Difficult territory ahead

View from the top
Kevin Kelley
Difficult territory ahead
Kevin Kelley, CEO of Bermudian specialty insurer
Ironshore, assesses the impact of the European
financial crisis on the global insurance industry
The international financial markets have
never been more complex, posing broad,
uncertain implications for managing global
risk. In the fall of 2011, Ironshore hosted a
Financial Forum as an open, educational
exchange with insurers, brokers and
industry leaders to discuss the European
debt crisis and the consequences for the
global property/casualty insurance market,
as well as the impact on how financial
institutions operate in the interconnected
global economy.
In the US, the economy is struggling
with a great contraction. Since the crisis
began in 2007 and continuing today,
economic progress offers just slices of
hope in some sectors, yet meaningful
growth has not taken hold quickly enough.
Unemployment stands at 8.6%, affecting
approximately 14 million people, and as
many as 6 to 8 million jobs have either been
lost or not been regained. Interest rates are
at unprecedented lows, with returns of just
2% on the 10- year Treasury that woefully
impacts corporate portfolio yields.
As concerns about the European debt
crisis swell, the stability and viability of
the euro is being called into question.
Government balance sheets, loaded
with debt, limit the ability to leverage
public policy options as leaders wrestle
with solving the ensuing financial issues
without the benefit of economic growth.
The European crisis paints a broader
landscape that is even gloomier as the
eurozone nations continue to slash their
country’s respective growth forecasts.
Since the EU’s previous forecast for gross
domestic product growth was released in
May 2011, the debt crisis has worsened
for each of the seven countries. At the
heart of the issue is currency, but without
the proper, unified mechanisms in place
by which to manage possible outcomes.
While the euro nations strive to establish
an orderly transition, recent developments
suggest that at this stage, any transition
will be disorderly. If, for instance, debt is
marked down, the question becomes what
kind of stress will impact bank stability,
lending and liquidity.
The consequences surrounding the
sovereign debt crisis will ultimately flow
to the large, multinational banks that
will impact property/casualty markets
worldwide. New financial controls and
layers of restrictive regulation will be
inevitable as governments attempt to rein
in continued economic pain. The larger
issue then from an insurance and risk
perspective is the possibility that new
laws and/or regulations will be applied
retroactively. Regulation of the banking
industry raises compliance issues that are
costly and raise the spectre of liability risk.
The inference of finding culpability within
institutional risk management controls
triggers greater demand for professional
liability coverages. New regulatory
structures throughout the eurozone suggest
that the potential for heightened bank
operational scrutiny and the resultant
increase in litigation.
“When asset values decline precipitously,
it impacts the world economy, making
banks simultaneously vulnerable to
their diminution in value, which leads
to heightened regulatory scrutiny,” said
Greg Flood, president of IronPro. “Bank
shareholders may then become dissatisfied
with the bank’s stock performance and
other assets under management may suffer
similar value deterioration.”
According to Flood, at this juncture,
“bank boards focus more closely on
directors’ and officers’ liability insurance
coverage in anticipation of potential
spikes in litigation from customers and
shareholders.”
Already a movement is underway to
facilitate intermediate and short-term
financing that is shifting the focus from the
West to the East, with long-term financing
on the horizon. Larger banks capture
or pull back from short-term financing,
depending on the costs of funds and
liquidity. Western banks are becoming less
instrumental and may not be in a position
to restore historical levels of influence
within the global financial system due
to the cost of compliance, layers of new
regulation, and the underlying threat of the
too big to fail theory.
Challenges, however, present
opportunity. Larger banks in Japan, Asia
and even the US have access to liquidity
and are seeking growth prospects from the
emerging markets, such as Latin America,
Africa and south-east Asia, outside of the
eurozone where they have the opportunity
to grab market share. Banks are therefore
revisiting methods of financing global
trade. As such, Ironshore has seen growth
within its political risk insurance (PRI)
division, particularly for its trade credit
insurance protection, benefitting from this
transition to a new financial order beyond
the borders of the eurozone countries.
Capacity and demand are strong for
trade-related domestic and cross-border
insurance serving corporations, as well as
financial institutions. Insurance exposure
on programmes tend to be on the shorter
side, with an average duration of two
years or less, so underwriting decisions
are based on whether Ironshore and its
clients are comfortable doing business in
these emerging markets in light of adverse
global events.
“I am cautiously optimistic that
insurance companies will continue to see
broader demand for the products in the
years ahead, with growth driven from the
emerging markets,” noted Daniel Sussman,
president of Ironshore’s political risk
insurance division. He added that timing
for PRI expansion within the global
insurance industry is “excellent now, in
terms of clients realising real franchise
value from the products and available
capacity for this specialty risk.”
The severity of the European crisis
notwithstanding, innovative companies
will seek and develop opportunities
for managing and offering solutions
to effectively manage risk throughout
oscillating periods of challenge and
change. Last year, Ironshore Australia
was launched to serve the Australian, New
Zealand, and south-east Asia regions and
in 2012, the company will open offices in
Singapore.
Ironshore’s expanding market presence
within these two regions is a testament to
management’s ability to look beyond event
challenges, like the European crisis, to see
opportunity in new markets and act upon
them in a timely manner. The outlook
and subsequent impact on the property/
casualty insurance industry that are being
driven by consequences surrounding the
European financial crisis are far from
certain. Yet, as a sector, insurance has
proven to be a resilient industry that is
increasingly responding and preparing for
a new era of international, interconnected
global risk management platforms. l
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