Big Interview: Malcolm Steingold

Malcolm Steingold does not believe in forecasting reinsurance rate movements ahead of renewals seasons.

“We don’t predict rates,” he says simply, emphasising this stance is also the view of his long-term employer, Aon Benfield, who Steingold first joined in the early 1990s in one of its previous incarnations – Aon Re.

“My own personal view is when people talk about whether the market is soft or hard, it is really more of a case of looking at each account on its own merits,” he tells Insurance Day when we meet in the reinsurance brokerage’s Sydney headquarters just before the climax of the important January 1 reinsurance contract negotiations.

For this correspondent, who has spent many a year traversing the world, consistently being told rates in loss-affected areas would increase by 5% to 10% at every renewal, such a view offers refreshing relief. For Steingold, it is simply a case of never generalising when talking about the global reinsurance sector’s many diverse markets.

“Large sophisticated reinsurers now measure their return on capital right down to an individual layer on a programme,” he continues.

“They will look at that and ask: ‘what has the experience been? Are we getting an adequate return on that specific layer?’ That is what will drive the rate.

“Maybe, it used to be the case thyou could talk about whether rates were going up or down, and what the market was doing, and then apply that on a global basis.

“Today, rate movement and what happens to prompt that really does occur on a regional and client-specific basis. The world has changed.”

CATASTROPHE CHANGES

From an insurance perspective at least, no part of the world has seen more change over the past year than the Asia-Pacific territories Steingold oversees in his role as regional chief executive at Aon Benfield.

As has been well documented, catastrophe losses across the Asia-Pacific region, such as the Tohoku and Canterbury earthquakes, as well as flooding in Australia and Thailand, accounted for more than two-thirds of last year’s $100bn-plus insured loss bill, with losses from the Thai flooding and the February 2011 Christchurch quake continuing to drip-feed upwards through the recent 1/1 renewals period.

With industry estimates revealing the global reinsurance community will be in the chair for approximately 65% of the $20bn-plus losses anticipated from the catastrophes in Australia and New Zealand and as much as 80% of the expected $12bn hit from Thailand, it is little surprise Steingold is seeing unprecedented structural change in markets across a region that, with the obvious exception of Japan, has previously been largely regarded as a diversification play by a global reinsurance community with approximately $450bn worth of capacity to burn.

“The flooding in Thailand is the biggest insured loss in Asian history outside of Japan,” Steingold asserts.

“In terms of loss development it is still early days, particularly with regard to the contingent business interruption element because that has a relatively long tail. It takes a while before you can assess adequately what that loss is.

“Yet Thailand was never considered a peak zone. Some people did not consider it a cat-producing country. Now, the belief is there is no cat-free country.

“Forget about cat-free – that was an urban myth,” he continues. “Global reinsurers priced US hurricane and quake risks for a greater return on their capital because they were perceived as peak zones, as were European wind, and quake and wind in Japan.

“The rest was considered non-peak, and yet in 2011 this is where the losses occurred, so there will now be a pause or reconsideration about the diversification benefits of writing business in what were considered non-peak zones.

“There will be an expected higher return on capital for those zones, but at least clients will be able to access reinsurance markets for capacity.”

XOL SHIFT

Steingold believes the present situation in the region is focusing reinsurers’ minds on obtaining quality underwriting information, He also takes the glass half-full view the recent cats will lift everyone’s game in terms of risk assessment.

“The original insurers will look a lot more closely at their risks, risk management and accumulations, and reinsurers are going to demand a higher resolution of data,” he explains.

“For example, in Thailand, before the flooding, perils cover was largely given under pro-rata programmes without any limit at all. In hindsight, that was a form of free catastrophe cover,” he explains.

“We have seen reinsurers take perils out of many pro-rata programmes in Thailand since the floods, and clients have instead had to buy cat excess of loss (XOL) risk and cat programmes. “That is a big structural change in the market, and at present, both the market and individual insurers are assessing how much additional catastrophe cover they need.

“What were minimum rates-on-line on the high layers of programmes, are no longer minimum rates-on-line and reinsurers are saying their returns at those higher levels have got to be somewhat higher than they have been in the past.

”On each individual programme, insurers are having to decide whether it is a better use of capital to retain risk, or to cede at the bottom levels.”

Such change is not just restricted to loss-affected markets either. Citing China as an example, Steingold says the feedback his team is receiving indicates that clients can expect reduced event limits on their pro-rata coverage, as well as a greater need for risk XOL cover.

“Again, reinsurers are risk-adjusting for greater returns on capital,” he says.

CHINA’S INFLECTION POINT

The Asia-Pacific head is clearly excited about the future prospects for the reinsurance industry, and indeed his own company, in China.

Aon Benfield data reveals China now represents close to 4% of the world’s total insurance premiums at Yuan1.45trn ($230.3bn), with aggregate reinsurance premiums ceded by Chinese property/casualty (p/c) insurers now totalling $6.5bn, having increased 70% over a five-year period. The reinsurance broker believes this rate of growth is expected to rise further in the future.

Steingold says Aon Benfield made a “significant investment” in its China resource last year, which will continue through 2012 with the broker expected to develop its catastrophe-modelling capabilities by deploying a team from its Impact Forecasting analytical team on the ground in the country later this year.

The team’s aim will be to help Aon Benfield’s client base to better understand their individual risk profiles. The broker already has a similar presence elsewhere in the region, in Singapore.

“With our strategy in China, we take the position we have to invest beyond the existing needs of the business,” Steingold explains.

“Our investment focuses on our potential needs in two to three years’ time, so we do not find ourselves in a position where we suddenly have to start investing, and it is too late to take advantage of opportunities.

“We have been ramping up our presence in China gradually over the past few years, and we will continue to do that.

“We hired a senior leader at the end of 2011, Helen Ye, to look after our catastrophe business in Asia-Pacific, excluding Australia and New Zealand. We view catastrophe as a specialist class in China and Asia-Pacific, not as a commodity class.”

Steingold describes the Chinese reinsurance opportunity as having now reached “an inflection point” with the sector’s regulator the China Insurance Regulatory Commission (Circ) “deadly serious” about catastrophe business.

In terms of perils, China has suffered five of the top 10 deadliest natural disasters in history, with recent events affecting more than 70% of China’s land area and more than half the population, yet many Chinese insurers still buy catastrophe cover on a 1-in-60-year basis rather than the general international standard based on a 1-in-250-year event.

“As the regulator starts to become more focused on risk-based capital, I suspect a lot more cat cover will be purchased, with the next step minimum event retentions,” Steingold says.

“Penetration has increased significantly as well. It is reaching the critical mass where the market will take off.”

AGRICULTURAL REVOLUTION

Meanwhile, government subsidies have also seen annual growth in agriculture premiums soar in excess of 100% from 2005 to 2010 to reach Yuan13.6bn, with carriers buying a significant amount of reinsurance, according to Aon Benfield, which introduced the first agricultural model into the country in 2010.

“The challenge for our clients in the Asia-Pacific region and particularly in China is growth,” he adds.

“That places a strain on capital. Our role is to assist clients in modelling how much capital they need to support their risk profile.”

REINSURANCE RAMP-UP

With Aon Benfield now boasting a team of 400 employees across the Asia Pacific region, who are responsible for producing a “dynamic” reinsurance premium pool of $4.8bn, it is clear the reinsurance broker has undergone considerable growth of its own in recent years, with a ramp-up of its analytical division in particular resulting in this area now constituting 10% of the workforce.

The majority of Asia-Pacific staff are based in Aon Benfield’s Tokyo, Hong Kong, Singapore and Sydney hubs but the broker also has people on the ground in a number of locations including New Zealand, Malaysia, Indonesia, Thailand, Vietnam, Pakistan and India, with its presence in China established via offices in Beijing and Shanghai.

Steingold says the broker is now everywhere it needs to be in terms of location within the region, declaring himself satisfied with the carrier’s current resources. He believes the main focus for 2012 is to start generating a greater return on the investments in the region Aon Benfield has already made, “both in our analytical and broking capabilities”.

He notes Aon Benfield’s Asia-Pacific division grew approximately 13% last year compared with 2010, in terms of top line revenue.

“It was a fascinating year and from our perspective it has certainly justified the investment Aon Benfield has made in the region,” he says.

“In the first two quarters of this year, we collected around $2bn in reinsurance claims.

That is a big number and that requires resource.

“Then you look at a market like Thailand, which is moving from pro-rata coverage to XOL. You need an incredible amount of analytical resource to help the market do that, particularly given one of the challenges in this regard is finding data of a high-enough quality.”

“We want to maintain our position as both thought and market leaders,” he adds. “This is not about size. It is about quality and changing the market.

PREMIUMS IN THE SYSTEM

“The main issue with the Asia-Pacific region, and particularly Asia, remains the premiums in the system,” he continues.

“Someone has to pay for the catastrophes we have seen this year and if it is expected the insurance and reinsurance industry is an effective way of funding natural catastrophes, then there needs to be a substantial increase of original premiums in the system.

“Thailand is a perfect example, maybe that industry needs to generate significantly higher levels of revenue to fund the now-perceived catastrophe exposure,” he concludes.

Malcolm Steingold CV

Malcolm Steingold has more than 28 years of reinsurance and associated industry experience. His background includes reinsurance underwriting, legal practice and reinsurance broking.

Having practised as a solicitor specialising in insurance and reinsurance law, Steingold was recognised as a leading industry expert in legal liability insurance in Australia. He subsequently developed specific expertise in property catastrophe and alternate methods of risk transfer.

Joining Aon Re in 1993, Steingold built a domestic treaty team specialising in the analysis of insurance portfolios, and the design and placement of reinsurance programmes. He also further developed the company’s catastrophe and financial modelling capability.

He assumed the role of chief executive of Aon Re Australia in March 2000 and, under his leadership, it developed into the market leader in both liability and property classes of businesses with respective market shares of 45% and 60%.

Steingold was appointed chief executive of Aon Re Asia Pacific in April 2005. This role required him to develop a single operating unit from disparate businesses across the Asia-Pacific region.

Following the acquisition of Benfield in December 2008, he was appointed chief executive, Aon Benfield Asia-Pacific and chairman of Aon Benfield’s APAC executive.

He represents the Asia-Pacific region on the Aon Benfield international executive. Steingold is also a member of the Aon Asia-Pacific board, which oversees governance of all Aon’s businesses throughout the region.

Malcolm Steingold on.....

Thailand

“The flooding in Thailand is the biggest insured loss in Asian history outside of Japan. Yet Thailand was never considered a peak zone. Some people did not consider it a cat-producing country. Now, the belief is that there is no cat-free country. Forget about cat-free – that was an urban myth.”

Asia Pacific underwriting after the 2011 cat bill

“The original insurers will look a lot more closely at their risks, risk management and accumulations, and reinsurers are going to demand a higher resolution of data.

“There will now be a pause or reconsideration about the diversification benefits of writing business in what were considered non-peak zones.”

Investing in China

“With our strategy in China, we take the position that we have to invest beyond the current needs of the business. Our investment focuses on our potential needs in two to three years’ time, in order that we do not find ourselves in a position where we suddenly have to start investing, and it is too late to take advantage of opportunities.

The main aim for 2012

“To start generating a greater return on the investments in the region Aon Benfield has already made, both in our analytical and broking capabilities.”