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Financial solutionsDefusing capital market risks

TOPICSMAGAZINE

The magazine for insurersFacts, markets, positionsIssue 1/2013

TOPIC

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AZIN

E 1/2013A

ccumulation risks in m

arine insurance · Market study Turkey · Telem

atics · Financial solutionsM

unich Re

Accumulation risks in marine insurance are frequently not given su� icient consideration. Companies which fail to adjust their risk management in good time can soon run aground. PAGE 6

TurkeyFuture market for insurers

1Munich Re Topics Magazine 1/2013

Editorial

Dear Reader,

Optimists see every problem as something that demands to be solved. They have a similarly constructive approach to challenges, which gives them a huge advantage over pessimists. The optimist sees risk as an opportunity. Finding the right balance between risk and opportunity is also ultimately what our work is about. Genuine success comes only to those that can identify and properly assess both sides.

The devastating natural catastrophes of recent years have heightened risk managers’ awareness of the fact that accumulation losses can reach astronomical levels in the worst case. And yet there are still areas where this problem is not given sufficient consideration. Our cover story highlights the special features of marine risks and shows how insurers operating in this sphere can identify accumulations that could threaten their survival, and adjust their exposure accordingly.

Turkey’s economic performance and assured foreign policy have impressed many observers in recent years. Now Ankara is looking ahead to the Republic of Turkey’s centenary in 2023, by which time it hopes to be one of the world’s ten leading economies. This rapid development also opens up many opportunities for the insurance industry. Read our market analysis to find out more.

What will the future bring? Exciting innovations for one thing. For ex ample, driverless cars that can take you anywhere you want to go. “The allseeing black box” is an article that will give you a taste of what the world of telematics will bring us in the future.

I hope you find this issue of Topics interesting and informative, and remain every bit as optimistic in 2013.

Munich, December 2012

Dr. Torsten JeworrekMember of the Munich Re Board of Management and Chairman of the Reinsurance Committee

NOT IF, BUT HOW

2 Munich Re Topics Magazine 1/2013

6Containing accumulation risks

Controlling accumulations does not always receive the attention it merits in marine insurance, as mobile risks are so difficult to assess. But even the specific features of marine risks can be addressed by means of adequate risk management. We highlight trends, developments and solutions.


Life insurers have been severely affected by the financial crisis. Munich Re offers life insurers tailored solutions and advice on corporate financing.

3016

MarinEAvoiding accumulation risks 6 Risk managers should be addressing the topic of accumulation control in marine insurance.

turkEyAnatolian tiger poised to pounce 16A competitive economy and consolidated budget are pointing the way forward for Turkey. A market study.

Price competition affects all players 20Muzaffer Aktaş, Managing Director of reinsurance brokers Willis Re in Turkey, talks about the current state of the Turkish insurance market and outlines its future prospects.

Effective support for Turkish farmers 27Tarsim – How the governmentsupported agricultural insurance pool works. risk ManagEMEnt solutionsNew ways to manage undiversifiable risks 30Solutions that help life insurers on key corporate finance issues.

logisticsAttention! Perishable goods 36Technological progress presents new challenges in the transport and storage of perishable goods. How insurers can adapt their products to meet these new challenges.

tElEMaticsThe all-seeing black box 40 Vehicles that can reach their destination without drivers, talk to traffic lights and communicate with one another.

Editorial 1News 4Literature 39Column 46Imprint 47

Contents

Turkey’s ambitious goal: It wants to be among the top ten global economies by 2023. An overview of the economic situation and insurance market in Turkey.

Know

ledge in dialogue 2013M

unich Re

Knowledge in dialogueClient seminar programme 2013


nEws

Nikolaus von Bomhard has been named 2012 “Insurance Leader of the Year” by St. John’s University’s School of Risk Management in New York. The school has presented this annual award to industry leaders for outstanding achievement since 1995. Widespread admiration for his style of leadership in the service of all Munich Re stakeholders was one of the reasons cited for the award. His personal approach to leadership and his stance on economic and political issues in these testing times was another. The School of Risk Management was founded in 1901 as the Insurance Society of New York. It was merged with St. John’s University in 2001. The official awards ceremony will take place on 16 January 2013 in New York.

awardNikolaus von Bomhard is the 2012 insurance manager of the year

Munich Re has an attractive programme of seminars and workshops in 2013 tailored to the needs of our international clients. We have around 50 seminars and workshops on primary insurance and reinsurance topics in life and nonlife areas as well as a selection on enterprise risk management at insurance companies. The seminars are held in Munich and at other locations in our international organisation. With the “Knowledge in dialogue 2013” seminar programme, we offer our clients an ideal forum for knowledge transfer and for constructive dialogue and networking. If you are interested in receiving a copy of the “Knowledge in Dialogue” programme, just contact your Client Manager.

>> More information at connect.munichre.com

cliEnt sEMinarsUp-to-date knowledge

The inaugural RISK Award was presented at the International Disaster and Risk Conference (IDRC) in Davos on 26 August by the Munich Re Foundation, UNISDR and GRF Davos. The €100,000 prize (the highest riskprevention award in the world) went to a stunningly simple earlywarning system developed specifically for Beira in Mozambique, but which could easily be replicated throughout the world. Hollow tubes with a float inside are installed at strategic points in rivers, streams and drainage channels. If the water level rises, an electric switch is tripped by means of the snorkel principle. Local people can then take themselves and their belongings to safety.

>> More information at www.munichre-foundation.org/de/ home/Projects/DisasterPrevention

risk awardA simple but ingenious early-warning system

Since August 2012, Munich Re has been supporting a twoyear project to protect buildings, infrastructure and human lives in Aizawl, India. Our partner in this project is the nonprofit organisation GeoHazards International, which aims to reduce loss of life and suffering from geological perils in the world’s poorest regions. For example, the project supports a programme in India to make schools more earthquakeresistant. More information can be found at www.geohaz.org.

In its new information platform Touch Engineering, Munich Re presents solutions competence for the insurance of technical risks. You can find out about interesting Munich Re engineering projects, get to know our experts and read about our range of services. www.munichre.com/engineering

The Munich Re Foundation’s 2013 Dialogue Forums will focus on the topic “The (im)mobile society – Ready for the future?” The series of forums will run from January to May 2013. Participants at these five events will include leading figures from politics and the economy, who will be joined by experts on the environment, climate, transport, energy, ergo nomics and the social sciences to discuss this topical issue. You can find out more at www.munichre-foundation.org.

It may surprise many people to know that the increase in weatherrelated loss occurrences is highest in North America not Asia. Our new client publication “Severe weather in North America” offers a detailed analysis of the different weatherrelated risks and exposure in North America. You can obtain “Severe weather in North America: Perils – Risks – Insurance“ via our client portal connect.munichre.com.

News in brief


nEws

Topics: The havoc wreaked by Hurricane Sandy on the power stability of the northeastern US surprised many people worldwide. Your office is based in Connecticut, one of the hardest hit states, where some 600,000 people lost power for days on end. Can you describe the experience?

William H. Bartley: Imagine a twentyfoot wall of water coming down the street, a surge powerful enough to take out entire neighbourhood blocks – houses, stores, cars, all gone. That’s what we saw happen down the coast from New York to Virginia. The damage was devastating in many areas. Hundreds of thousands of people lost power for days, and in many cases, for weeks.

As an electrical engineer and expert on power systems, how would you explain the technical reasons behind the widespread blackouts?

We have two ways of distributing power: above ground and below ground. Within densely populated urban areas, substations, breakers, transformers and cable systems are often located underground in tunnels or subway systems. When the water came surging into the New York and New Jersey area, these systems were all flooded. The utilities had to shut them down to prevent extensive damage and avert safety hazards. Utility crews had to wait until the water had receded before they were able to go down there and reenergise the systems.

Hurricane Sandy brings New York to a standstill

And what about areas that rely on aboveground distribution?

Many people throughout the US – in cities and rural areas alike – receive power distributed by way of aboveground cables and poles. And in the areas affected by Sandy, thousands of these were damaged by strong winds and falling trees.

Is one system more impervious to damage than the other?

Unfortunately both systems are ul tim ately vulnerable to nature. Flood waters can cause as much damage to underground systems as high winds to aboveground power lines and poles. Cost is also a consideration. Building the infrastructure required to install distribution and transmission lines underground is extremely expensive.

Does the energy mix itself play a role in the stability of a city’s power distribution?

Not in terms of system damage caused by natural or manmade disasters. Like coalfired generation plants, renewable energy sources – such as large wind or solar farms – have to be hooked up to the power transmission grid. If power lines are down or a substation fails, the energy source itself doesn’t matter. It’s simply a distribution problem.

So what can be done to prevent these types of mass outage in the future?

We can’t always prevent a power outage, but through better emergency planning, we can reduce the impact.

natural hazards

Being prepared means having a plan, procedures, regular training and readiness drills. When something like Sandy comes along and knocks out the power for hundreds of thousands of people in multiple states, a tremendous amount of coordination among utility companies and engineers is required – from the initial assessment and diagnostic phases to safe restoration.

What sort of advice do you offer clients in terms of safeguards against blackouts?

While the risks associated with power outages can’t be fully mitigated, we do advise our clients to develop their own preemergency plans for computer backup, water and emergency power. We also advise our clients to use more energyefficient equipment that not only reduces the burden on the power grid, but also benefits the environment in the long run.

William H. Bartley, P.E., is Assistant Vice President and Principal Electrical Engineer at Munich Re’s subsidiary, The Hartford Steam Boiler Inspection and Insurance Company.

William H. Bartley, P.E., sheds some light on power supply and stability in the USA.

7Munich Re Topics Magazine 1/2013 7

Marine

Christian Forwick and Gerhard Vogl

As a rule, when the insurance sector turns its atten-tion to accumulation losses, property insurance takes centre stage. Major natural catastrophes in recent years have heightened risk managers’ awareness of the fact that extremely high losses can accumulate here in the worst case. In the special line of marine insurance, on the other hand, the problem of accumu-lation continues to receive far too little attention. Quite a risk, considering that this sector is taking up an increasing proportion of insurers’ portfolios. The reasons are various: Transport capacities by sea, land and air are increasing throughout the world and both port logistics and speed of trans-shipment are keep-ing pace with this development. This results in higher value concentrations and consequently higher insured values. Offshore energy is also gaining in importance. The Gulf of Mexico alone has around 4,000 oil platforms. Even a moderately severe hurri-cane could lead to enormous losses there.

Real treasures can be found here in Singapore’s port and container terminals. Constantly increasing value concentra-tions lead to ever higher insured values.

Avoiding accumulation risks Global transport capacities, value concentrations and insured values are all rising to unprecedented levels. Companies which fail to adjust their risk management in good time can soon run aground under Solvency ii.

However, there are already enough sophisticated, state-of-the-art modelling tools for offshore energy risks to ensure that accumulation risks are adequately assessed. With these tools, leading providers of off-shore energy capacity can successfully control their accumulated liability commitments.

Risk of multi-line loss accumulations

Considered in isolation, marine exposure should not pose any great problem for the majority of property-casualty insurers. Despite this, companies operating predom inantly in property insurance should not neglect supposedly less highly exposed lines of busi-ness such as marine insurance, for the problem of accumulation can intensify existing negative trends in the property sector or jeopardise tightly calculated profitability margins. The extreme case of a multi-line accumulated loss can even escalate into a threat to a company’s continued existence. For instance, if a major port were to be destroyed by an earthquake or tsunami. Losses under property and marine covers


Marine

Fig. 1: The largest container ships in comparison

+ 16%A new record

The capacity of a Triple E vessel, 18,000 TEU, will set a new world record. Maersk Line continues to break its own records and sets new standards for the shipping industry. From Regina Maersk to the Triple E class, Maersk has designed the largest con-tainer vessels in the world since 1996.

Source: Maersk Line

2013Triple E Maersk class18,000 TEU

2006Emma Maersk class15,500 TEU

1997Sovereign Maersk class8,100 TEU

1997Regina Maersk class7,100 TEU

18,000standard containers

can accommodate

111 millionpairs of trainers.

A standard twenty-foot container can accommodate 6,000 pairs of trainers. The biggest container ship (Triple E Maersk Class) can accommodate around 111 million pairs of trainers – enough to supply the entire population of Mexico.

Immense dimensions and immense value: the “Edith Maersk” and its seven identical sister ships are the world’s largest con-tainer vessels. They measure 397 m in length, 56 m in breadth and can carry 15,000 containers.


Marine

could very quickly accumulate in such a case, for example if the port has large warehouses and oper-ates as a trans-shipment centre. Obvious and usually considerable property losses suffered by the stored goods are not infrequently accompanied by conse-quential losses due to disrupted production chains directly leading to business interruption/contingent business interruption losses. The major earthquakes in Japan (11 March 2011/magnitude: 9.0) and Chile (27 February 2010/magnitude: 8.8), the floods in Aus-tralia in late 2010/early 2011 and the floods in Thai-land in late 2011 are examples of recent losses with a high exposure for marine insurers.

Unlike the stationary risks encountered in property insurance, marine risks are normally mobile. Never-theless, goods can easily remain in one place for a longer period of time (up to 60 days according to the Institute Cargo Clauses (ICC) and sometimes consid-erably longer); major fluctuations in insured values and accumulations at the storage locations are conse-quently characteristic features of cargo business. It is often claimed that potential loss accumulations can-not be determined in advance because it is impos-sible to say exactly when any given number of risks will aggregate in a certain place. The loss accumula-tion scenarios, risk models and vulnerability curves which have proved their value in property insurance are therefore unlikely to yield satisfactory results when determining the probable maximum loss in marine business.

Special features of mobile risks

However, this stance does not stand up to closer scru-tiny, for parallels do indeed exist: a significant number of marine risks are likewise stationary and subject to assessment criteria very similar to those used in prop-erty business. They include the majority of offshore oil and gas platforms, shipyards, marinas, exhibition goods (fine art) and warehouses with revolving stocks. They all have a fixed location, but fall within the domain of marine insurance.

The accumulated insured values or insurance limits can therefore be determined fairly accurately. Another feature common to many mobile risks is that they come together for a certain period of time in such trans-shipment and trading “hubs” as distribution warehouses, ports, exhibitions and museums.

This basically means that no line of marine insurance business can be excluded when considering accumu-lations. On the contrary, the possible magnitude of loss following a major event must be individually established for each line of business and correlations between the individual lines taken into account, as they are usually linked by a close causal relationship. The following trends and developments must be noted:

Not colourful Lego bricks scattered about a child’s playroom but innumerable con-tainers that were whirled about and scat-tered like toy bricks by the tsunami on 12 March 2011 in Sendai, northern Japan.


Marine

0

5

10

15

20

0,0

0,2

0,4

0,6

0,8

1,0

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Fig. 2: Development of world trade

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

The increasing globalisation of the economy since the beginning of the 21st century has led to substantial growth in world trade.

Source: WTO

– Increasing trade flowsForeign trade volumes are being driven steadily upwards by globalisation and the associated inter-connection of otherwise distant economic regions. Growth has become enormously dynamic as markets have opened up and taken their place in the global division of labour, allowing such booming economies as the BRIC countries (Brazil, Russia, India and China) to grow at above-average rates. Increasingly short product life cycles, especially for electronic devices (smartphones, tablets, laptops) are another driving force leading to ever higher trade volumes. They are also boosted by the general cost-motivated increase in the speed of sales (“time is money”), as reflected in the continuing trend towards just-in-time logistics systems. Insurers must expect higher exposures as a result of these trends and developments. Stockyards, warehouses, trading centres and ports are exposed to the perils typical of coastal regions – particularly floods, earthquakes, tsunamis and windstorm – with corresponding accumulation risks for insurers’ global marine portfolios.

– Growing transport capacitiesModern container vessels can carry roughly 15,000 standard twenty-foot containers instead of the 700 carried in 1967. As a result, the insured value of the cargo is frequently in the range of €1bn or more. In order to cut transport costs further, ships measuring 400 m in length and accommodating up to 18,000 TEU are soon to be launched (see Fig. 1: Development of

ship sizes). An accumulation of individual major risks, such as a collision between two “mega-ships” (tankers, container vessels), is a possible scenario, considering the steadily rising tonnages and increas-ing density of shipping traffic. The probability of such an event increases as crew sizes are cut, standards of training decline, language barriers increase and cost-cutting measures take their toll on safety standards. Furthermore, the marine lines are also strongly linked: a collision may not only result in the total loss of cargo and vessel, the shipowner’s liability insurance may also have to pay the cost of remedying the environ-mental damage.

– Higher exposure in shipbuildingThe trend towards bigger tonnages and better tech-nological standards is driving up the hull value of shipbuilding projects. Standardisation and more effi-cient production processes are also leading to shorter construction times, with the result that shipyards can work on several projects simultaneously. In the event of a builders’ risk loss, substantial additional exposure must be expected in the form of delayed delivery and the resultant consequences for business interruption insurance.

– Accumulation potential of port facilitiesPort facilities (including piers, wharves, docks, dis-patch terminals, loading and loading logistics, ware-houses) are essentially stationary risks of a predom-inantly property nature and consequently have similar accumulation scenarios. Considered in isolation, port facilities do not constitute any undue risk for the insurer. When viewed in combination with other marine risks, especially the goods stored in the port, however, the situation looks very different.

Luxury yachts moored tightly side by side in Monaco’s harbour. The resultant accu-mulation potential is considerable, particu-larly as pleasure craft spend most of the time anchored in their home marina.

US$ bn


Marine

For all classes of insurance, the problem essentially lies in property-type risks. Since port facilities are often located near large cities or even form part of an industrial city, they should always be included in the overall assessment of accumulation risks. This was clearly demonstrated by the earthquake off the Jap-anese coast in March 2011. The subsequent tsunami caused major damage along a stretch of coast several hundred kilometres long. The insured losses were immense and affected not only property, but also the sectors marine hull, marine cargo and even aviation.

– Value concentration in marinasThe large number of geographically concentrated individual risks makes pleasure craft business a potential source of major losses in conjunction with such natural hazards as windstorms, tsunamis or floods. This is due to the fact that pleasure craft nor-mally remain within a closely confined radius and are kept most of the time at anchor in their home marina. As a result, the potential accumulation is high, par-ticu larly as the yachts are being increasingly luxuri-ously equipped, driving up the sums insured. The risk of fire is also higher in winter months, as the vessels are often kept tightly packed in large halls during the winter season.

– Higher risks with offshore energyAs the comparatively accessible onshore oil fields are gradually being exhausted, oil companies are making ever greater efforts to tap the deposits under the sea-bed. According to the International Energy Agency (IEA), more than half the new reserves discovered since the turn of the millennium are located in deep water. This has led to a steep rise in insured values and value concentrations per platform, a higher risk of pollution (Deepwater Horizon 2010) and above all higher accumulation risks due to the higher exposure to natural hazards (wind, huge waves, earthquakes and seaquakes). Much the same can be said of off-shore wind farms which are, at present, additionally exposed to a disproportionately high prototype risk.

– Solvency II calls for accumulation control The trends outlined above show how important it is to look beyond the immediate horizons and to establish the level of exposure over all the various fields of busi-ness. Insurers can only take account of worst-case scenarios in their underwriting policy and adequately include accumulation risks in their premium and li -ability calculations if they are aware of the possible accumulation potentials. Solvency II makes accumu-lation control more important than ever, as the new regulations not only demand that risks be made fully transparent, but also require a capital base commen-surate with the risk. If (internal) risk models are used, uncertainties in the exposure figures are penalised actuarially by safety loadings. This inevitably leads to higher prices and a diminishing competitiveness in the market. Furthermore, competition for capital within a company is a disadvantage, as more profit must be earned on the increased risk capital. Non-EU countries, for instance in Asia and South America, are also closely monitoring the introduction of Solvency II and considering whether or not to introduce a similar supervisory system.

Risk management in three stages

For marine insurance, a balanced and sustainable risk management system within the meaning of Solv-ency II should comprise three stages in practice:

1. Micro-assessment of the accumulation riskSince the various subclasses cargo, hull and liability (P&I) normally correlate in the event of a loss, this increases the risk of accumulation for the insurer. Even on the level of individual policies, however, con-siderable exposures can accumulate and exceed the limits in force. Particular attention must be paid to portfolios with a geographical concentration of off-shore energy risks. Each marine class written must therefore be individually assessed with regard to the potential loss accumulation.

2. Macro-assessment of the accumulation riskEven comparatively small marine portfolios should be considered as a whole, for the risks can rapidly accu-mulate with those of other segments, as the above example of port facilities in industrial centres has shown. In an extreme case, losses under marine covers can prove to be the proverbial final straw.

3. Solvency assessment and determination of the need for reinsurancePrimary insurers are responsible for risk-adequate underwriting, maximum risk transparency and for adequately safeguarding their risk capital.


Marine

Topics: What are your responsibili-ties as deputy harbour master?

Andreas Brummermann: The har-bour master and his crew (port authority) are legally respons ible for ensuring the safety, flow and environ-mental compliance of shipping traffic. As the police authority responsible for shipping, we also exercise certain regulatory powers. The port authority is responsible for port regulations, acts as the licensing body for harbour shipping and as the authority super-vising the harbour pilots.

Natural catastrophes, weather risks and major accidents can cripple trad-ing hubs like sea ports, airports and logistics centres. Tell us about your emergency scenarios and safety pre-cautions.

Hamburg made significant improve-ments following the 1962 floods. A central disaster management service (ZKD) was set up to ensure optimum handling in the event of loss or dam-age. Depending on the magnitude of the loss, the ZKD can be enlarged fol-lowing a major or accumulated loss and centrally manages the individual regional disaster management ser-vices (RKD). The port authority’s naut ical centre acts as the reporting point for the port of Hamburg. Losses of every kind are reported there and evaluated before appropriate action is taken. Within disaster manage-ment, we distinguish between defen-sive disaster management (acci-dents, damage, etc.) and preventive disaster management (storm surge).

How do you manage to ensure a smooth flow of traffic for freighters and container vessels of all sizes?

Traffic within the port of Hamburg is managed through the port authority’s nautical centre. This is the focal point for all operations needed to ensure the smooth and safe flow of shipping traffic. The nautical centre works closely with the national estuary centres, the port and river pilots on the river Elbe, the tugs, line handlers, quay operators and shipbrokers. We are particularly concerned with ensuring that every ocean-going ves-sel is given a safe berth here and that the large tide-bound vessels enter and leave the port within the time-frame available to them.

How do you deal with hazardous goods?

Hazardous goods are to be found on virtually every container ship and are loaded in accordance with stowage requirements. Even before a vessel arrives in Hamburg, the harbour police receive a detailed list of all hazardous goods on board. Liquid bulk goods, such as petrol and oils with a low flash point, must be trans-shipped in tanker terminals, where special safety regulations apply.

Which technical aids do you have?

Our most important technical aid is the network of shipping data on the river Elbe. All the estuary centres associated with the river Elbe are interconnected in this system and every inward or outward movement of a ship between the German Bight and its berth in Hamburg is regis-tered there. Inside the harbour, 13 radar stations provide a clear view of each harbour basin. Each vessel can be contacted by VHF radio on spe-cially allotted channels. In foggy con-ditions, harbour pilots provide separ-ate fog advice via allocated radar channels. The telephone system also has a priority function to ensure it is constantly available without disrup-tion.

Are there any times, places or types of vessel that pose a particular danger?

All vessels are treated in accordance with their hazard potential. In the case of tankers, a “ban” can be issued if necessary in poor visibility. General rules of conduct must be observed by all vessels in fog. Above all, tide-bound vessels must enter and leave the port within certain time-frames, otherwise they could end up with too little water under their keel. As far as places are concerned, special priority rules must be observed in the port of Hamburg in order to prevent poten-tially dangerous situations arising.

andreas Brummermann is deputy harbour master at the port of Hamburg. around 10,500 ocean-going vessels from every corner of the globe docked here in 2012 alone. Topics spoke to andreas Brummermann about his work and the risk potentials involved at the port of Hamburg.

Gateway to the world


Marine

Made-to-measure reinsurance solutions can help to assure solvency if the calculated capital requirement following a catastrophe exceeds the insurer’s finan-cial capacity.

In future, under Solvency II, the following once-in-200-years loss scenarios – with further subdivision into geographical zones for natural catastrophes – must be taken into account in the standard formula as possible accumulations for marine business:

− Tanker collisions − Loss of an offshore platform or offshore complex

In addition to the purely quantitative assessments required, it must also be demonstrated that all com-pany risks and particularly all major-loss potentials have been correctly estimated and duly included in the strategic business and risk management. This also imposes higher demands on the quality of data, adequate process management and the wording of the underwriting and reinsurance policy. Wide-rang-ing documentation duties are to ensure that supervi-sory authorities can follow the logic of insurers’ appraisals. If the authorities conclude that the quanti-tative calculations do not adequately reflect the risk or that the data material does not meet with the quali-tative requirements, surcharges may be imposed on the required risk capital.

New risk models under development

In short, Solvency II requires a distinctly heightened awareness among primary insurers if they are to underwrite marine risks on a profitable basis in the long term. This requires precise knowledge of all the risks written (underwriting limits, scope of cover, exposure, geographical location, vulnerability to loss), maximum transparency of the portfolio and compli-ance with certain data standards (geographical data, liability data, policy data). However, it also includes collecting risk data as the non-leading primary insurer, for example in relation to warehouses separ-ate in terms of fire risk, or in order to determine the development of container stock (empty/loaded/aver-age values) in a given harbour. Information on how to prepare a suitable risk data model (KISS) can be obtained from the German Insurance Association (GDV). One positive side effect of this heightened risk awareness is that it can create an incentive to develop new risk models or adapt established risk models from property insurance to meet the needs of marine insurance.

OUr eXPerTS

Christian Forwick is a marine underwriter at Munich Re responsible for MGA and French [email protected]

Gerhard Vogl is a marine under-writer at Munich Re responsible for various markets in central and eastern Europe. [email protected]

Solvency II requires a distinctly heightened awareness among primary insurers if they are to underwrite marine risks on a profitable basis in the long term.


What is it that makes reinsurance so exciting?

You can find out the answers to this question in TOPICS ONLINE. Our magazine for insurers takes you behind the scenes at Munich Re and shows what drives us. We will introduce you to interesting people, address current topics in the worlds of insurance and finance, and present the latest trends, solutions and services.

Have your say: use the comment function to start interesting discus-sions with us. Your opinions are reflected in interactive surveys.

www.munichre.com/en/topicsonline

not if, but how


Jürgen Brucker and Joachim Mathe

Turkey is a rising star among the emerging markets, its dynamic rate of development earning it the nick-name “Anatolian tiger”. This rapid expansion is driven by the private sector, most notably by industry. The country has extensive integration with the European Union through a customs union. As a result, the EU is not only by far the most important trading partner, but also supplies most of the foreign capital that is directly invested in Turkey. Its geographic location at the point where east meets west is another advan-tage. For many companies, this not only makes it an excellent production location, but also an ideal base from which to do business in Asia, the Middle East and North Africa.

Growth fuelled by direct foreign investment

Turkey’s economic miracle dates back to a home-grown economic crisis that shook the country’s bank-ing system in 2001. At the time, ballooning sovereign debt and runaway inflation forced the government to radically alter its approach. And with great success:

Boomtown: Istanbul’s population is expected to grow by a further five million in the next ten years.

Anatolian tiger poised to pounceTurkey has seen an impressive upswing in recent years, thanks to a competitive economy and successful consolidation of the national budget. With an eye to its centenary celebra-tions in 2023, the country has set itself some ambitious goals: it plans to become a top-ten economy.

in the years that followed, the transformation of the country’s financial system, a flexible exchange rate and economic reforms increasingly attracted foreign capital and stimulated growth. From 2002 to 2011, the nominal gross domestic product (GDP) grew more than three-fold to US$ 773bn, with the result that the country now ranks sixth among the economies of Europe and 16th in the world. Its national budget was also successfully restructured: according to forecasts, the 2012 deficit should be no more than 1.5% and total debt around 37% of GDP.

The upswing went hand-in-hand with major struc-tural changes in the economy. The agricultural sector still makes the greatest contribution to the economy, not only representing over 10% of GDP, but also pro-viding jobs for more than one-third of the country’s working population, with roughly half the country’s land being used for farming. In recent years, however, industry has been gaining. Together with the mega-city Istanbul and the capital Ankara, Izmir and such provincial towns as Kayseri, Konya and Adana have

Turkey

Turkey


20,000

15,000

10,000

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0

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Fig. 1: Annual growth rate of the Turkish insurance market

TL m

35%

30%

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10%

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0

9,000

8,000

7,000

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02007 2008 2009 2010 2011

Fig. 2: Profitability of Turkish life and non-life insurers

TL m

14%

12%

10%

8%

6%

4%

2%

0

Life and non-life insurers once again reported higher net earnings overall and a higher return on equity in 2011.

Net earnings (left-hand scale)

Equity (left-hand scale)

Return on equity (right-hand scale)

Source: Association of Insurance and reinsurance companies of Turkey

Following the slowdown in growth due to the global financial crisis, the Turkish insurance market returned to double-digit growth rates in 2010 and 2011.

Premium volume (left-hand scale)

Annual growth (right-hand scale)


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Fig. 3: Profitability of Turkish non-life insurers

TL m

12%

10%

8%

6%

4%

2%

0

–2%

–4%

–6%

Considered in isolation, non-life business in the Turkish insurance market remains in the red, with a loss of TL 15m in 2011.

Net earnings (left-hand scale)

Equity (left-hand scale)

Return on equity (right-hand scale)


Turkey


now become industrial centres. In addition to textiles, the country’s main products include motor cars and commercial vehicles as well as consumer goods, such as electrical and household appliances. The services sector including tourism, traffic and transport has also developed rapidly, and the energy market has acquired a new significance as the nation’s economy has grown.

As the economy booms, Turkish consumers are also becoming a more attractive prospect. The Turkish population is one of the youngest in Europe, with 58% of the country’s 74 million people aged under 30. The economy’s positive development is also reflected in rising incomes and growing purchasing power.

Ambitious goals for Turkey’s centenary

The goals pursued by Prime Minister Recep Tayyip Erdoğan are ambitious: by the time the Republic of Turkey celebrates the 100th anniversary of its founda-tion (29 October 1923), it aims to have become one of the world’s ten leading economies and Istanbul is to be home to five million more than its currently esti-mated population of 15 to 17 million. To create living space for this new population, two new urban centres are to be built on the fringes of this densely built-up metropolis, one on the European side and one on the Asian side. Development of the infrastructure is also being stepped up by the government. New ports, a third international airport, a third bridge across and two tunnels under the Bosporus, as well as a high-speed train to Ankara are planned to handle the expected volume of traffic.

However, it is doubtful whether all these projects can be realised within the planned time-frame, for the country still faces several other challenges. After the current account deficit reached the record level of roughly 10% of GDP in 2011, the economy now faces more and more imbalances in foreign trade. The Cen-tral Bank is pursuing a weak-currency policy in an attempt to curb its deficit, making imports more

expensive and fuelling inflation. In addition, the finan-cial sector has become increasingly dependent on short-term foreign funds, making the country suscep-tible to external shocks. But even if Turkey is spared such shocks, GDP is only expected to grow at more moderate rates of between 4% and 5% until 2014.

Rapidly growing insurance market

Despite these uncertainties and the existing struc-tural weaknesses, Turkey’s economic importance is set to increase, as is that of its insurance sector. This sector has already grown rapidly in recent years, from a premium volume of barely 10 billion Turkish lira (TL) in 2006 to TL 17.1bn in 2011 (see Fig. 1). This rise was not solely attributable to economic growth, but also to the market’s generally low insurance penetration. In the past year alone, the market expanded by 21.5%, leaving a phenomenal real growth rate of 8.5% after adjustment for inflation.

Personal accident, life, motor third-party liability (MTPL), fire and health are the biggest segments. Profitability, on the other hand, is unsatisfactory in most lines of business. Although the underwriting result improved slightly in 2011, the market climate in property and casualty insurance remained troubled, with numerous insurers reporting a loss. The difficult market situation is also reflected in the return on equity, which has largely declined since 2008. Non-life companies even reported a negative ratio in 2011 (see Fig. 3).

As the economy booms, Turkish consumers are also becoming a more attractive prospect. The Turkish population is one of the youngest in Europe, with 58% of people aged under 30.


Turkey

Topics: What are the driving forces behind Turkey’s economic growth?

Muzaffer Aktaş: Turkey owes its dynamic growth, in part, to increas-ing industrialisation and the rapid development of tourism over the past 25 years. At the same time, visionary economic pol icies and the tough new banking regulations introduced between 2000 and 2002 have also contributed to its growth.

How would you describe the current situation on the Turkish insurance market?

Despite sizeable growth in the last ten years, the market remains rela-tively small. Notwithstanding the current ruinous price war, it offers enormous potential. Large, cap ital-rich international insurance com-panies fighting for market shares are one reason for the fierce struggle over prices. As a result, many of the rates quoted are no longer technic-ally justifiable, but this downward trend cannot continue indefinitely. Ultim ately, even the big players will feel the pinch and be compelled to change tack.

Insurance companies backed by for-eign capital have controlled around 60% of the Turkish market for the last four years. Has this brought any improvements?

International insurers are extremely welcome. They are all leading com-panies with a wealth of experience. I am therefore optimistic that, with their aid, we will be able to make the general public more aware of the benefits of insurance. This will be of enormous benefit to us all.

Muzaffer Aktaş, Managing Director of reinsurance brokers Willis re in Turkey and responsible for the Middle east and Africa, explains the Turkish insurance market’s present situation and outlines its future prospects.

Price competition affects all players

Istanbul threatened by earthquake risks

The pools Tarsim (for agricultural covers, see page 27) and TCIP (for earthquakes) are two special features specific to the Turkish market. While Tarsim was established to reflect Turkey’s significance as an agri-cultural producer, the earthquake pool TCIP was set up following the Izmit quake in 1999 with support from the World Bank, among others. The degree of seismic activity indicates just how important the pool is: more than 1,000 quakes with a magnitude of 5 or higher were registered in Turkey in the period from 1900 to 2011, including ten in the Istanbul region alone (see map of natural hazards on page 25).

The city straddling the Bosporus is particularly at risk, as it is located north of the North Anatolian Fault, partly on the Anatolian Plate and partly on the Eur-asian Plate. Due to the chronological east-west sequence of quakes in northern Turkey to date, it is only a question of time before an earthquake strikes this city and the millions of people living there. Opin-ions diverge as to its magnitude. Some experts con-sider the probability of a violent quake within the next 30 years to be in excess of 60% – with potentially devastating consequences for this densely populated and highly industrialised region. Others expect the tectonic stresses to be reduced in a series of minor earthquakes.


Turkey

Earthquakes are by far the most important catastrophe risk in Turkey. To what extent is the public aware of the need for suitable covers?

Earthquakes are a terrifying natural hazard. Every major event is vividly remembered for a long time, which makes it easier to sell corresponding products. Market penetration will therefore increase. As people become more aware of the risks, they will also be more willing to pay higher insurance premiums. Mean-while, insurers will spend more on reinsurance cover and reinsurers will increasingly benefit from this devel-opment.

How do you expect the Turkish insurance market to change in the next few years?

On the one hand, I expect further consolidation in the near future, albeit on a smaller scale than at pre-sent. However, I also hope that the international companies operating in Turkey will try to explore the untapped personal lines and intro-duce niche business. If the Turkish economy continues to grow at its present rate, people will soon be able to feel that wealth in their own pock-ets. They will become more aware of the need for insurance cover and be prepared to spend more money on it. That will contribute decisively to the further growth of insurance in Turkey.

Which are the main areas or lines of growth in your opinion?

Growth will be found primarily in construction, small industries and tourism.

What do you think of the efforts to introduce a regime similar to Solv ency II in Turkey?

The Turkish Treasury regards Solv -ency II as an essential tool for achiev-ing financial strength and protecting both insureds and insurance com-panies. Turkey is way ahead of many other non-EU countries in this respect.

The crisis in the eurozone, volatile capital markets and persistently low interest rates are also having an impact on the insurance industry. What challenges do you foresee for the industry in the near future?

Insurance business is based on two pillars – technical income and invest-ment income. Both must be equally strong and generate sufficient profits. The advantage of this two-pillar principle is that difficulties in one area can be mitigated by efforts in the other to reduce financial fluctuations. Since investment income is very low in the present economic situ ation, higher priority must be given to the technical side.

As the latest quakes in Christchurch, New Zealand, have shown, however, even smaller earthquakes can cause considerable damage and losses. Statistically speaking, the next major event is already long overdue: in the last 1,500 years, Istanbul suffered a major earthquake every 100 years on average, the last in 1894.

Obligatory earthquake insurance TCIP

Since it was set up, TCIP has covered losses totalling more than TL 145m. Premium income between 2000 and 2011 totalled around TL 2,290m, and TL 400m in 2012 (as at November 2012). Cover is provided on a first-loss basis with a maximum exposure of around TL 150,000 and a deductible equal to 2% of the sum

insured. The average sum insured is TL 67,000, the average premium TL 100 per year. It is calculated on the basis of five different rating zones and three different construction classes. For houses and apart-ments worth more than TL 150,000, add itional pro-tection can be purchased from the insurers operating in the market. In June 2012, the total sum insured by the TCIP equalled TL 261bn; buildings in Istanbul accounted for 28% of this total, and buildings erected after the 1999 quake made up 60% of the total.

22 Munich Re Topics Magazin 1/2013

Solvency II will ensure that the same solvency standards apply in all EU countries in future. Yet the regula-tions governing the capital base and risk management are also attracting widespread interest outside the EU, too. In Turkey, insurance companies and regulatory authorities are not only keeping a close eye on develop-ments, but even introduced the first changes in 2008. Probably from 2016 on, the supervisory authority will extensively include risks and the necessary capital base in its solvency assessment – and that will have a lasting impact on Turkish insurers’ strategy, organisation and culture, as well as on their business models. The Turkish regulations are not expected to diverge significantly from the European model, although excep-tions are likely in certain areas.

In order to find out just how ready the Turkish insurers are to meet these future requirements, the country took part in the European Union’s fifth Quantitative Impact Study (QIS5) in 2010. Altogether 46 insurers and one reinsurer participated. It was found that the target value for the Solvency Capital Requirement (SCR) was TL 1.2bn higher than the solvency cap ital required under the previous standards, and that this latter was, in turn, equal to 2.4 times the Minimum Capital Requirement (MCR).

To ease the process of adjusting to the SCR, Munich Re has identified ten levers to relieve the solvency capital and strengthen risk-adjusted earnings power.

1) Focus on non-life underwriting

Since non-life underwriting presum-ably ties up the most risk capital – both gross and net – before diversifi-cation, adjustments are likely to bring considerable relief here. Market and insolvency risks follow a long way behind. Where the latter are concerned, important factors include the agents’ traditionally strong pos-ition in Turkey, the fact that premium payments are retained for longer than the European average, and the reinsurers’ rating.

2) Differentiated earthquake tariff

In the long term, the earthquake tariff will make way for insurers’ own models or those of professional mod-ellers. Until then, more differentiation must be achieved in the earthquake tariff as regards zoning, construction standards, etc. in order to achieve a profitable premium level. The Own

Risk and Solvency Assessment (ORSA) forming part of the 2nd pillar of Solvency II must be fully imple-mented and smaller insurers must (also) have both the procedures and data needed to develop their own tariffs.

3) Nat cat offers little potential for optimisation

In the nat cat segment, Turkish insurers traditionally purchase rein-surance covers with a return period of more than 200 years (99.5% VaR). Although, due to earthquakes, the gross exposure to natural perils is by far the largest risk factor, the net risk capital required is significantly lower. The only remaining (very small) potential for optimisation lies in the amount retained.

Looking to Europe

The aim of Solvency II is to ensure a risk-adequate cap-ital base for the insurance sector in the European Union. Although Turkey is not a member of the EU, the new solvency rules will fundamentally change the insurance industry there, too.

Solvency II

Istanbul’s most famous skyscrapers are in the Levent financial district.

23Munich Re Topics Magazin 1/2013

Solvency II

4) Motor business under scrutiny

On a net basis, motor third-party li ability (MTPL) and motor own dam-age (MOD) will probably prove to be the biggest drivers of risk capital in most cases. This is hardly surprising considering that the primary insur-ers’ share of almost 50% for motor insurances is considerably larger in Turkey than in other European mar-kets. At the same time, the market-wide combined ratio is an average 105% (MOD) and 125% (MTPL). For many years, Turkish insurers were able to compensate this weakness with high investment income, but this is no longer possible as it has declined considerably.

5) Growing importance of reinsur-ance

The advantages of reinsurance (relief for the capital structure, more robust profitability) are of even greater con-sequence under Solvency II. The insurance companies were therefore called on to identify reinsurance pro-grammes in 2013 and 2014 that bring an optimisation of capital. Con-sidering the dominant position of MTPL and MOD in the premium and reserve risk, reinsurance is an effect-ive means of relieving risk capital.

6) Reserve quality is key

Retrospective reinsurance solutions (especially loss portfolio transfer) impact the reserve risk and act as a direct relief on capital. However, the quality of the reserve is decisive. In the past three years, the gradual introduction of a modified IBNR cal-culation (incurred but not reported) has had a positive effect here.

7) Relief through proportional rein-surance

Proportional reinsurance solutions will become more important, particu-larly for MTPL and MOD, as the com-bined ratio is driven skywards by high frequency and not by major losses. Quota share solutions are no more tightly structured than trad-itional covers and therefore allow full transfer of the risk. It is advisable to change over to proportional covers at an early stage, as the full effect is only felt after two or three years, due to the subsequent impact on reserves. The reinsurers’ rating, above all, has a decisive effect on capital relief.

8) Focus on profitability

A minimum of technical profitability is needed in order to implement pro-portional reinsurance solutions. Risk-adequate prices must be calculated and enforced; external factors, such as the development of interest rates and catastrophe losses, must not jeopardise the business model. All insurers must therefore scrutinise their complete range of products and services closely.

9) Opportunity costs decide the price

In the fiercely competitive Turkish market, price and reinsurance com-missions are the most important negotiating components, along with the service. However, such factors as the rating or effective capital relief will increasingly determine the (added) value of reinsurance solu-tions. The price of these solutions will also be determined by alternative financing models with equity or debt, as well as the associated opportunity costs.

10) Optimise loss and administra-tion expenses at an early stage

Measures to cut costs should be taken even before Solvency II. Among other things, these could include the introduction of repair networks for cost-efficient claims settlement in motor business or the systematic use of IT to improve the management of fraud cases.

Conclusion

Turkish insurance companies should not wait until a new Solvency regime is adopted, but should instead take strategic steps as soon as possible to optimise their capital structure and possibly realign their business model.

The implementation of Solvency II involves considerable effort on the part of the insurers. Munich Re offers specific and efficient assistance in all areas (non-life, life, health) when pre-paring for the new regime. In collab-oration with the various Business Units, our Solvency Consulting team uses practical examples to ensure transparency and pass on the know-how needed to find a systematic strategy and plan suitable measures. In this context, Munich Re can draw on extensive experience in the devel-opment and use of internal stochas-tic risk models and link them with value-based portfolio management. In addition, we are actively involved in key national, European and inter-national supervisory and technical boards, and ensure both the transfer of knowledge and the development of recommendations for action in operative business.



Turkey

The pool’s obligatory nature results from the fact that TCIP cover must be proved whenever ownership is transferred. The same also applies when concluding a contract with a utility company (gas, water, electri city). However, anyone lacking such cover is unlikely to face sanctions in practice. This may well be due to the fact that the TCIP law was only formally ratified in May 2012, although it was passed in September 2000 with the pool starting its operations immediately. Now that it has been ratified, it is hoped that the num-ber of insureds will rise appreciably in the near future, from approx. 4.2 million today (including 1.2 million in Istanbul) to 6 million in 2014, particularly since insurance penetration can be improved significantly from its present level of 30%.

The TCIP’s governing board of seven members is made up of representatives from various ministries, Istanbul University and the private sector. Operative business and claims settlement were assigned to the insurance company Eureko. Sales are handled by 28 authorised insurers and their agents in return for a commission. Munich Re has been a reliable partner for the TCIP and the pool’s leading reinsurer for several years. When Turkish earthquake risks were placed on the capital market for the first time in 2009, Munich Re assisted the TCIP, collaborating closely

with the teams for traditional reinsurance and for capital market solutions. Munich Re’s European wind-storm risks and the TCIP’s earthquake risks were combined in a joint cat bond issued by Ianus Capital Ltd. The issuance of a further cat bond exclusively for the TCIP’s earthquake risks is currently in the planning phase.

No more than a few seconds’ advance warning

Since experts can do no more than provide estimates of the possible time and magnitude of the next earth-quake, measures to limit the damage and minimise losses are of paramount importance. And Turkey is a very advanced country in this respect. Earthquake research and contingency planning are given high pri-ority, aided, above all, by Istanbul University’s Kandilli Observatory and Ankara Technical University.

Despite all these efforts, however, an early-warning system for Istanbul is still only just being set up. The main problem lies in the short time of just a few seconds’ advance warning. For this reason, loss-mini-misation efforts are focusing on automatic systems.

Morning rush hour at Eminönü Square: This part of Istanbul is on the European side.

Turkey

Iran

Russia

Libya

In the grip of nature’s power

Natural catastrophesEarthquakeWinter stormFlood/Flash flood

The map shows locations where earth-quakes (orange), floods (green) and winter storms (blue) have occurred. Turkey has frequently been hit by devastating natural catastrophes, partly because the whole country is exposed to earthquakes (Zone 0 rather strong to Zone 4 destructive, or even worse). Earthquakes have claimed count-less victims. For example, on 17 August 1999 in Izmit when an earthquake with a magnitude of 7.6 resulted in 18,000 deaths. Or on 26 December 1939 when an earth-quake of 7.8 magnitude in Erzincan killed 30,000 people.

Source: Munich re

Earthquake zones (Mercalli scale)MM V (rather strong)MM VI (strong)MM VII (very strong)MM VIII (destructive)MM IX (violent)

Istanbul

Bursa

Izmir

Antalya

Konya

Ankara

Kayseri

Adana Gaziantep

Diyarbakir

Turkey


Erzincan

Izmit

Turkey


our exPerTS

Jürgen Brucker is a Client Manager in the Southern Europe department responsible for the markets Turkey and Turkic States. [email protected]

Joachim Mathe is Executive Client Manager responsible for Southern [email protected]

As soon as sensors register strong tremors, safety measures are automatically initiated by a communi-cations network which is separate from the mobile telephone network. Lifts are stopped at the next floor, power lines de-energised, gas mains shut off and traffic signals show a red light. Nevertheless, experts believe that Istanbul is still not adequately prepared for a major catastrophe.

The Turkish government has recently launched a pro-gramme to make six million buildings – i.e. one-third of the existing buildings – more earthquake-proof or to replace them completely. The programme spans a period of 20 years. Construction costs for Istanbul alone are estimated at around US$ 100bn.

Contingency plan for insurers

Special construction codes have been in force since 1940 and have been revised nine times, usually fol-lowing an earthquake. However, the regulations were not always complied with. As a result, it is not uncom-mon to find buildings on sandy ground, and the typ-ical multi-storey apartment blocks are widespread, despite their proven instability. According to a study by the World Bank, the codes have been strictly applied since 1999.

A major earthquake in Istanbul would sorely test every insurer’s claims management. Not only would tens or even hundreds of thousands of claims have to be settled quickly and efficiently – a daunting task even in normal conditions – but the insurers them-selves would also have to cope with the consequences of the catastrophe: damaged infrastructure, disrupted communications systems, personnel shortages.

Proactive contingency planning can help to avoid inconsistencies in settlement, as well as delays and inappropriate claims payments. Provided that it has been structured correctly, it can play an important part in preventing a possible loss of confidence and a nega tive impact on the development of business.

Munich Re has prepared a contingency planning guide to assist its clients. Our experience in trad itional claims management combined with findings from past disasters provides an ideal basis for drawing up individual plans in line with regional specifics and the local infrastructure. The guide was presented at the 4th International Istanbul Insurance Conference in October 2012.

Turkey


Effective support for Turkish farmers

Brigitte Engelhard

The Turkish Agricultural Insurance Act passed in 2005 laid the foundations for the establishment of a government-supported insurance pool for farmers. The aim of this public-private partnership is to help farmers manage the risks they face. The creation of a central unit – the Tarsim agricultural insurance pool – has resulted in a transparent structure which operates efficiently and effectively, promoting the interests of all concerned.

Founded by Turkish insurance companies, the pool is run by a board of management whose members include the main stakeholders, such as the Ministry of Food, Agriculture and Livestock, Undersecretary of the Treasury, the Union of the Agricultural Chambers and the Insurance Association of Turkey. This board of management determines the system’s strategic orientation and basic principles of operation. The essential pillars and achievements of this public- private partnership (PPP) include:

− Public co-financing of premiums − Public co-financing of catastrophe losses − Cooperation between companies and the establish-ment of uniform terms and conditions − Uniform settlement of claims

The management company of the pool implements the pool’s strategy, carrying out all insurance oper-ations. Sales, on the other hand, are handled by the Turkish insurers’ agents in return for a commission (see Fig. 1).

Tarsim provides coverage for arable crops, fruit and vegetables, livestock (cattle, sheep, goats, poultry), greenhouses and aquaculture. The insured perils and exclusions are shown in Fig. 2.

Modern technology is used in day-to-day operations, for instance to transmit data from agents or loss adjusters to the central office in Istanbul or to simplify the verification of losses. Tarsim is linked to the Min-istry’s registration system from which it can retrieve important data needed for writing policies. A pilot project using geo-information systems (GIS) has also been operating for several years.

Since Tarsim was set up, the level of insurance take-up has risen from less than 1% to 8% today, with a corresponding rise in premium volumes (see Fig. 3). A premium volume of TL 500m (around €215m) is expected for 2012. The loss ratio of the original

Turkish farmers are well-protected by the gov-ernment-supported agricultural insurance pool. Tarsim provides coverage for arable crops, fruit, vegetables and many other agricultural products.

Turkey


Reinsurance companiesReinsurance

Government

Insurance companies

Farmers

Tarsim

Co-financing of premiums

Co-financing of catastrophe losses

Loss settlement

Possibility of reinsurance

Premiums

SalesPremiums

Insurance line Coverage Main exclusions

Crop – Hail– Storm– Flood– Fire, EQ– Landslide– Tornado

– Field crops– Vegetables– Fruits– Cut flowers– Seedlings– Fruit seedlings

– Drought– Rain

Greenhouse – Hail– Storm– Tornado– EQ– Landslide– Flood– Vehicle impact

– Fire– Snow and hail pressure– Crop– Technical equipment– Construction– Plastic and glass cover

– Frost

Livestock

Poultry

Aquaculture

– Mortality– Abortion

– Mortality

– Mortality

– Theft– Epidemic disease

– Theft– Epidemic disease

– Epidemic disease

– Frost

– Quality loss (hail)– Fruits

– Fruits

– Vegetables– Cut flowers

Fig. 2: Covers and exclusions in the Tarsim system

Tarsim offers Turkish farmers extensive coverage.

Source: Mr, Tarsim presentation 2011

Government, Tarsim pool and primary insur-ance/reinsurance combine to offer farmers the risk protection they need.

Source: Mr, Tarsim presentation 2011

Fig. 1: Tarsim – Structure and stakeholders

Turkey


Financial Year

business (excluding costs for loss adjusters) fluctu-ated between 44% and 85% between 2007 and 2011. The average loss ratio over this period was 69%.

Tarsim’s reinsurance is based on a proportional treaty covering all segments. Munich Re has been actively supporting the Turkish agricultural insurance market since the 1960s and strategically promoted its devel-opment right through to the establishment of a PPP solution. From the outset, Munich Re acted as the leading reinsurer and main risk carrier for Tarsim. In this way, Munich Re not only contributed decisively to the pool’s development and growth, but also helped to shape its underwriting structures. Local companies can participate in the proportional reinsurance and acquire shares.

In addition to the quota share reinsurance, the risk retained by Tarsim is protected by the government. The local companies’ shares are likewise protected, albeit with a higher attachment point. The profes-sional reinsurers’ liability for frost and flood losses is limited. In this way, the government relieves private insurers and reinsurers in years in which natural catastrophes have struck. This, in turn, helps to main-tain low premium rates for the farmers.

In terms of its basic conditions (statutory basis, cen-tralised structure, subsidised premiums and public participation in catastrophe losses), the Turkish PPP extensively drew on the international experience in this field – experience which can be found in Munich Re’s “SystemAgro” (www.munichre.com/systemagro). This stands for a system of sustainable multi-peril crop insurance that has been in operation for more than 200 million hectares of land throughout the world for over 35 years. It is primarily designed to assist farmers. Before Tarsim was founded, for ex -ample, Turkish farmers were only able to buy straight hail insurance and a traditional livestock insurance, but now they can purchase more comprehensive cover which also remains affordable due to the sub-sidised premiums. Public participation in the catas-trophe losses additionally makes it pos sible for the insurance and reinsurance industry to provide risk capital on a long-term basis.

The drought which hit the USA in 2012 is a prime example of how public participation in catastrophe losses works. Although 75% of the maize and soybean fields were severely damaged, the PPP was able to survive by sharing the risk, thus maintaining the farmers’ “safety net”. Such catastrophe scenarios must also be expected in Turkey, particularly as climate change progresses. Certain challenges still have to be mastered by the relatively young Tarsim system in order to be prepared for the future. Among other things, its products must be continuously adapted, insurance penetration – a sign of its acceptance by and support among farmers – increased, cost-effi-ciency optimised and risk sharing harmonised among the stakeholders. These changes will allow Tarsim to develop in a sustainable manner and give Turkish farmers the risk protection they need.

our exPerT

Brigitte Engelhard is an underwriter at Munich Re responsible for agri cultural business in [email protected]

500,000

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

02007 2008 2009 2010 2011

Premium in TL

Aquaculture Poultry Livestock Greenhouse Crop (other perils) Crop (frost)

Fig. 3: Tarsim – Development of premiums and composition of the portfolio

Insurance penetration and conse-quently premium volume have increased substantially since the Tarsim pool was set up.

Source: Mr

Risk ManageMent solutions


life insurers have been badly hit by the financial and debt crisis. this is due primarily to capital market risks actually materialising to a significant level, so that the values of the assets and liabilities of many market players have drifted apart. Munich Re has created its Financial solutions unit to develop solutions tailored to the needs of the sector and advise life insurers on corporate finance issues.

New ways to manage undiversifiable risks

Risk managers constantly monitor movements in share prices and interest rates.



Increasing expectations of asset-liability management

One of the fundamental problems in achieving a balance between assets and liabilities is the duration mismatch, which results from the differing maturities of life insurance policies and the investments cover-ing them on the assets side. The effect of movements in interest rates on assets and liabilities (“interest-rate sensitivity”) has developed to companies’ disadvan-tage since the beginning of the financial and debt crisis and a gap has emerged between the two sides of the balance sheet.

Services and reinsurance solutions devised by our Financial Solutions Team are typically aimed at reducing the negative effects of past and future inter-est-rate movements and, if possible, even eliminating them. A reinsurance contract offers considerable advantages over hedging transactions such as the purchase of interest-rate derivatives, for example the fact that the valuation of insurance and reinsurance contracts for balance-sheet purposes is based on the same principles. Moreover, supervisory requirements – such as reserve increases due to interest-rate move-ments – can be transferred to the reinsurer via the reinsurance treaty. The reinsurer provides the required technology and assumes the administrative work and the operational risk arising out of the use of

Stefan Jaschke and Gunther Kraut

How can companies cope with the new requirements in risk management and corporate finance? As in the past, insurers are working with their reinsurers to find appropriate answers and solutions – especially in the area of underwriting risks – but that is not the case for the capital market and financial risks that are of paramount importance for life insurers in particular. Financial market risks cannot be diversified like underwriting risks, which vary greatly in type and geographical impact. Products and determining fac-tors are the same throughout the world; economies and trading centres are so interwoven that the risks are increasingly cor related globally when crises unfold. Insurers are looking to reinsurers to offer new answers and solutions – particularly in view of the enormous risks accumulating in life insurers’ balance sheets worldwide.

Munich Re has set up a Financial Solutions Team in its global life reinsurance to devise worldwide solu-tions for risks that are difficult to diversify and to advise life insurers on corporate finance issues – the latter with a particular focus on profitability and solv-ency requirements. This puts Munich Re in a position to support its clients as a partner in dealing with all of the risks on their balance sheet.

Transfer Diversification Limitation

Transferable risks Measurable and diversifiable risks

Other risks

Market-consistent valuation

Capital costs Limits and reimbursement

Hedgeable

Insurable

UninsurablePolicyholders

Insurer

Banks/Investors

Pricing and structuring for three risk categories

Clear communication of which risks are to be transferred to whom is vital for product design, ALM and structuring.



derivatives, which facilitates acceptance by auditors and supervisory author ities of this form of risk cover.

Comparably effective ALM solutions to these and other risks realised by companies themselves will always be extremely laborious. The stricter require-ments for quantifying liabilities following the intro-duction of MCEV (market-consistent embedded value) and Solvency II alone will involve a great deal of work. To meet these requirements, a high degree of actuarial expertise and knowledge of the financial markets is needed as well as the appropriate technol-ogy – all the more so since the higher level of market consistency demanded by regulators for the valuation of liabilities and the qualitative requirements also mean that ALM processes have to be carried out, monitored and adapted much more frequently.

ALM processes specific to life insurance are needed

The standards in the banking sector are only applicable to a limited extent to the ALM processes required in insurance. Though there are similarities between the regulatory rules applicable to banks and insurance companies, a special procedure is needed to deal with the non-hedgeable market risks typically incurred by life insurers with very long-term contracts. Further-more, the platform solutions used in banking, where the software has often been designed under pressure to standardise and industrialise, do not generally enable life insurers to rapidly and flexibly adapt their product assortment in response to new market requirements.

Topics: No competitor has a unit comparable with Munich Re’s Finan-cial Solutions and setting it up was a major strategic step for the Group. What was the objective?

Stephan Reulein: The first aim was to position ourselves in the market and with our clients. As a leading reinsurer, we always aspire to being the best at managing all risk factors that could adversely affect our clients’ balance sheets.

What part has the financial and debt crisis played?

Since the crisis erupted in 2008, financial market risks have to a great extent materialised. Take equities and interest-rate risks as an example. In the crisis, they moved in a direction that produced remarkable effects and posed challenges especially to life insurers with their predominantly long-term liabilities – guaranteed interest rates for example. Financial Solutions develops solutions to these risks, which – as we have observed in the last few years – are difficult to diversify, complementing the trad-itional reinsurance approach.

We also provide advice on key cor-por ate finance issues, especially our clients’ profitability and solvency. All this makes us the reinsurance partner of choice across the whole risk spectrum.

What makes this business model different?

Instead of concentrating on the trad-itional underwriting risks, we focus on risks that cannot be managed using classic methods of diversifica-tion and present them in a tradeable form. At our client’s request, we then sell them to appropriate invest ors in the financial markets.

“the insurance industry is facing challenges in risk manage-ment and corporate finance that cannot be overcome using traditional reinsurance alone”, says stephan Reulein, Head of Financial solutions at Munich Re.

“new strategies are needed to handle our clients’ most important risks.”



However, such transactions are only possible after extensive structuring efforts and transformation of those risks that our clients are not able to or do not wish to keep on their bal-ance sheet for financial or strategic reasons.

How do you go about this?

Our team and the Financial Solutions business model offer particularly attractive benefits – comprehensive consultancy and analysis services combined with highly specialised risk-structuring and transformation capabilities. Each of our transactions requires intense interaction with the insurer to produce a precise analysis of its specific risk situation and to transform the risks identified in such a way that they become tradeable. We often need to work closely with the client for months to achieve this.

Financial Solutions deploys an expert team of around 50 staff for such transactions, each highly profes-sional and with very specialised experience and knowledge. Why is such a breadth of knowledge and skills so important for the success of your unit?

There are a number of reasons for this. We are a relatively small, proac-tive and flexible team. Only by seam-lessly combining a broad spread of skills and a wide range of different competencies can we complete our transactions successfully. The finan-cial products and risk management solutions we develop also require a holistic approach along the entire value chain – from analysis, structur-ing, product design and pricing to transformation and transfer of the risks. And last but not least, we are living in a fast-changing world, and that applies to both the insurance markets and the financial markets in which we sell risks. It is vital for all involved to be close to the markets to be able to offer practicable, state-of-the-art solutions

Corporate finance and the manage-ment of undiversifiable risks pose a challenge to any insurer, irrespective of the areas in which it operates. But Financial Solutions is part of the Life Division – wouldn’t it have made more sense to set up your unit else-where in the structure or as an inde-pendent function?

Possibly, but there were good reasons for situating Financial Solutions within the Life Division. Life insurers’ business models cause them to accumulate exceptionally large num-bers of risks that cannot be diver-sified using traditional methods. Life is therefore our most important client segment and we have direct access to it as a Life Division unit. In view of the complexity of the issues involved, this closeness to the business is indispensable for both our clients and us.

Specialised hedging platforms are therefore indis-pensable for the ALM of life insurance liabilities, but only a small number of major market players can jus-tify the substantial investment required to create and operate them.

For companies looking for improvements in efficiency through economies of scale, the Financial Solutions Team can provide the necessary experience in the ALM of life insurance products and has the technology required on its own platform. The added value lies in the combination of efficient processes and the cus-tomisation possibilities indispensable for life insurers – in both product design and the structuring of rein-surance solutions. In addition to its presence in the worldwide insurance markets, Munich Re offers the ability to analyse, transform and assume actuarial and

financial market risks in a single package and to sell on selected risks.

A broad portfolio of innovative risk transformation strategies

The Financial Solutions Team’s ability to structure and transform risks can be applied to a wide variety of situations. It offers customised optimisation strate-gies for insurance groups, tailored to the applicable accounting and regulatory requirements and taxation considerations. Now more than ever, groups are facing the challenge of having to ensure that their individual subsidiaries meet local capital requirements, whilst at the same time having an efficient capital structure from a group perspective and producing a good return.

There is a wide range of actions that can be consid-ered. For example, insurance groups and financial


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OverallMexicoUSA CanadaAustraliaChileUK Thailand OtherFatalities

Infections and deaths (logarithmic scale)

Global dynamics of pandemics – past and present

The difference between an epidemic and a pandemic is that an epidemic is local or regional, whereas a pandemic affects people in all age groups worldwide.

From 1918 to 1920, Spanish flu was caused by an unusual strain of the influenza virus (a sub-type of the H1N1 virus). It claimed many millions of victims: scientific litera-ture mentions the figure of 25 million deaths, other sources as many as 50 mil-lion. Spanish flu occurred in three waves – the first in spring 1918, the second in autumn 1918 and the third in many parts of the world in 1919 (Fig. 1). The first wave led to only a negligible rise in the mortality rate in the population as a whole, but the fatality rate for the autumn 1918 wave was extremely high.


While troop movements in the First World War contributed to the worldwide propa-gation of the flu, nowadays worldwide travel in particular leads to a much more rapid global propagation of viruses than was then the case.

The spread of swine flu, for example, showed how quickly a virus can now grow into a pandemic (Fig. 2). The virus was identified in mid-April 2009 in two patients, who had fallen ill independently of one another in the USA at the end of March.

A cluster of the illness first became appar-ent in Mexico with indications that the virus had crossed the border and by the end of April 2009 the World Health Organ-ization (WHO) had issued warnings of a pandemic. The highest level of alarm was sounded at the beginning of June 2009.

The high degree of attention it attracted and the extent of the measures taken were due in no small part to the fact that the virus was of an H1N1 sub-type, as was the case with the 1918 Spanish flu pandemic. It was more than a year later, in August 2010, that the WHO was able to declare the pan-demic phase for the swine flu over. Cases had been confirmed in 214 countries and, according to official figures, at least 18,446 deaths were linked to the virus.

The effects of pandemic events are cor-related worldwide, as illustrated by the historical documentation of the progression of Spanish flu in 1918 (see graph on left) and swine flu in 2009 (below).

sources: nicholls, H. (2006). Pandemic influenza: the inside story. Munich Re (2012). Based on a WHo chart (http://www.who.int/csr/).



A member of Munich Re’s Financial Solutions Team, Gunther Kraut is responsible for developing new approaches to pandemic risks. [email protected]

conglomerates can achieve the desired capital effects at individual-company level by means of tailor-made intra-group contracts. Financial Solutions provides advice on the identification and structuring of appro-priate transactions. For the remaining optimisation potential at group level, such a mandate can cover advice on transactions in liquid markets or even illiquid markets via private placements.

Clients working with our Financial Solutions Team benefit from Munich Re’s experience with projects throughout the world, either using pure structuring services or having Munich Re as a partner that con-tributes its worldwide presence and recognised expertise to coordinating the various parties to transac-tions.

The introduction of Solvency II is currently causing demand for these services to rise. Large insurance groups in particular wish to make use of the options they have and take the necessary action now, even though the precise form that the new solvency regula-tions will take is not yet clear. This includes transac-tions that match as far as possible the items relevant to ALM within a group, thus strengthening the indi-vidual companies, and group-external risk transfer that reduces the remaining ALM risks to the stra-tegically desired level.

Another example is dealing with pandemic risks, which can only be diversified to a limited extent in an average portfolio of life insurances. This is par-ticularly true of geographical spread, since by defin-ition a pandemic is a global event fraught with many uncertainties. Financial Solutions analyses and struc-tures pandemic risks to render them transferable. Other players may be interested in assuming such risks because they either have no correlation with their own exposure or constitute an anti-correlation. The occurrence probability of a pandemic is not linked to developments in financial markets, and a pandemic has opposite effects for life insurers and pension providers. This can make it attractive, for example, for insurers with significant annuity port-folios or pension funds to assume pandemic risks. In practice, however, the right setting must first be cre-ated to fulfil the prerequuisites for the risks to be assumed.

The Financial Solutions Team comprises insurance and finance specialists, producing a successful combination of comprehensive actuarial knowledge, highly specialised financial market expertise and state-of-the-art technology. The result is a unique portfolio of services aimed at hedging risks that are not diversifiable or difficult to diversify. The combin-ation of this with traditional reinsurance methodology and Munich Re’s strength enables its insurance clients to benefit from products that address the full range of a company’s risks.

ouR eXPeRts

Dr. Stefan Jaschke is Head of Quanti-tative Methods at Munich Re and responsible for life reinsurance pricing and hedging issues. [email protected]


logistics

Keith Auld

Even in the depths of winter, supermarket shelves are packed with tropical fruits enticingly wrapped in colourful paper. Steak from Argentina, Kobe beef from Japan, prawns from Thailand: all these products are readily available from your supermarket. The products offered to consumers in local shops hail from all around the world, including perishable products which remain fresh despite being shipped over long distances.

Munich Re has for many years insured perishable products in transit and in storage in its marine line of business. The cover offered being based on established market standards and clauses, such as the Institute Frozen Foods and Institute Frozen Meat Clauses, both dating back to 1 January 1986.

There are many different types of perishable products, all of which need to be treated differently so that they do not deteriorate and become unfit for sale within a very short space of time. The natural process of deterioration can basically be slowed in two ways: by controlling either the temperature or the atmosphere surrounding the products. The two methods can also be used in combination.

However, underwriters should always remember that the process of decay can only be delayed, but not stopped indefinitely. The extent to which techno logic al progress has also changed the market and how it affects the insurance industry needs to be analysed in more detail.

A great deal has changed in recent years, especially with regard to the transport and storage of perishable products. Increasingly sophisticated systems allow temperature and atmosphere to be controlled with much greater precision than anything envisaged in the past. As a result, chilled and fresh goods are now shipped over distances which, only a few years ago, would have dictated that the products be frozen.

technological advances have led to major changes in the transport and storage of perishable products. consumers’ expectations have also risen significantly. insurers need to analyse the consequences of these changes for their underwriting and adapt their products accordingly.

Perishable products – A different perspective

Modern technology also allows products to be stored for much longer periods without deteriorating. Nowadays, apples remain fresh even after being stored for ten months. Only a few years ago, a storage period of four months would have been considered very good.

Another decisive point is that the ambient conditions (temperature, composition of the atmosphere, relative humidity, etc.) can be monitored and recorded much more precisely. Digital readings and computer printouts supply far greater detail and accuracy than older analogue methods. The parameters for the transport and storage of products can consequently be set far more tightly and deviations recorded more precisely than was previously possible.

Consumers look for quality

Consumer expectations have also changed as technology has advanced. Today’s consumers demand high quality and detailed information on how the product has been produced, transported and stored. They are also better informed and unwilling to accept any risks arising from products that might not have been kept in optimal conditions. At the same time, they also demand that products be available wherever and whenever they want, even if they come from the other side of the world. Seasonal restrictions are becoming increasingly unacceptable. Freshness is also more important today. Deepfrozen meat was readily accepted by many markets only a few years ago, but those same markets now increasingly demand chilled meat even though it costs more. According to estimates, over 80% of the meat shipped to Europe and the USA from the southern hemisphere in 1990 was frozen. By 2010, the opposite was the case with more than 80% being chilled.


logistics

Consumers’ growing awareness of quality issues is also reflected in more detailed labelling with storage recommendations and “sellby” or “useby” dates. If a product does not meet the customers’ exacting standards, or if the handling or storage requirements appear to be compromised in any way, it will not be bought or customers will complain. A tricky situation for firms: dissatisfied customers nowadays are not slow to seek legal redress or air their grievances through the media. In view of these trends, every supplier or distributor of perishable products must be highly cognisant of the business repercussions of failing to meet consumers’ high standards.

Vulnerable to disruptions

Insurers must likewise be aware of the ramifications of this trend. Do underwriters have the information needed to assess the risks correctly and mitigate their own exposures? Should products be adapted to meet changing demands? For example, the fact that average prices are being driven steadily upwards by the combination of technological advances and con sumers’ heightened quality awareness. Or that increasingly efficient supply chains are encouraging justintime procurement which, in turn, forces suppliers to maintain stocks near the endmarket. Another effect of justintime distribution is that the distinction between perishable products that are “in storage” and “in transit” is becoming increasingly blurred. All these effects indicate a significant accumulation of exposures at major distribution hubs.

Modern technology and distribution systems are normally highly reliable. However, they are also highly vulnerable to disruptions in the power supply or infrastructure. Even events at a considerable distance from where a product is being stored can have a major impact on its storage conditions and hence on its quality, for instance, if the power supply were to be interrupted by a natural hazard or fire in a power plant. Even if backup systems are available, they are normally only designed to bridge a disruption lasting a few hours. Yet such disruptions can persist for days or weeks, even in modern industrialised countries.

A disruption to the electricity supply need not actually have a direct impact on the quality of the product. It could simply cause the monitoring and recording systems to fail. A product could be deemed unsafe and therefore unfit for use if it cannot be proved that it has been properly stored without interruption. What is more, perishable products are very often produced for a precisely defined market. Meat destined for Germany, for example, is produced, packaged and labelled differently depending on whether it is to be sold in the north or south of the country. This means that products cannot simply be diverted to other regions if a regional distribution centre cannot receive produce for one reason or another.

Shoppers can buy fresh fruit and vege tables from all over the world at their local supermarket. Fish, meat and pharmaceut icals have usually also travelled long distances.


logistics

Firms are therefore not only demanding insurance cover for the direct losses normally expected, but also for losses which appear somewhat removed from the usual domain of marine insurance. Insurers are increasingly being asked to provide coverage for products which may have been compromised indirectly, but have sustained no immediately discernible damage. Fearofloss claims are not new, but they are becoming more common in conjunction with perish able products, especially pharmaceuticals. Manufacturers and distributors often wish to withdraw a product from the market, simply because its uncom promised storage and transport cannot be proved. It must then be destroyed, meaning a total loss for the insurer.

Sell-by date is important

Loss of shelf life is a similar problem with fresh products. Even if the product does not show any immediate signs of damage, the natural process of deterioration may have been speeded up by disruptions in the controlled temperature chain. Although the product can still be sold, it must be put to market earlier than intended. This results in a temporary oversupply and consequently lower prices. Suppliers are increasingly turning to their insurers to compensate the difference in prices. The problem is further compounded by the fact that suppliers may be contracted to supply replacement products for the originally scheduled delivery date, giving rise to additional costs. Here, too, suppliers are seeking to recover these extra expenses from their insurers.

Loss of value is another problem associated with perishable products that cannot be delivered to their intended market. It may be possible to further process the product (chilled meat could be frozen, for instance) or to sell the product to another, possibly less discriminating market. In both cases, however, a price markdown must be expected.

Marine insurance is very closely linked to the daily operations of commerce, and the problems outlined above pose a major challenge for underwriters. Insurers cannot simply continue to offer their established products if these do not meet their clients’ actual needs. The Institute Frozen Meat Clauses of 1 January 1986 are specifically “not suitable for chilled, cooled or fresh meat”. Simply adapting coverage ad hoc to meet clients’ perceived requirements and hoping for the best is not the answer.

Underwriters must respond very quickly to the changing market, but often cannot rely on historical data because of the sheer extent of change that has taken place (loss data relevant to frozen meat has little bearing on chilled meat). They need to analyse the impact of new technologies on their clients’ requirements and adapt their insurance products accordingly. The potential for increasing accumulations associated with the new technologies and wider covers must also be considered. Dealing appropriately with these challenges will require considerable effort, but we will find the results of our endeavours very rewarding.

our ExpErt

Keith Auld, Marine Underwriter, Munich Re, Australasia, is responsible for marine risks in Australia and New [email protected]

Shipment and storage of perishable goods have to follow strict regulations.


litEraturE

Focusing on catastrophes

Len Fisher “Crashes, Crises, And Calamities: How We Can Use Science to Read the Early-Warning Signs”Basic Books, 2011

Zoran Andrić

Man has always wished for the gift to foresee impending misfortune. Many catastrophes are preceded by earlywarning signs, but unfortunately we often only recognise them as such after the event. The physi cist Len Fisher, a successful science writer and the author of numerous books, describes man’s long quest to discover the portents of such catastrophes as tsunamis, earthquakes or sudden population declines. It was once hoped that animals might be possessed of a sixth sense which would warn them of earthquakes. Unfortunately, this has proved to be a fallacy. Similarly, the notion that the “balance of nature” and the “invisible hand” of the market will always ensure the longterm stability of ecosystems and economies has turned out to be nothing more than wishful thinking. Negative feedback may be able to temporarily restore stability, but in the long run nature and economies are subject to a complex balance of positive and negative feedbacks. A “critical transition” will repeatedly occur – a point at which systems start to become unstable, leading to disaster. Fisher provides detailed descriptions of mathematical models which can be used to calculate this critical transition point. Thanks to highperformance computers, it is now even possible to predict some catastrophes. Indeed, Fisher believes that the theory of complex systems can give us a handle on catastrophes of all kinds. Like the mathematician René Thom, he divides catastrophes into seven elementary mathematical types, deriving a direct link between these catastrophe types and our everyday lives on the basis of similar patterns. The most important earlywarning signs Fisher identifies are also interesting: an increase in stress, a concentration of stress at particular weak spots, loss of resilience, increasing fluctuations and the occurrence of extreme conditions as well as changes in spatial patterns. The author has written a very vivid and informative book on a serious subject.

telematiCs


Driverless vehicles that safely reach their destination, communicate with traffic lights or even with one another – these are just a few of the visions put forward by the vehicle telematics sector. But what impact will such developments have on insurers’ business?

Hands off the steering wheel! The Google Car travels even without anyone on board. This driverless car has already been licensed for use on public roads in the US states of California, Nevada and Florida.

The all-seeing black box

telematiCs


Jochen Friedrichs

Vehicle telematics is a rapidly developing field. Mod-ern vehicles are packed with increasingly sophisti-cated technical assistants: GPS, automatic distance sensors and emergency braking systems have long since become standard features in top-of-the-range vehicles. A “lane assist” function makes the steering wheel vibrate as soon as the driver runs over a line marking a lane boundary. In darkness, infrared sensors project an image directly onto the windscreen to warn the driver of pedestrians at the roadside.

Increasingly, vehicles are also communicating with the world around them. Intersection assistants, for example, communicate wirelessly with traffic lights whose camera systems supply the on-board assistant with data on the vehicle’s speed, its distance from the intersection and its direction of movement. In this way, it can warn the driver of red light infringements or hazardous turn-off manoeuvres or recommend the right speed to negotiate phased traffic lights.

The car becomes a communications expert

That, however, is only the beginning – other develop-ments go much further: a number of research projects are studying communication between vehicles. The aim is to extensively incorporate the intelligence of a driver into the vehicle – but without the attendant ego. In the future, vehicles will be able to communicate with one another so that they can jointly prevent traffic jams and accidents and further take the strain off their drivers.

Those who do not like to drive can take a back seat. In the USA, the “Google Car” has impressively demon-strated that cars can also drive without human assist-ance. Indeed, the driverless car has already been licensed for use on public roads in the states of Cali-fornia, Nevada and Florida. During an initial phase, however, at least one driver must be on board to inter-vene if necessary, rather like a driving instructor.

Impact on insurers

Technological progress is unstoppable. Telematics will affect more and more walks of life, changing our dependence on technology and our habits. Most insurers are observing the trends in telematics with great interest, though they are still looking for the levers and parameters that will give them a handle on the new risks and opportunities which this technology presents for their business.

A small black plastic box, hidden deep in the heart of the vehicle, could be a “game changer” by radically improving insurers’ ability to assess both drivers and vehicles, at least in Europe. As part of a legislative initiative introducing eCall, by 2015 every new car in the European Union is to have a small sensor that will automatically trigger an emergency call in the event of a road accident and thus also activate the insurer’s “rescue chain”.

In other emergency situations, such as a medical problem or breakdown, the driver can trigger eCall manually. With a telematics box in the vehicle, insur-ers could also locate stolen vehicles. While the driver normally remains unaware of the telematics box, its sensors continually collect data on his or her driving behaviour – an invaluable treasure trove for data min-ing systems.

The possible applications for telematics-based insur-ance are numerous and the potential enormous, but its success for the insurance industry is difficult to assess. The crucial question is ultimately who collects which data and how; who has access to it and what advantages can policyholders gain from the telematics boxes? Are customers really prepared to voluntarily hand over personal data about their own driving behaviour? What can insurers offer in return? How low must the telematics-based rates be in order to attract policyholders? Insurers must also consider whether the cost of new hardware, logistics, instal lation and removal of the telematics boxes are worth the effort in the first place – particularly if price is the only factor motivating customers.

Research projects are studying communication between ve hicles. In the future, vehicles will be able to communicate with one another so that they can jointly prevent traffic jams and accidents and further take the strain off their drivers.

telematiCs


Are telematics-based tariffs only suitable for young men?

In Europe, the introduction of unisex pricing has also lent new impetus to telematics-based insurance. Since the beginning of 2013, European insurers have no longer been able to use gender as a rating factor in motor insurance. With the rating factors used in tele-matics-based insurance, however, the driving behav-iour of every single policyholder can be observed and evaluated very precisely. This gives rise to new busi-ness models, such as that of the British telematics insurer, insurethebox. The start-up company aims to show, in particular, that insurance premiums remain affordable even for inexperienced young drivers, pro-vided that this target group’s individual driving behav-iour is better than the norm. The cars are fitted with a telematics box and the drivers collect bonus miles for defensive driving behaviour which count towards the agreed annual driving performance for the policy. The internet-savvy “Facebook generation” is the primary target group of insurethebox.

Its motto: “Show that you can drive better than your friend. You can save money and post your success on Facebook.” Using social media adds emotionality to motor third-party liability, which customers generally perceive as a fairly generic product. Certain insurers in Germany are testing another strategy in telematics-based insurance. Customers of ÖSA (Öffentliche Versicherungen Sachsen Anhalt), for example, can have a “crash sensor” installed in their vehicles by the insurer. The ÖSA Copilot is sold in addition to nor-mal motor insurance and a monthly usage fee charged for the three-year term of the policy.

Fig. 1: eCall – Life saving call

In the event of a crash, an eCall-equipped car automatically calls the nearest emer-gency centre. The European Commission states that eCall might cut emergency ser-vices response times by as much as 50% in the countryside and 60% in built-up areas. The quicker response will save hundreds of lives in the EU every year. The severity of injuries will be considerably reduced in tens of thousands of cases. As eCall normally “sleeps”, it does not allow vehicle tracking outside emergencies.

PositioningVia satellite positioning and mobiletelephone caller location, the accurateposition of the accident scene is fixedand then transmitted by eCall to the nearestemergency call centre. More information isgiven in the eCall, e.g. the direction oftravel and the vehicle type.

1

Emergency callAn emergency call (eCall) is made automa t-ically by the car as soon as on-board sensors(e.g. the airbag sensors) register a seriousaccident. By pushing a dedicated button inthe car, any car occupant can also make aneCall manually.

2

Emergency call centre (PSAP)The eCall’s urgency is recognised, theaccident’s location can be seen on a screen.A trained operator tries to reach the mobile phone number of the registered driver to get more infor mation. If there is no reaction, emergency services are sent without delay.

3

Quicker helpThanks to the automatic notification ofthe crash site, the emergency services(e.g. ambulance, firefighters, police) arrivemuch quicker. Time saved translates intolives saved.

4

telematiCs


These two products illustrate the distinction between a telematics-based tariff and a telematics-based insurance product: the former takes account of tech-nical possibilities when structuring and calculating the tariff, while offers such as the Copilot, which is essentially based on the introduction of eCall, affect the extent of loss incurred by the insurance customer.

Incentives instead of penalties

Telematics-based insurers in Europe are increasingly relying on telematics boxes which are installed in the car. When the car is sold, the box sometimes has to be removed from the car and installed in the new one. This gives rise to considerable costs for the insurer. In North America, on the other hand, telematics products are seen as a proven means of developing individual premium rates for the policyholder and not primarily as an aid in an emergency.

Instead of a black box, the insurers use low-cost memory sticks which are directly plugged into the car’s diagnostic interface by their customers. Driving data are collected on the memory stick. At the year-end, the insurer can then use these data to calculate the renewal premium.

One of the leading telematics insurers in the US, Progressive gives a discount of up to 30% with its “Snapshot” product if the stored data prove that the driver brakes defensively, drives fewer kilometres than the average driver in the state, and the car is rarely used during peak commuter traffic times or between midnight and 4 a.m.

Fig. 2: Intersection assistant – Never drive through a red light again

Never drive through a red light again: Various car makers are currently working on safety technologies to assist drivers in error-prone situations. Volkswagen’s “inter-section assistant” warns drivers of red light infringements and hazardous turn-off manoeuvres. The system can also recommend the right speed to negotiate phased traffic lights or to approach a stop light.

telematiCs


The term telematics is a combin-ation of the words “telecommuni-cations” and “informatics” and describes the technology linking these two fields. Smartphones (iPhone, BlackBerry, etc.) have long since turned this young branch of information sciences into a mass market.

Vehicle telematics is concerned with the use of telematics in road traffic and the car industry. In many coun-tries, numerous services are already being provided by means of tele-matics-based solutions or are in the test phase. These include traffic management (collection of road tolls) or the optimisation of cost manage-ment and route planning in commer-cial vehicle fleets using GPS-assisted information systems.

Insurance telematics describes all applications with which the insur-ance industry is seeking to generate additional customer benefit or influ-ence the individual risk behaviour of its policyholders. These include such telematics-based insurance products as eCall or Copilot and telematics-based rates such as those offered by insurethebox (www.insurethebox.com) in the United Kingdom or the tele-matics-based tariff “Snapshot” from Progressive (www.progressive.com) in the United States.

Telematics – One name, many applications

Other US insurers, such as State Farm Insurance, rely on the use of smartphones. State Farm offers an app with which policyholders can directly investigate their own driving behaviour. This makes telematics products more intelligible for the customer and also makes it easier for them to keep tabs on any developments wherever they are via a smartphone. For the insurer, that means a growing target group.

Flat-rate mentality meets PAYD

Telematics applications in the US and UK in particular have spurred insurers throughout the world to intro-duce such telematics-based rates as “pay-as-you-drive” (PAYD). However, it has still to be shown that telematics-based rates can indeed significantly and enduringly change users’ driving habits and reduce loss potentials.

The data provided by current pilot projects are often not sufficiently comprehensive to yield significant findings which can be applied to a complete portfolio. It may also be assumed that new telematics-based rates will primarily attract defensive drivers with lower mileage and that the findings cannot simply be applied to all drivers in a portfolio by way of extrapolation.

The general trend towards flat-rate tariffs in almost all areas of life, such as mobile phones, internet access, “all you can eat” or “all-inclusive” package holidays, could prove to be another obstacle preventing the spread of telematics-based tariffs. Why should insur-ers take a different tack? Especially since young drivers – having only just got their first taste of the boundless freedom which four wheels can afford – will care little for premium billing that is accurate to the kilometre, despite their small budgets. The same desire for fixed annual premiums that can be calcu-lated in advance is also to be observed among com-mercial users, such as fleet managers who only have a fixed budget for insuring their fleet at the start of the year. For many fleet managers, PAYD insurance would be an incalculable risk if they were to be obliged to pay additional premiums during the year or at year-end.

Usage-based price models are only of interest when considerably lower usage gives customers a cost advantage in relation to the flat rate. Applied to PAYD rates, these would solely be of interest to customers with low mileage; all others would stick with the option most advantageous to themselves: a flat-rate model requiring no modifications under the bonnet.

telematiCs


Our expert

Jochen Friedrichs is a Senior Consultant in the Motor Consulting Unit (MCU) at Munich Re, where he advises clients on fleet and commercial motor business, driver assistance systems and insurance [email protected]

By 2015, every new car in the European Union is to have a small sensor that will automatically trigger an emergency call in the event of a road accident.

Who pays for “Big Data”?

To motivate customers to change over to a telematics-based tariff, the telematics-based premiums would have to be relatively low to start off with. In the current low-premium environment, that alone is one of the reasons why there is little further scope for cut-throat telematics-based rates.

High implementation costs for the hardware needed by insurers to handle the constant stream of data generated by the telematics boxes are another aspect. Handling big data, integrating such new rating fac-tors into existing system environments and account-ing for the user data accumulated every single day all give rise to additional administration costs for the insurer, costs which would first of all have to be shared out among all insurance premiums in the portfolio. Depending on the market situation, that may not always be possible.

Such telematics applications as the eCall/Copilot described above are often not directly connected with the insurance company’s core product – namely, the provision of insurance cover – and are sold as part of a legally separate service contract. Since many insurers have neither the wish nor the ability to be both a pro-vider of logistics services and a hardware supplier, they normally require a partner for such telematics products as eCall.

Yet partners can very quickly become rivals, for other market players, such as automobile clubs, telecom-munications and IT companies, leasing and service companies, are already working on their own telemat-ics-based insurance products.

Portfolio optimisation: Concentrating on the core business

In most markets, motor insurance accounts for the lion’s share of property and casualty insurance. Not all insurers, however, are currently managing to keep their motor business profitable. While telematics-based insurance promises new opportunities in the long term, insurers should strive to effectively opti-mise their portfolios in the short term. Financially bol-stered and with lean processes in place, insurers will be able to take up the new opportunities and chal-lenges presented by the telematics sector – in a few years’ time, when the technology has become suffi-ciently widespread, is accepted by customers, and the introduction of telematics-based rates has become worthwhile in actuarial terms. Until then, Munich Re’s experts in the Motor Consulting Unit will continue to observe the telematics sector, providing support for strategies and implementation.


COLUMN

Economics from a risk perspective

The whole world is striving for eco-nomic growth. But why exactly? Per capita income has doubled in the past 20 years, but that hasn’t made us twice as happy. Quite the con-trary: the consequences of our thirst for growth – depletion of natural resources and the destruction of the environment – are brought home to us every single day. Can or must we perhaps even abandon our quest for economic growth? No, for the biggest challenges facing mankind – and the insurance industry – cannot be mastered without growth and pro-gress.

Very few people know much about the country of Bhutan and its 700,000 inhabitants. But economists do. Several years ago, the government there stopped measuring its economic success primarily in terms of gross national product. Instead, it conducts surveys to determine the “gross national happiness” of its people. When British sociologists drew up a global ranking based on their “Satisfaction with Life Index” a few years ago, Bhutan ranked 8th, far ahead of Germany which only managed a lowly 34th place.

If our much higher per capita income cannot make us happier, why then does the quest for economic growth dictate our lives?

This debate over the necessity and consequences of economic growth is not new. It was sparked in the 1970s, for example, by the Club of Rome and its analysis of the “Limits of growth”.

Dr. Michael Menhart, Head of Economic Research at Munich [email protected]

Today, it is the financial crisis that is fuelling debate over the correct objective of economic activity.

The shortcomings of gross domestic product (GDP) as a central unit of measure are essentially undisputed. It does not take account of such unpaid activities as bringing up children, nursing sick or elderly relatives, or voluntary work. GDP largely ignores the impact of economic activity on the environment and provides only little indication of the quality of life. What’s more, GDP per capita offers little indication of actual wealth distribution.

However, that does not mean that we can or should renounce economic growth. A world without growth is impossible in the long term and that is definitely a good thing. For eco nomies, growth is in the nature of things – or rather, in the nature of man. Population growth and higher productivity due to technological progress will lead to a steady increase in economic performance in the future, too. Yet when considering the necessity of further increases in wealth, we must look beyond our immediate horizons, for many less developed countries will only be able to catch up with us through economic growth.

So why do we in the industrialised countries have to keep growing? Firstly, because persistent stagnation would have major consequences for the labour market. Due to technical advances, firms will need fewer employees in future to produce the same output as today. Without growth, the number of people “surplus to requirements” would steadily

increase. Secondly, the biggest challenges facing mankind and the insurance industry cannot be mastered without economic growth. Take climate change, for example: without growth, there would be no investment. And without substantial investment, such projects as the transformation of Germany’s energy system could not be realised. The same is also true of demographic change. Without economic growth, we would probably find ourselves heading towards an intergener ational clash over wealth the like of which has never been seen before

That is why economic growth is and will remain a prime objective. We can no longer afford to ignore the criteria of economic, ecological and social sustainability in matters of growth. And we must also realise that, in the long term, while economic growth may be essential to happiness and contentment, it cannot guarantee them. That is just as true for us as it is for the Kingdom of Bhutan, no matter what index is used.

Economic growth, wealth, happiness – What do we really want?

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Editorial deadline14 December 2012

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Picture credits Cover page: Carmen Jaspersenp. 1: Robert Brembeckpp. 2, 8, 9: ddp images/APp. 3 left: Lonely Planet Imagesp. 3 right: picture alliance/ZBp. 4 left: Karsten de Riesep. 4 middle: Marcus Buckp. 4 right: © Munich Re Foundation Archives (T. Loster)p. 5: William Bartleyp. 6: picture alliance/Chromorangep. 10: picture alliance/Hoch zweip. 13: Andreas Brummermannpp. 14, 26, 29, 32, 45: Foto Meinenpp. 15, 40: Shutterstockp. 16: Jose Fuste Raga/Corbisp. 20: Muza� er Aktaşp. 22: Reutersp. 24: picture alliance/Yadid Levy/Rop. 27: Brigitte Engelhardp. 30: picture alliance/Frank Mayp. 35: Stefan Jaschke, Gunther Krautp. 37: picture alliance/Arco Images Gp. 38 top: picture alliance/EB-Stockp. 38: Keith Auldp. 40: picture alliance/dpap. 46: Kevin Sprouls

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