In this year’s IUMI gathering in Cape Town, South Africa, IMN spoke to John Wilkinson, Chief Executive of Global Marine Partnership, Munich Re, about the challenges and opportunities facing the marine sector in insurance and reinsurance.
Wilkinson has direct responsibility for global marine business at Munich Re. Besides marine and offshore Energy reinsurance business at the company’s headquarter in Munich, there are key marine hubs in Singapore, Bogota, New York and Johannesburg, which are incorporated into the local Munich Re operations.
That is the “classical” reinsurance business. Munich Re also has embedded in its reinsurance organization, a “risk solution business” whereby risks written by their Lloyd’s operation, Munich Re Syndicate (formerly Watkins) complement the parental activities.
Other operations within Wilkinson’s remit include the classical Lloyd’s service companies of the Syndicate which are actually owned by Munich Re Specialty Group (MRSG) and form part of their network of International Distribution Companies. They are based in Labuan, in Singapore and in Dubai, and the Syndicate also trades through a division of Lloyd’s China in Beijing. There are also owned MGAs, which are slightly different from the classical service companies, including NMU Specialty which is headquartered in Manchester and GJW based in Liverpool; GJW has focussed on development as a digital yacht insurer over the past 18 months.
There is also Roanoke Group Inc in the US – who write custom bond and cargo business for the Syndicate and Roanoke Insurance Brokers Ltd (RIBL), which is a London based Lloyd’s broker owned by MRSG that handles in-house as well as third-party business
These entities form MRSG’s risk-solution organization, whilst MRSG is also owner of the syndicate and the capital provider, and together with the marine reinsurance organization of Munich Re, they form the “Global Marine Partnership”, said Wilkinson, a title representing the true coherence of the partnership between a risk solution business and a reinsurance business which goes so much further towards supporting clients.
The reinsurance side is very much traditional marine business and offshore energy, P&I and marine liabilities. Wilkinson noted that Watkins syndicate was originally one of the largest marine and offshore energy syndicates. “But over the past few years we have transformed it into a Specialty syndicate. contingency, terror, cyber, trade credit, satellite, some accident & health, taking advantage of the fact that Lloyd’s is a Specialty market”.
Big Data, IoT, Cyber: Why a standalone cyber department?
I asked Wilkinson how he saw the increasing significance of “big data”, the Internet of Things (IoT) and cyber as a factor in his operation’s future.
He said that he saw challenges and opportunities Marine business and marine insurance in particular could be operated more efficiently than is currently the case. One of the things it had lacked was transparency. With property business one could see the property, know its value, and assess earthquake risk, flood risk, whether a storm could cause severe damage, etc. Contrariwise, in marine insurance one of the main things that insurers often needed to know was where the insured item was, and what kind of exposures the risk-writer was carrying.
For the shipping industry, interconnectedness would mean less time wasted, with electronic bills of lading and drone technology making sure that things were where they should be. For example, technology has already facilitated the ability to ensure that the fastest trade routes are used and meanwhile blockchain shows enormous potential for adding transparency.
Sensors and other technology would enable the tracking of vessels and cargo in real time “That means for us as insurers and reinsurers that we are able to put together products which are relevant to actual location and risk. So in other words we are getting the right premium and the person is also paying the right premium. We are able to marry that up and take away the issue of surprise for both sides”, Wilkinson said.
In this sense Wilkinson felt the new interconnected world provides a huge amount of useful data and potential for more efficient underwriting for both the transport industry and the logistics industry. This would enable insurers to take existing products and make them more viable for the exposures that they are running. But the big advantage would be that re/insurers could create new products suited to today’s world, because customers will have new exposures.For example, said Wilkinson, the gradual trend towards autonomous ships created new exposures, not least in liability. “We see this as an opportunity and by having more data we will create new products”.
He noted that although Munich Re issues a wide range of policies, there were certain areas where it did not currently want to go, for example elements of cargo, largely because the data needed to price the risk correctly was unavailable.
Wilkinson said that the company had been working on an innovative product for a number of years now for high-value shipments, guaranteeing that the shipment, for example expensive wine, would arrive in good shape for the consumer. Munich Re began with wine because it was a niche segment suited to pilot the insurer’s plans.
“A lot of wine is shipped around the world, and if we uncork a bottle of wine there is a tremendous disappointment if it tastes horrible. If wine overheats during shipment the whole pallet could appear undamaged, but be undrinkable, which would have a factor of reputational risk for the person who sells it” he said.
Munich Re thinks that the sensor technology being used in this niche segment could be deployed into far larger temperature-sensitive areas such as pharmaceuticals. Essentially it is a parametric traffic light system, and if the light turns red, the policy pays out on the grounds that the wine will not be drinkable.
He clarified that, although more data and more accurate data was key, it was not just about cargo policies being written more cheaply. The aim was to enable the creation of new policies to cope with the new kinds of risk. For example, more and more cargo was being ordered online via digital platforms with fewer face-to-face transactions. This was a system of distribution that insurers had to embrace, rather than exclude.
Wilkinson observed that the more we lived in an interconnected world, the more cyber exposure there would be out there – indeed, the more cyber would become the critical element. He said that Munich Re decided a long time ago that cyber could not be “a silent add-on”, at no expense. However cyber was a real and growing exposure, which made it a tremendously important that the insurance industry should offer cover, and to offer risk management.
Munich Re has also been working with third-party providers, offering coverage with such risk management, whilst the insurance is offered by Munich Re Syndicate is written by a separate team as a separate peril, “because quite simply we believe that there is a real exposure there, and we think it needs to be properly assessed, and people need guidance”.
Whilst Munich Re wanted to help people to manage cyber-risk themselves, there remained diverse residual risk, and thus Wilkinson noted that as the company created tailor-made products, it meant in turn that the company needed the expertise. “We are building this expertise at Munich Re Syndicate within our fast-growing cyber department in order that we can write this business professionally and provide professional products”, Wilkinson said.
The operational aspect of this was that when Munich Re Syndicate underwriters had a policy they wanted to write, which had a cyber element, they could go to the cyber department and ask them how much needed to to be charged for that part of the policy. However, the Syndicate also wrote a range of standalone cyber policies from the cyber department, for all sizes of companies, from Fortune 1000 down to SMEs.
Wilkinson noted that there were people in the Munich Re Syndicate cyber department who had come from the Munich Re IT department and they learnt to underwrite. On the other hand, the company also had people in the cyber department who had been underwriters of other classes and who learnt to be cyber underwriters. Wilkinson felt that the combination of the two was important. “We would not want to be without that IT know-how. It’s not as if we have now reached the pinnacle and are standing still. We are living in a fast-changing world, with huge exposures growing exponentiality, so these developments are going to continue, and you need to be ahead of the game,” he said.
Wilkinson was keen to emphasize that on the reinsurance side there was a danger of “silent cyber”, whereby the underwriter would be providing coverage via the back door. This was unsatisfactory for both sides, because the reinsurer did not really want to provide it and the cedant did not really know whether they had it. Plus, no premium was being charged for it. “So whether it is on the reinsurance side or on the primary side, we want to provide professional, cyber coverage”, said Wilkinson.
Misdeclaration of cargo, travel itineraries
I asked about misdeclaration of cargo, a factor that had been of some significance in the past year in relation to hazardous versus non-hazardous materials.
Wilkinson said that it had always been a problem in cargo insurance to get transparency and he thought that with blockchain technology, electronic bills of lading, sensor technology etc, the situation would improve, closing some of the loopholes. But clearly if people had criminal intent to pass things through the transport industry that were deliberately misdeclared, that was very difficult to deal with, and was not a problem unique to marine. He said that the newer “Smart Ports” were a step in the right direction because they knew where ships and their cargoes had arrived from, and if this was misrepresented, it would be a strong clue as to whether cargo had been properly declared or not.
Interconnectedness and sector convergence
On interconnectedness and how this was changing what one would define as “the marine insurance sector”, Wilkinson said that the ability to have different forms of transport – on sea, land or by air – which are connected together, talking to each other behind the scenes, generated the ability for insurers to develop the products and solutions that support the seamless chain. Whether it was called “marine” or something else shouldn’t really matter, and of course there would be a cyber element in there as well, and certainly it was critical to make sure that the cyber element was properly priced.
Wilkinson said that it was important for the industry to move forward with its products; one could not continue to offer the old products and say “we hope it’s okay”.
Exposures have changed, and the industry as a whole needs to adapt and to embrace these changes. “As an industry I think that in the past we have tended very often to try to exclude things which, truth be told, we did not completely understand. And I think that we have to try to get our heads around these new technologies and exposures because quite simply otherwise we reduce our relevance”, warned Wilkinson.
However he also felt that for many years the insurance industry had failed sufficiently to blow its own trumpet about how important to the global economy it was. “It is so important for keeping the wheels of commerce growing, and yet in many ways insurance is not properly valued”, he said.
Wilkinson noted that catastrophe business was an essential part of Munich Re business and, after investing considerable sums of money in getting to grips and understanding the exposures, he felt that the company knew what the exposures were and how to price them.
“Clearly last year was a headline year for natural catastrophes, with three very significant hurricanes plus other losses such as the Mexican earthquake and the California wildfires” said Wilkinson.
He observed that over the past decade there had been fewer natural catastrophes in heaviliy insured areas compared with the number that would be expected over time. But this had been plain good luck. He thought that the three hurricanes occurring within a very short time period had surprised some people, even in the marine sector. This was “very much a reminder for the consumer out there that there are very significant exposures and a reminder for the market that we need to price those exposures in a proper manner and not rely upon luck”.
Wilkinson said that marine had to be sustainably priced, and if you looked at where the market was, with high combined ratios even in many non loss-affected areas, clearly there were very small margins, and the consequences of that were now being seen.
I asked whether the pricing of marine business and pricing of cargo business was hardening.
“Well we haven’t seen from our perspective the kind of increases that we would like, on the reinsurance nor the primary side. In fact I would say not just that we would like, but what we think is needed to put the market in a more sustainable position. Clearly the losses have been huge, and whilst of course some people would argue that the losses have impacted the property side more than on the casualty side, there are very few companies that aren’t operating on a composite basis, and even the marine losses have been significant.”
Wilkinson said that some of the lines of business were making losses even before the hurricanes came along, and clearly this had added significantly to the pressure. “If you think of a classic one, hull, every time you go to IUMI they say ‘it’s another year when hull didn’t make any money’. Well, we write virtually no more blue water hull, because at the end of the day we believe, and both our models and IUMI tells us, that it is very difficult to make a profilt in this class. So why would you encourage your underwriter to write it?”
Wilkinson said that this was one example where, from his perspective, something had to change. “There aren’t too many places to run any more, and I think that as an industry we need to price these things properly because, as we saw with Harvey, Irma and Maria, there is real exposure there”.
Wilkinson said that there was a huge need for sustainable natural catastrophe cover for both insurers and for local economies. Some of the island economies that took a battering from the hurricanes last year would have been in grave difficulties without nat cat cover.
Wilkinson noted that this was a constant topic in Asia where the level of penetration was not so high. He felt that there the hurdle was sometimes education about the nature of risk and the means by which it could be mitigated. Sometimes it was about going out and doing a bit more selling and sometimes it was about local governments, local organizations, local associations and trade associations, becoming more aware.
Lloyd’s and marine today
I asked about the current state of marine in the Lloyd’s market.
“Lloyd’s has been making noises about marine and we have seen some people pull out. Do you think that will have an effect? Is it having an effect already?”
Wilkinson said that Lloyd’s wanted to put itself into a sustainable position, which he thought on the one hand was down to the issue of the performance gap, but on the other hand Lloyd’s clearly had an expense issue. “I think that Lloyd’s is doing what it feels is right to improve the situation. I think that at the moment it is too early to say what the impact will be. But, considering the losses there, I think that the effort to close the performance gap is important.”
Finally Wilkinson said that he was an optimist, but he felt strongly that the industry needed to invest in the future. “We need to come up with new solutions; we need to take advantage of the opportunities that are there, and not shy away from them. They are challenging, they do require us to work to get our heads around them. But I think that this is one of the things that we have been good at, in some areas.”
He said that Munich Re and Munich Re Syndicate wanted to play a significant part, to show that from the company’s point of view there was a good future in a more interconnected world.
“If you look at blockchain, the data revolution, if you look at IoT, the greater level of transparency that is out there, and the data that is available, there is a tremendous opportunity. The industry can move their products from what in some cases are non-sustainable, to sustainable products that are both forward looking and offer customers more of what they want and what they expect from insurers”, Wilkinson concluded.