With the 2021 renewal season in the Latin American markets in full swing, Deutsche Rück has started underwriting business in the region. The timing is critical: COVID-19 has crudely exposed the gaping omissions in protection in Latin America and the need for more reliable reinsurance partnerships. Florian Kummer, Managing Director of regional operations, who heads up this exciting new market segment, explains Deutsche Rück’s objectives there.
For many Latin American countries the effects of COVID-19 have been devastating, says Kummer. The high numbers of deaths caused by the disease brought many of the region’s economies to the brink. Businesses struggled to keep up production as workers failed to show up with rising infection numbers, especially among the more vulnerable lower-income population. Supply chains faltered. As insurance penetration has been traditionally low for decades, protection for the economy was weak. The gross domestic product (GDP) of the key nations shrank drastically – Brazil’s went down 4.4 percent, Argentina’s by 9.9 percent, Mexico’s by 8.2 percent and Peru’s by 11.1 percent.
For Kummer, the crisis illustrates the need for insurance capacity and reliable partners on equitable terms in the region. “The pandemic has shown that the protection gap is not just a theoretical concept – it is a real danger to economic development in Latin America,” he says.
Kummer explains that Latin America cannot be viewed as a single market. “It’s a diverse region”, he says. “In the Caribbean countries, natural catastrophes, such as earthquakes, hurricanes, and flood are the predominant risks.” Tourism is a key market here. Especially Mexico which has strong ties to the United States – more than 80 percent of the country’s exports go north of the border. “This means that export liability to the US is a big factor.”
In the southern parts of the region, the mining, agricultural and oil industries dominate the economic landscape. “It’s a very heterogeneous continent, with different socioeconomic structures and political regimes, which you all have to take into account to find the best insurance solutions.”
What unites most of the region is the growing middle class that has emerged over the last two decades. “More than 100 million people have been lifted out of poverty, and there has been real socioeconomic progress,” Kummer points out.
With over 25 years’ experience in reinsurance, Florian Kummer has held many senior management positions. An economist and political scientist by training, he has intimate knowledge of the region and of Latin American culture. He has lived and worked in Mexico City, Madrid, São Paulo and Miami, among other places.
The emergence of a strong middle class is interlinked with the prosperity of the region’s small and medium-sized (SME) enterprises.
The majority of companies in Latin America are SMEs, which serve as the lifeblood and economic backbone of the region. “Local and regional insurance companies have traditionally strong ties and deep-rooted distribution networks in these segments. This is also precisely where our specialist skills and knowledge lie, so this seems a very good fit,” says Kummer.
He continues: “Deutsche Rück is a highly specialised risk manager and part of the German Savings Banks Finance Group, so we direct our attention towards local and regional primary insurers, where we occupy a leading position in our domestic market.”
However, there is a lot of volatility in the region. “There are earthquakes, hurricanes, flood events, political and macro-economic risks,” Kummer explains. “Managing this uncertainty in a professional way is essential and can be very profitable. Higher volatility comes with higher margins, if handled correctly.”
In this environment, stability is key. “With increased uncertainty, more volatility and complexity, long-term stable relationships are vital.” Kummer points out that Deutsche Rück’s interest in the region is for the long term. “That’s different from much of the international interest in the region that we’ve seen so far,” he observes.
Deutsche Rück will concentrate on traditional property and casualty business. For the past decade, the Deutsche Rück Group has concentrated on underwriting P&C reinsurance risks across the entire European market, more recently entering international markets further afield, including the Maghreb region and the Gulf States. Now it’s time to bring some stability and security to the central and south American nations.
Video conferences are going to play a greater role in the wake of the COVID-19 pandemic – and that goes for the reinsurance industry too. But client managers will still need to travel to meet with their clients because personal interaction is essential for building relationships of trust.
It goes without saying that a great many people are looking forward to seeing things get back to the way they were before the outbreak of the coronavirus. However, some aspects of daily life, such as business travel, may have changed irreversibly. According to a study by the Fraunhofer Institute for Industrial Engineering, the majority of decision makers in companies will question in future whether planned trips to visit clients and business partners are strictly necessary. “Business trips will in future be significantly more selectively and cautiously considered”, says Fraunhofer expert Josephine Hofmann.
Frank Versluis believes that video conferencing may become the new norm for the reinsurance business. He is responsible for managing reinsurance clients in Europe, Israel and North Africa at Deutsche Rück’s subsidiary DR Swiss from his office in Zurich. “What the pandemic taught us is that we can also maintain contact with our clients via video conference”, says Versluis. He believes further that face-to-face meetings, which were previously considered to be second nature, could in future be replaced by telematics.
The Underwriting Director of DR Swiss has only ever met some of his clients on screen. That’s because Versluis started his current job in spring 2020, just as the pandemic was getting underway. He is only too aware therefore of the disadvantages of virtual meetings. “When you meet with someone personally and even perhaps go to a restaurant with them after a meeting, you tend to be more inclined to talk about other topics such as football”, he says. It’s precisely these opportunities for personal, one-to-one interaction that reinforce relationships and build mutual trust. And that’s a lot more difficult to achieve via a small screen where there may be others on the call.
This is an experience shared by Klaus-Gregor Hahn, who manages clients in Austria as well as Central and Eastern Europe (CEE) from his office at Deutsche Rück in Düsseldorf. Nurturing relationships with clients isn’t the sole advantage of on-site visits – it’s a chance for client managers to gather a more integrated impression of their business partners. “This is best achieved when you’re on location, where you’re able to see the client’s office environment, and when you have the opportunity to talk to your colleagues and the boss of your direct contact partner”, says Hahn, who heads up CEE. At the same time, Hahn concedes, he’s developed a new appreciation for digital formats during the pandemic. In June this year, for example, Deutsche Rück held a successful client event called “Österreichtage” (Austria Days) that took place online for the first time ever.
If there’s one thing Versluis and Hahn are certain of, however, it’s that when the Covid-19 crisis has passed, they are going to start travelling to visit clients at their location again or meet them in person at big company events such as those held in Monte Carlo and Baden-Baden. Personal contact is vital in the reinsurance industry, at least once or twice a year.
The reinsurance experts will certainly have to weigh up each individual, planned business trip more carefully in future to decide whether or not they really are necessary. What became a necessity under Covid, has now successfully established itself as common business practice. The question of whether a digital meeting will suffice versus jumping on a plane for a more exclusive face-to-face, will ultimately fall to client managers at Deutsche Rück. And in many ways, this has always been the case. “Even in the past, we never really saw the necessity of flying to Prague for a mere two-hour meeting, for example,” says Hahn.
Nothing made quite as great an impact on the year 2020 as the global spread of the SARS CoV-2 virus. By contrast, the damage caused by natural disasters in Germany last year made barely a ripple. One exception to the rule was the turbulent month of February, when winter storm CIARA (also known as SABINE or ELSA), ripped through Central Europe, affecting the British Isles, France, the Benelux countries, Switzerland, Austria and Denmark, as well as Germany.
Across Europe, the destructive windstorm was responsible for the highest insured natural hazard claims in 2020. In addition, extreme precipitation in south-western France and north-western Italy at the beginning of October were responsible for largescale property damages. While the Croatian capital Zagreb and the surrounding area was hit by two severe earthquakes in March and December 2020, causing billions of euros in economic losses.
In Central Europe, 2020 started out with exceptionally mild temperatures and less-than-wintry conditions. The winter storm season 2019/2020 reached its peak in February, when Central Europe was struck by six windstorms, of which CIARA (SABINE) between 9 and 11 February was the strongest. Insurance claims amounting to 1.571 billion euros (according to information provided by Perils AG) made the storm the most expensive natural disaster of the year in Europe. February also marked the end of the second warmest winter in Germany and by far the warmest winter in Europe.
The port city of Saint-Malo in French Brittany got hit by huge waves brought on by winter storm CIARA in the middle of February 2020.
Spring in Central Europe, and especially in Germany, proved to be extremely dry and the sunniest since 1951. June and July fluctuated between very warm, changeable and at times thundery. A protracted period of hot weather followed: August was the second warmest in Germany since 1881, preceded only by the record August of 2003. Autumn was exceptionally sunny in September and November, interrupted by an predominantly overcast October. Across all months, temperatures were higher than usual, making autumn 2020 the third-warmest autumn in Germany – and the warmest in Europe – since records began.
Due to the months with high temperature anomalies, 2020 was the second warmest year Germany had experienced since 1881. With a countrywide average temperature of 10.4 °C, it was only slightly cooler than the record year 2018. Europe-wide, 2020 landed squarely in first place as the warmest year in the history of modern measurements. The positive deviation from the previous record holder 2019 amounted to a full +0.4 °C, according to the Copernicus Climate Change Service (C3S). Globally, 2020 was among the three warmest years since 1850, according to the World Meteorological Organization (WMO), with the six warmest years all having occurred since 2015. In contrast to the record year 2016, 2020 saw no strong El Niño conditions, which usually contribute to globally elevated temperatures.
The neutral or comparatively weak El Niño conditions at the beginning of the year and the development of La Niña conditions at the end of September had a significant impact on the global occurrence of natural hazard events. The central regions of South America and the western part of the US experienced devastating forest fires in 2020, while China and Japan were impacted by extreme floods.
The hurricane season in the North Atlantic was even more unusual. With 30 tropical cyclones, 13 of which developed into hurricanes, it was the season with the most named storms to date. Hurricane ETA was the cause of particularly high damages in Central America at the beginning of November. And out of the twelve hurricanes that hit the US, LAURA in August was the most damaging. LAURA was also the natural hazard event with the highest insured loss in 2020. By the end of the year, the total insured natural hazard losses worldwide were above the previous ten-year average.
If you could paint a picture of the perfect world from a life insurance perspective, what would it look like? Steady growth in new business, happy and successful sales partners, healthy and satisfied customers, declining claims expenses and rising earnings for the life insurer. Sounds like a dream? No, more like an opportunity!
For decades, the life insurance industry has played a pivotal role for policyholders – that of the risk carrier, who casts a wide safety net and assists the customer in the event of a claim. Despite the pace of change, that role will continue to exist, but it will not be enough on its own. That’s because digitalisation in other sectors and the rise of competitive, direct-to-consumer service offerings have significantly influenced customer behaviour.
As with many industries undergoing digital disruption, customer expectations can no longer be neglected. In fact, they have the potential to take the connection between insurer and policyholder to new levels, while improving revenue performance in a sustainable manner. Targeted customer relationship management (CRM) is used to support the customer throughout the entire contractual relationship, from consultancy, implementation and risk assessment to portfolio management, claims assessment and active claims handling.
The pathway to successful CRM lies in health services. That’s because they have universal relevance for all customer groups – for the healthy as well as for those with pre-existing illnesses – and can therefore provide the link across the entire value chain in the insurance contract. Health insurers are already pioneering with service offerings that cover prevention by rewarding healthy living, and dovetailing this data into risk protection.
Deutsche Rück is doing the groundwork on practical solutions for life insurers when it comes to “staying healthy” and “getting healthy”. The offerings are diverse and range from health bonuses for active and mindful behaviour, to rewarding demonstrable participation in prevention programmes, up to accruing higher levels of insurance coverage through the achievement of defined health targets. The latter is a unique approach in the industry.
The primary purpose of health services surely is to have healthier customers, to keep them in good physical and mental condition, and to improve the medical outlook of those with pre-existing conditions.
For the insurer, finding new ways to connect with a generally healthier customer base is a win-win situation. Not only does it bring new business opportunities, but above all, active risk and portfolio management through continuous interaction, control and increased information flow between stakeholders.
A total solution is not needed, nor even desirable here. Discovering health services step by step and applying them to one’s own business is not only achievable, but it’s even a more promising path. To tackle this process, you need not only courageous but also reliable partners who can deliver the right solutions and assist in their operational implementation.
Deutsche Rück wants to redraw the world of life and health insurance. With a fresh outlook on products, processes and new services, we show life insurers how they can implement the approaches in full, in part or one step at a time.
Sustainability is the hot new topic for the asset managers of insurance companies. With many insurers having already made their portfolios more climate conscious in recent years, the regulators are now springing into action too. They increasingly commit insurance companies to invest more sustainably and there are some significant legislative changes on the horizon.
The announcement by the German Insurance Association (GDV) attracted a lot of attention in January: The association’s member companies committed themselves to aligning their investments with the United Nations’ sustainable development goals and the goals of the Paris Agreement on climate change. The aim is to make insurers’ investments completely climate-neutral by 2050 at the latest. “We are contributing our expertise and economic clout to limit the effects of climate change and make them manageable,” said Jörg Asmussen, chairman of the Management Board at GDV, at the time. The initiative was widely reported by the media, which was hardly a surprise considering German insurers manage around 1.7 trillion euros, making them one of the country’s largest institutional investors.
For some time now insurance companies have been working towards making their investments more ESG-friendly. The reasons for this are changing customer requirements, an enhanced understanding of corporate responsibility, combined with increasing regulatory pressure. “The EU has been working for several years to commit companies in the financial sector to greater sustainability,” says Wolfgang Eichert, head of the Brussels office at the Association of German Public Insurers.
In previous years, the rules were more advisory than binding but this is now changing. As a first step, life insurers are required as of this year to inform their customers about how the company manages sustainability risks in its investments and what impact the portfolio has on the environment and society. This is legislated by the EU Transparency Regulation. “It is one reason why many insurance companies have made sustainability a board topic in the past year,” says Eichert.
The next milestone will be the EU Taxonomy Regulation, which comes into effect next year, and will define when an economic activity is to be classified as sustainable. “What concrete impact the taxonomy regulation will have on insurance companies on a day-to-day basis is not yet entirely clear, because technical regulatory standards are still being developed,” says Eichert. What is certain, however, is that the new rules will be stringent. “That’s why companies that weren’t sustainability pioneers before are now seriously addressing this topic.” The Insurance Distribution Directive is also evolving: in future, insurers will have to ask their customers about their sustainability preferences.
Over the next few years, increasing regulation and the reframing of many corporations’ public image will cause the portfolios of insurance companies to shift more definitely in the direction of sustainability, compared to previous years. “Especially when it comes to new investments, primary insurers will pay even more attention to sustainability than they have recently,” says Claus Stegemann, who works in Strategic Asset Allocation at Deutsche Rück. “By avoiding sustainability risks, investors are trying to improve the risk-return profile by making adjustments in the allocation of the investment portfolio. In addition, new investment alternatives will be explored by investing in new technologies, such as environmentally-friendly energies and energy conservation.” These changes are also being implemented in the reinsurer’s own investments. For example, Stegemann and his colleagues want to reduce securities of companies that make money from fossil fuels like coal in their portfolio.
In their efforts to achieve even greater investment sustainability, however, insurance companies have to repeatedly deal with the fact that there is a lack of reliable data on which to base investment decisions. A study by asset manager Candriam proved last year that this is one of the biggest hurdles to ESG investing for insurance companies. However, that could soon change: a forthcoming directive from the EU Commission will put the non-financial reporting of capital market-oriented companies on an almost equal footing with financial reporting. In short, this means companies will have to report on their impact on the environment and society in the same rigorous detail as they report on their business figures.
Jan Stepic, Melanie Dahms, Stephanie Embach-Stein, Sven Klein
Andreas Meinhardt (verantwortlich für den Inhalt)
ENORM Digital GmbH
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Published in August 2021
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