriers is mobile technology
For most insurance executives, their smartphones are their lives, connecting them to emails, keeping them on track for appointments and most likely acting as a source of entertainment while travelling. It’s amazing what you can accomplish through mobile technology, like deposit a check to your bank account via mobile app (so you have extra cash for poker tables) or FaceTime (i.e., video chat) with someone hundreds of miles away (letting them know you’ve lost that money from a bad hand).

In order to remain profitable, productive and competitive, insurers have seen the need to develop mobile capabilities to meet rapidly changing customer expectations. A recent report from Novarica revealed that 60 percent of insurers will add new mobile capabilities for policyholders and agents in 2013. The news isn’t surprising, with more than half of the European and U.S. adults already connected to the web through a mobile connection, such as a smartphone or tablet. Here are three reasons insurance carriers should consider betting on mobile technology:

1. Mobile App Wager: Mobile apps allow insurance carriers to easily connect with consumers and allow consumers to file claims. US Liberty Mutual’s mobile Apps allows consumers to start a claim, and it records information such as accident location via GPS, the other party’s insurance information, a voice note recording to help remember specific details, and images pertaining to the damage.

2. Proof of Insurance: Providing proof of coverage has never been so easy. As of January 2013, 22 US states are considering an electronic proof-of-insurance coverage legislation. The new legislation will allow drivers to use their smartphones to show their insurance identification card. Colorado is the latest state to adopt the new law, allowing Colorado drivers to show digital proof of coverage via mobile devices in early August 2013.

3. Gold Incentive: Insurance carriers have the opportunity to offer incentive programs to consumers via mobile devices. The US State Farm is running an incentive program that tracks the amount of miles policyholders drive, factoring the information to determine whether the driver is eligible for a monthly discount. One way the data is collected is through smart phones, either from an enabled Bluetooth on the device or via a charger port. The data is then sent to the insurance carrier via app or Internet.

Allianz SE: "Living on credit is never a sustainable strategy"
Dieter Wemmer, Member of the Board of Management of Allianz SE, Europe's largest insurer which has assets totalling more than 500 billion euro’s was recently interviewed about the economic policies being pursued by the world's major central banks and on the following website there is an English transcript of this interview which was published in Germany by the "Finanz und Wirtschaft":

Insurance Industry and climate change: Not much is done in America while Europe seems to be more aware of climate change
The insurance industry believes climate change is a serious threat to people and property, yet only some companies advocate climate solutions. If there were one American industry that would be particularly worried about climate change it would have to be insurance, right?

From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt, natural catastrophes across the United States pounded insurers last year, generating $35 billion in privately insured property losses, $11 billion more than the average over the last decade.

And the industry expects the situation will get worse. “Numerous studies assume a rise in summer drought periods in North America in the future and an increasing probability of severe cyclones relatively far north along the U.S. East Coast in the long term,” said Peter Höppe, who heads Geo Risks Research at the reinsurance giant Munich Re. “The rise in sea level caused by climate change will further increase the risk of storm surge.” Most insurers, including the reinsurance companies that bear much of the ultimate risk in the industry, have little time for the arguments heard in some right-wing circles that climate change isn’t happening, and are quite comfortable with the scientific consensus that burning fossil fuels is the main culprit of global warming.

The American insurance industry is doing little to help combat global warming and the industry has really not been engaged in advocacy related to carbon taxes or proposals addressing carbon. On the other hand big European reinsurers like Munich Re and Swiss Re support efforts to reduce CO2 emissions. As one expert put it “in the United States the household names really have not engaged at all.” Instead, the focus of insurers’ advocacy efforts is zoning rules and disaster mitigation.

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A Moody's report says volatility of regulatory ratios to impact European insurers
Moody's Investor Service recently has outlined its expectation that EU solvency ratios will ultimately exhibit a more complex volatility under Solvency II than under Solvency I, as both the available capital and the capital requirements of the solvency ratio will change with market conditions. The new report, titled "European Insurers: Solvency II - Volatility of Regulatory Ratios Could have Broad Implications For European Insurers", is now available on Moody's subscribers can access this report via the link provided at the end of this press release.

While Moody's acknowledges that the move to Solvency II will not change insurers' economic reality, the introduction of new solvency ratios may influence the behaviour of investors, insurers and regulators. The aim of the new regulation is implicitly to influence market behaviour in ways that are favourable to creditors, but there is nevertheless some risk of the opposite occurring. The report explores some potential unintended consequences of the new regulation from the perspective of investors, insurers and regulators, and discusses Moody's interpretation of the new solvency ratios in its analysis of insurers' capital adequacy.

The magnitude of the credit implications will depend on the final calibrations of Solvency II, which will influence how issuers, investors and regulators themselves react. In particular, as part of the preparations for Solvency II, the European Insurance and Occupational Pensions Authority (EIOPA) has launched the Long-Term Guarantee Assessment (LTGA), an impact study that is testing different ways of discounting the liabilities of insurers. In a separate report, entitled "European Insurers: Solvency II LTGA Study Assesses Impact of Different Liability Discount Rates" Moody's has described what it views as the two extremities that define the range of possible outcomes post the study which are opposite in terms of implied capital requirements.

At one end, a high discount rate would lead to lower capital requirements, while a low discount rate would require more capital. Moody's expects that the eventual outcome post the study will be to permit relatively generous discounting of liabilities. This is because law-makers recognise the capital burden that a more punitive version of Solvency II would place on insurers which provide guaranteed products, particularly within an extreme low interest-rate environment. Such an outcome would not lead to negative rating pressure for most Moody's-rated insurance groups who the rating agency expects will remain relatively well-capitalised on an economic basis in this scenario.

Britain: Is the British insurance industry ready for the EU Solvency II rules?
“The EU has come one step closer to striking a deal on the long-delayed Solvency II rules", says Charles Juniper, senior analyst, insurance technology, Ovum, who has given his initial thoughts on what this means for the industry and how prepared organisations currently are for the implementation of the regulation — now indicated to be in 2016.

The UK insurance industry is generally in good shape when it comes to complying with the requirements of Solvency II. In part, because the UK industry already had a rigorous risk-based framework in place with its Arrow process. However, this is not a uniform picture across all EU member states — with some countries facing a technology challenge to hit the expected 2016 deadlines. In general, the larger EU member states are in good shape to achieve compliance, but the original project completion dates have come and gone 18 months ago and there is still only a tentative go live date. Meanwhile, insurers are still having to continue their spend on Solvency II project teams — which is a significant frustration, especially as market conditions remain tough in Europe.

Most of Europe’s largest insurers have already invested significant amounts in re-architecting their systems to meet the demands of Solvency II — as much as €5bn across the industry according to some estimates. The key challenge has been gathering the data required, which is often scattered across many differing legacy systems, to build a picture of the true risk an insurer is exposed to. But, the more comprehensive and detailed picture of risk that insurers now have is driving positive benefits. At Ovum, we are seeing a number of insurers embedding this greater insight to improve their business by targeting niche sectors or improving the accuracy of their pricing.”

France: As a major actor in the economy, the insurance sector has been impacted by the follow-up from the financial crisis and its repercussion for the Eurozone
In France, the answer to the crisis has been found to a certain extent in increased supervision and regulation. This evolution in the supervisory landscape gives rise to new challenges in terms of consistency of supervisory practices and in particular in relation to the level of convergence of the rules protecting retail consumers in the different areas of the financial sector.

We will focus on some key trends in the French insurance supervisory landscape, largely influenced by the EU initiatives affecting the insurance sector. Market trends and overview of the financial results for 2012 in the French insurance sector According to the figures published by the Association of Insurance Undertakings (FFSA), in 2012 investments made by the insurers in the economy have exceeded the threshold of €1 trillion (including €4.2 billion in SME’s and mid-tier firms) and insurers were the largest holders of French public debt. The assets of insurance companies amounted to €1,881 billion and the turnover of the French insurance sector amounted to €182.3 billion.

It clearly appears from these figures that the French insurance market has remained resilient and the insurance industry has been able to maintain a strong role in the economy. In order to reduce the risk of another financial crisis, one of the remedial measures has been to redefine the supervision landscape in the financial sector. The mechanisms of the supervising authorities have been modified and their supervisory powers increased.

In France, supervising authorities for the banking and insurance sectors merged in 2010 into a new single supervisory authority, the French Prudential Supervisory Authority (ACP) which was granted enhanced powers, including new powers to issue recommendations and take positions. The economic turmoil changed the corresponding economic environment, as well as the preoccupations of the French regulator, which now carries out a more diversified and coordinated control of the industry.

Financial services providers in France must also now become familiar with new players on the scene at a supervisory level, namely the pan-European supervisory authorities for banks, insurance and the securities markets. Although day-to-day supervision of financial services provider remains at a national level, these pan-European authorities, with a view to working towards a common rulebook, develop technical standards where necessary and draw up interpretative guidelines to assist national authorities. Although there are no current projects to set up a single supervisory mechanism for insurers (unlike for banks), the pan-European authority for insurers, the EIOPA takes an active part in the control of the insurers.

By way of example, on 6 December 2012, it published procedures as to how it will issue warnings and temporary prohibitions and restrictions regarding financial activities. This results in insurers now clearly being subject to a two-layered control. Still in relation to customer protection, in addition to the national rules, insurance companies must prepare for the various reforms that are in the pipeline at EU level and which may affect their business.

These in particular include IMD 2, MIFID II, and the packaged retail investment products (PRIP's) initiative. The purpose of these reforms is to further increase consumer protection in the financial sector by creating common standards across insurance sales and ensuring proper advice is given, though feedbacks from the stakeholders in relation to these texts show that it is indeed difficult to adopt a text which would not add unnecessary burden on the market player and would at the same time achieve an adequate level of protection for consumers.

The emphasis put on customer protection by the ACP is very much in line with the global approach taken at EU level by EIOPA, which likewise considers that protection of consumers is a fundamental goal and that it is important to have a consistent approach in the various projects which impact the distribution of financial products. It closely monitors the legislative projects and therefore plays a key role to ensure that the final texts which are in the pipeline can effectively be supervised both at EU and national level.

Gibraltar: Has become a major EU insurance domicile
Gibraltar is a British Overseas Territory which is a self-governing and self-financing parliamentary democracy within the EU, located at the southernmost tip of the Iberian Peninsula. The territory covers 6.5 km. and has a land frontier with Spain. Gibraltar is a separate and distinct legal jurisdiction and its Parliament is solely responsible for the enactment of all domestic laws and for the transposition of EU directives. Over the past 20 years Gibraltar's insurance industry has grown from just 12 licensed insurers to the present 56 licensed insurers currently writing new business.

Some of the benefits for Insurance companies to settle in Gibraltar are:

  • Gross premium income written by all insurance companies in Gibraltar was € 3.7 bn in 2011 and these companies held assets of more than € 8.6 bn.
  • Gibraltar motor insurers currently write 10% of the total UK motor market.
  • Household names such as Brit Insurance, Intercontinental Hotels, Novartis, and Tate & Lyle have chosen Gibraltar as a domicile for their European Union (EU) captives.
  • In recent years Bermudian insurers Arch, Transatlantic Re and XL Insurance have established insurance companies in Gibraltar.
  • Gibraltar's EU membership provides passporting rights in insurance, insurance mediation and reinsurance across all 30 EU and European Economic Area (EEA) countries.

Two of the three largest global insurance managers have operations in Gibraltar and there are also independent insurance managers with a significant number of insurance companies under management. Three of the 'big four' audit firms have a presence in Gibraltar as do other leading accountancy firms and there are also independent local firms. Insurers' legal requirements are well served with a wide choice of well qualified legal practitioners and 16 banks and building societies are currently authorised by the Financial Services Commission.

Unlike certain captive domiciles, Gibraltar insurance companies write both direct and captive business. Therefore, the insurance community has the skills and connections to assist captive owners with the front end solutions required in writing direct third party business. A bilingual workforce in English and Spanish, two of the most widely spoken languages in the world, is also of great benefit.

The Netherlands: Outlook remains negative for Dutch insurance industry
The negative outlook on the Dutch insurance industry principally reflects Moody's expectation of an adverse economic environment and ongoing competition that will continue to impair profitability, says Moody's Investors Service in a new Industry Outlook published recently. The main drivers of the negative outlook include (1) a further contraction in Dutch life insurance, driven by the slowdown of the mortgage market; (2) a shift of the life business model, as insurers will target pension volumes at the expense of margins; (3) high competition in non-life insurance; and (4) increasing pressure on health insurance profitability.

The report, "Dutch Insurance: Adverse Economy and Margin Pressures Underlie Negative Outlook" is now available on Moody's says that the slowdown of the Dutch economy will have a knock-on effect on the overall demand for insurance products. "In particular, our expectation of a mortgage market slowdown will negatively affect life insurers, because mortgage-related savings and protection products represent an important part of life insurance sales", explains Benjamin Serra, a Moody's Vice President for European Insurance and co-author of this report.

Moody's says that the Dutch market for life insurance will also continue to shrink because of customers' preference for banking products. "Insurers will increasingly focus on pensions to grow their earnings, and we expect that they will target volumes at the expense of margins to build market shares with the hope of creating economies of scale", adds Nadine Abaza, a Moody's Associate Analyst and co-author of the report.

In non-life, high competition will limit insurers' ability to increase prices and offset rising claims. Moody's also believes that combined ratios will remain high, despite insurers' focus on operating costs. "In particular, we expect a continued deterioration in disability claims which are partly correlated with the economic environment", says Nadine Abaza. In addition, insurers are increasingly moving towards more direct distribution, which will reinforce intense pricing competition.

Moody's expects that increasing political oversight aimed at controlling price increases in basic health will limit insurers' ability to offset rising healthcare costs. The demand in supplementary health -- currently the most profitable area for health insurers -- will also decline as a direct consequence of the economic downturn in the Netherlands.

Poland: Poland's biggest insurer PZU interested in Croatia Osiguranje insurer
Representatives of Poland's biggest insurance company, PZU, said in Zagreb recently they were interested in investing in Croatia Osiguranje (CO) as part of its privatisation and in having the Croatian state remain a "strong but friendly" shareholder in Croatia's biggest insurance company. PZU representatives were part of a business delegation accompanying Polish President Bronislaw Komorowski on a two-day visit to Croatia. PZU management board chairman Andrzej Klesyk told reporters PZU was interested in CO because of the similar insurance markets in Croatia and Poland, the two companies' similar history as former state-owned monopoly holders, and because PZU had chosen the Croatian market as ideal for expansion in this region.

Both companies are like the headquarters of their countries' financial systems, so PZU understands how important it would be to cooperate with the Croatian government in preserving the stability of the financial sector and wants the state to remain a "strong but friendly" shareholder in CO, Klesyk said. He said CO would benefit from PZU also because Poland joined the European Union eight years ago, so PZU could share its experience in what lay in store for insurance companies. PZU is the biggest Polish insurance company, with a 32 per cent share in the general insurance market and a 43 per cent share in life insurance. The average annual gross premium written is about EUR 4.5 billion. Last year, the company netted EUR 778 million in profit.

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Russia: Voluntary Medical Insurance and food vouchers losing popularity as incentive
Many companies in Russia succeed in providing a variety of employee benefits. The standard package of employee benefits, including Voluntary Medical Insurance (VMI) and food vouchers, is almost no longer perceived by talented employees as a competitive advantage of the employer. Forward-thinking companies go further and try to adapt international practices to the Russian market, and also conduct benchmarking for the best local experience. However, VMI today is the most popular social privilege, designed to solve number of problems:
- increased productivity by reducing morbidity;
- the provision of timely medical care to employees.

Unfortunately, for all the popularity of VMI, HR departments still come across problems in health insurance and inconvenience for users of these programs. The most difficult for international medical insurance companies is to provide medical insurance to expats who often hold leading positions and require special attention.

Today, the Russian market can take advantage of programs of four leading insurance players who are in partnership with international insurers. This alliance is established to ensure the maintenance and administration of such programs. Quite often, medical services companies are involved to cooperate in order to provide international medical services assistance, including in Russia. Programs of this type of insurance also provide a settlement for the international system of payments.

Turkey: Turkey's domestic insurance market slow to react to nation's economic growth
There is huge potential for re/insurance growth in Turkey, according to Namik Gulsun, Executive Director, EMENA at facultative and wholesale broker, Faber Global, a trading division of Willis Group Holdings. While much of Europe remains mired in economic crisis, Turkey is still enjoying steady growth. This presents an opportunity to both insurers and reinsurers looking to grow. However, the domestic insurance market in Turkey has been slow to react to this opportunity.

Gulsun says: “Domestic insurers must take advantage of this growth by promoting the use of more specific insurance covers for the new assets it is creating. While they cruise slowly but surely towards increasing insurance penetration in the country, Turkish insurers must also adapt and become more responsive to new types of risks that they consider ‘unusual’ in terms of sophistication or size.” He explains that “much of Turkey’s growth is being driven by the government’s use of Project Financing, where the private sector provides the financing for construction projects, which will eventually be handed back to the government. This means that the scale and complexity of construction projects and assets in Turkey is increasing phenomenally.”

Gulsun commented: “This has left Turkey’s insurers playing a game of catch up. While the industry is astute at covering traditional risks, it has not yet become attuned to covering more specific complex risks that the country’s recent economic boom is creating. This is where reinsurers with global expertise can offer assistance and support in creating appropriate programs to cover more complicated risks.

USA: Obamacare: America's most radical health care reform to be launched on January 1, 2014
The Patient Protection and Affordable Care Act — often referred to as “Obamacare” — was signed into law on March 23, 2010. Many businesses held out hopes that the controversial package would be repealed or scaled back, but the 2,500-page law remains on the books and parts of the program have already been implemented.

January 1, 2014 marks another important date in the rollout of the new healthcare reform. “2014 is what everybody has been scared about as that is the full implementation date,” said Tom Goedde, benefits group manager for AHM Financial Group, during his presentation to trucking fleet executives at the 2013 CCJ Spring Symposium in Birmingham, Ala. “The big term is going to be ‘shared responsibility’, shared responsibility for individuals and for companies and corporations.”

In a nutshell, individuals must have coverage or pay a penalty, while large companies (defined as 50 or more employees) must offer healthcare coverage to its employees. Small employers are not required to offer coverage, but if they choose to, the costs will certainly be higher than current healthcare plans as they face market reform and higher taxes. “There’s no rest for anyone under the law,” said Goedde.

Citing employer-related research on new healthcare policy, nearly 90 percent are retaining their plan coverage to retain current employees. Of those employers opting to discontinue plan coverage, the biggest reason (86.4 percent) given was the cost of providing that coverage is too high. “Unfortunately, I think we’re going to find that the Affordable Care Act, as it is called, is not that,” says Goedde. “It is going to add a lot more to business costs.”

Rasmussen Reports issued the results of a telephone survey in May that showed 55 percent of U.S. voters have an unfavourable view of healthcare reform, while a survey by the Kaiser Family Foundation showed that 23 percent of respondents weren’t even aware of the changes to healthcare law, and 12 percent mistakenly thought Congress had repealed it altogether.

Generally speaking, provisions take effect on your healthcare insurance anniversary date, according to Goedde. For example, if a company’s current healthcare plan is renewed on July 1, 2013, the changes in healthcare reform would take place on July 1, 2014.

Goedde, using numbers published by United Healthcare, a division of the largest single health carrier in the country, said individuals, small companies and large companies all will face substantial premium increases. Large companies should expect a 20- to 25-percent increase, small companies a 25- to 50-percent increase, and individuals a whopping 116-percent increase over prereform numbers.

USA: Medicare Reform: Spending growth fix depends on the pain
Cyril Tuohy writes: “There’s no easy fix in slowing the spending growth of Medicare, only how much pain Americans are willing to bear, according to a new analysis on the sustainability of the nation’s most far-reaching and expensive Health Insurance program. On the cost side, the fix is relatively straightforward: hike premiums, subsidize premiums to make them more affordable or push the eligibility age out two years to 67 years old, the study by researchers at RAND Corp. found. All three options have been considered seriously by lawmakers. “Each of these policies can save money for the Medicare program,” Christine Eibner, the study’s lead author and a senior economist at RAND, said. “The question is what to do about those people who lose Medicare as the cost rises or they are excluded. Those people may not be able to find alternative health coverage.”

Eibner and her colleagues tested three Medicare spending and enrollment models and found that hiking premiums for Medicare Part A would cut spending by 2.4 percent. Subsidizing the cost of purchasing coverage with the help of vouchers, for example, would cut spending by as much as 24 percent. Increasing the Medicare eligibility age would cut spending by 7.2 percent, the study found. “Each of the policies we examined would require sacrifices in eligibility and in higher costs imposed on Medicare enrollees,” Eibner said in a recent interview.

Policymakers looking for ways to curb Medicare spending growth will have to weigh the costs and the benefits of the alternatives, she said. Eibner co-authored the study with Dana P. Goldman, founding director of the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California; Jeffrey Sullivan, 11director of analytic services at Precision Health Economics, and Alan M Garber, professor at the Harvard Medical School.

The study is meant to guide lawmakers who are looking to slow the growth in Medicare spending, which is projected to increase to 24 percent of all federal spending, and to equal 6 percent of the U.S. gross domestic product by 2037. In 2012, the government spent an estimated $555 billion on Medicare, or about 3.5 percent of gross domestic product, according to the Congressional Budget Office. Although the Affordable Care Act to slow rising Medicare costs, the changes are not expected to make any appreciable dent in overall Medicare spending. Only structural spending reforms will translate into meaningful changes, according to the study’s authors.

USA: Poll: Most Americans want the option of less health insurance coverage and more take home pay
While employers wrestle with ways to meet the requirements of President Obama’s health care law, most Americans want the option of less health insurance coverage and more take home pay. If they had a choice, 59% of Likely U.S. Voters would choose a less expensive health insurance plan that covered only major medical expenses and a bigger pay check. The latest Rasmussen Reports national telephone survey finds that just 31% would opt instead for a more expensive insurance policy that covered just about everything and receive a smaller pay check.

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