Industry the October 2017 issue

Stabilizing the World

Placing insurance where it has never been before.
By Adrian Leonard Posted on October 2, 2017

Even his wife wondered what he could possibly have to say that would interest a room packed with 232 defense players from 42 nations, most in uniform and bemedaled. But invite him they did, and Catlin, not a man to shirk from risk, accepted. “I was the only one in the room with insurance knowledge,” he told Leader’s Edge.

NATO, he explains, had figured out that the world’s resilient nations cause the military alliance fewer troubles than its less resilient ones. “The insurance community is as good as it gets in terms of knowledge of risk mitigation and management, so we add value to their debate,” he says.

Adding value for the less resilient is the underwriter’s main mission these days. “That is my primary objective: to talk about risk mitigation and management. They are the best forms of protection,” Catlin says. “You may want to buy some cover for a tail event, if it is a good value, but mitigation and management must come first.”

IDF

That is one of the principles behind a new international body called the Insurance Development Forum, or IDF, which Catlin has led as chairman since shortly after its birth in 2015. It is a unique animal: a tripartite public/private partnership between the global insurance industry, the United Nations and the World Bank. The organization aims to optimize and extend the use of risk management and insurance to build greater resilience among those who are particularly vulnerable when disaster strikes.

Launched at the UN Climate Change Conference in Paris, the IDF is much more than a talking shop. Already it has attracted more than $65 million of state funds to its cause and prompted the announcement of the new Centre for Global Disaster Protection in London.

The IDF has two goals. One is to harness the power of micro-insurance to extend cover to 400 million uninsured people in the developing world against the negative effects of climate-related disasters. The IDF has embraced this challenge, set by the leaders of the G7 nations at their 2015 Summit in Germany and dubbed the “G7 InsuResilience” target.

The protection gap is massive, 70% globally. It ranges from Haiti, where just 1% of risks were covered after the 2010 earthquake, to New Zealand, where comfortably two fifths of losses from the Christchurch earthquake were insured.
Stephen Catlin, chairman, Insurance Development Forum

Stephen Catlin was first approached to chair the new Insurance Development Forum nearly three years ago. His recruiter was Rowan Douglas, CEO of Willis Towers Watson’s Capital, Science, and Policy division.

“Why me?” Catlin asked.

“We need a heavy hitter,” Douglas replied.

“My question stands!” Catlin retorted. “I think it is a worthwhile cause, but can I add value?”

Catlin was an employee then, following the sale of his Lloyd’s business to XL Group. He had to ask his CEO, Mike McGavick. The boss was emphatically on board.

“Stephen, it is absolutely a worthwhile cause, and I would love us to be associated,” McGavick told Catlin, “and you have the time and the network to do it, so I would like you to do it.”

“I thought about what came next and how I, as an individual, had set up a company from scratch,” Catlin recalls. “When you do that, your first goal is to try to survive, to pay the mortgage. I’d had 10 years of that when I set up the syndicate. Beyond that, for me, adding value and making a difference became much more important. If you do that, making money is a byproduct.”

On the basis that he could add value, Catlin said he would give it a go. “The test was the steering committee,” he admits. “I got it together myself in two weeks. It speaks to the importance of the subject matter to the individuals. They bought into the IDF, and I am fortunate to have their support.”

“It sounds daunting, getting insurance for 400 million people,” Catlin admits, “but the number isn’t so large compared to the global population.”

Micro-insurance is cover you can buy on your cell phone for all sorts of products, from crop insurance to medical expenses to liability cover. Since coverage triggers are parametric, claimants are paid a predetermined amount based on predefined terms, so the payout typically occurs very quickly. “There is a retained basis risk, of course,” Catlin says, “but the trick is to minimize that basis risk” through the use of parametric triggers.

By their nature, such triggers do not anticipate all possible scenarios, but they can be continually refined as insurers build experience.

An IDF working party is going flat-out on the 400 million goal, driven by Shaun Tarbuck, CEO of the International Cooperative and Mutual Insurance Federation, and Joan Lamm-Tennant, CEO of Blue Marble Microinsurance, a for-profit consortium comprising seven international insurance players (including XL Catlin and Marsh & McLennan). They have come together to create and provide socially impactful, commercially viable insurance protection to the underserved through micro-insurance and to build awareness of its possibilities. For example, they are piloting drought protection for small-holder maize farmers in Zimbabwe and climate risk cover for small-holder coffee growers in Latin America. The program uses point-sensor technology to measure rainfall and plant health throughout the growing season, which complements traditional grid remote-sensing data to create a higher-resolution parametric insurance cover.

The IDF’s second goal is all about filling the “protection gap” through state-level schemes. The gap is the uninsured distance between actual economic losses arising from natural catastrophes and other cataclysmic events and the level of insurance in place to cover them. “The protection gap is massive, 70% globally,” Catlin says. “It ranges from Haiti, where just 1% of risks were covered after the 2010 earthquake, to New Zealand, where comfortably two fifths of losses from the Christchurch earthquake were insured.” Eliminating the protection gap in developing nations through state-backed initiatives is Catlin’s main focus. “Our objective,” he says, “is to help countries and communities move from vulnerability to driving resilience and reducing risk by leveraging insurance and its related capabilities.”

Essentially, the higher the share of assets that are insured, the quicker the recovery and the lower the cost to the taxpayer. And it isn’t just a developing world problem—in California, less than 10% of property is covered for quake—but the IDF is focused on emerging countries, where the general understanding of risk mitigation, risk management and insurance is less developed and collecting risk data is a major challenge.

“That is where we always start,” Catlin reiterates. “The IDF is about helping people, organizations, municipalities and governments to understand how to improve risk data, helping them with risk mitigation and then management, and only ultimately asking if risk transfer and the insurance sector can add value. If we cannot, we shouldn’t be there. I say emphatically that this initiative does add societal value and we can do it more economically than governments can by trying to take on the risks themselves.”

One of the powerful benefits delivered by the IDF is that it makes this approach feasible by uniting the world’s leading insurance, reinsurance and broking firms with respected international institutions in a common purpose. From the insurance side, Catlin’s handpicked steering group includes the chief executives of the world’s top three brokerages and 12 of its largest global property-casualty insurers, plus dozens more individuals who sit on the IDF’s various working parties. “These are alpha people,” Catlin says. “They have come to the table because they see a common purpose. All the men and women sitting around it are looking for where they agree, not where they disagree.”

I say emphatically that this initiative does add societal value and we can do it more economically than governments can by trying to take on the risks themselves.
Stephen Catlin

Chairman:
Stephen Catlin, Special Advisor to the CEO, XL Catlin

Co-Chairs:
Helen Clark, Administrator, United Nations Development Program
Joaquim Levy, Managing Director & CFO, World Bank Group

Committee Members:
Inga Beale, CEO, Lloyd’s
Albert Benchimol, President & CEO, AXIS Capital
Gregory Case, President & CEO, Aon
Jean-Louis Davet, CEO, MGEN
Denis Duverne, Chairman, Axa
Daniel Glaser, President & CEO, Marsh & McLennan
John Haley, CEO, Willis Towers Watson
Torsten Jeworrek, CEO Reinsurance, Munich Re
Denis Kessler, Chairman & CEO, SCOR SE
Christian Mumenthaler, CEO, Swiss Re
Christopher Swift, Chairman & CEO, The Hartford
Maurice Tulloch, Chairman, Aviva Global Insurance
Rob Wesseling, President & CEO, The Co-operators Group
Mark Carney, Governor, Bank of England, and Chair, Financial Stability Board
Robert Glasser, Special Representative of the Secretary-General, UNISDR
David Nabarro, Special Advisor to the Secretary-General, United Nations
Stephen O’Brien, Under-Secretary-General and Emergency Relief Coordinator, Office for the Coordination of Humanitarian Affairs, United Nations

When an individual brokerage or carrier goes to a government, Catlin says, their hosts automatically assume their pockets will be picked. “When we go collectively,” he says, “it is much easier to open the door.”

Already this dream team has had political successes after passing through some very rarefied doors. At the G20 conference in Hamburg in July, U.K. Prime Minister Theresa May announced a commitment to provide £30 million (the equivalent of $39 million) for resilience risk transfer protection for emerging nations and to fund the proposed Centre for Global Disaster Protection.

The United Kingdom’s Department for International Development (DFID) reported that the center will help the poorest countries strengthen their disaster planning and get finances in place before disaster strikes so they can better manage the economic impact of emergencies. It will provide neutral advice, innovation and cutting-edge science to help build cheaper, faster and reliable finance in emergencies.

“We were surprised that Theresa May said what she said when she said it,” Catlin admits, “because it came before any announcement by DFID.” He says the main driver of the commitment was the relationship between the IDF and the DFID.

Members of the IDF team spent the better part of two years designing the center. “It was highly complex,” Catlin says. Meanwhile, Germany’s DFID equivalent, the Ministry for Economic Cooperation and Development, has pledged to put in €20 million ($23.6 million) and to work with the United Kingdom and the World Bank to create a “Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions.” It aims to leverage the synergies of governments, international organizations, civil society and the private sector working together to close the protection gap.

Catlin is enthusiastic about these achievements. “I have to believe that with two leading countries on board, more people from established economies will be taking the same view,” he says. The IDF does not plan to set the agenda but instead will attempt to deliver solutions that help donor nations reach their chosen objectives. The United Kingdom’s DFID, for one, is expected to state its priorities before the end of the year.

Politicians haven’t always been the easiest of partners to recruit, Catlin admits. Elections are bad for global resilience. “One of the biggest global challenges is that, on average, politicians have five years in office, so they care only about what might happen in the next five years,” Catlin says. “When you speak to them about something that might happen in the first five years, they listen. If it is a 10-year event, they pay less attention. Talk about a one-in-25 year event, and their eyes glaze over. If it is one-in-100, they fall asleep.” That, he says, is why it has been difficult to get politicians to think about climate change.

But Catlin wants more commitments from states, and he is working on them, attempting to convince politicians they have a fiscal responsibility that extends over a longer period than their terms of office. He says he is not hesitant to “name and shame” politicians who do not recognize their fiscal responsibilities and believes that, by discussing issues—and their possible ramifications—with politicians, he can “broaden horizons.”

He and his teams are also working with other nations’ international development bodies to build support. “I am personally very keen for this not to be seen as a U.K.-German initiative,” he says, stressing that the IDF project, its participants and its targets are international. “We are at the beginning of the story, not the end of it.”

If you believe that established economies have a duty of care to support emerging economies—those nations coming through—then developed-world governments should be thinking about contributing.
Stephen Catlin

Conversations are going on with other countries, Catlin says, but lobbying the United States is off the agenda for now, given the disarray in many executive-branch agencies. Still, he remains optimistic about a potential American commitment. “Trump has stepped back from completely reneging on the Paris Accord,” he says. “Over time, I believe, he will have to join the debates on climate change and sustainability.”

Catlin is clear in his convictions about who should pay for those who cannot pay. “If you believe that established economies have a duty of care to support emerging economies—those nations coming through—then developed-world governments should be thinking about contributing,” he says. They will do so one way or another, he insists. “If they don’t contribute before the event, then they will afterwards, through disaster relief. But that kind of disaster funding is widely realized to be incredibly inefficient, and the support doesn’t always get to the point of need.”

Catlin returns to the theme of resilience-building. “We need to help the emerging nations understand risk mitigation and risk management,” he says, “then help them to buy risk transfer, through support from established nations.”

Such financial support is given for the good of the target nation, the region and the world, he says. They are a lofty set of goals. “Can we achieve this vision?” Catlin asks, rhetorically. “I don’t know, but if we don’t try, we will never know.”

Risk & Reward is a valuable and thoroughly enjoyable book penned by a legendary underwriter. In effect, it is three short, distinct and very readable books bound into one, although the sections hang together very well.

The first section colorfully explains how the international wholesale insurance market—and especially Lloyd’s—actually works and is chockablock with anecdotes and examples from Catlin’s 45 years in the market. Never before has the global commercial insurance industry been explained (and laid bare) with such coherent simplicity and candor.

The second section is a brief history of Catlin, the author’s Lloyd’s business (now part of the global giant XL Catlin). It begins when Stephen Catlin entered the market in 1973. “I spent the first five years figuring out if it was the most famous insurance marketplace in the world or just a gambling casino,” he writes. This section covers the growth of Catlin from a business employing two people to one employing 2,500, then its acquisitions, and ultimately its merger with XL in 2015.

Alongside the corporate history, Risk & Reward tells fascinating stories about the action and shenanigans at Lloyd’s over the decades. It includes, for example, details of a secret meeting between senior people from Lloyd’s and Marsh in the wake of the World Trade Center attack, when the underwriters successfully convinced the brokers that Lloyd’s was not about to collapse. “If Marsh had decided to stop placing business with Lloyd’s syndicates so soon after 9/11…it could have tipped Lloyd’s over the edge,” Catlin admits.

The third section comprises the author’s personal musings on successful management—Catlin is an extremely credible source—and on the future of the insurance sector. Catlin’s uncanny ability to see around the corner is proven by his track record.

“No one has ever explained our industry’s value proposition. That’s what the book is about,” the author told Leader’s Edge. “This book shows how the parts come together. I hope it helps people who sit outside the industry, work alongside it, or are looking to join it to understand the big picture.”

No doubt it will. But it’s industry insiders who will be most fascinated of all.

Adrian Leonard

Leader’s Edge readers can purchase hardbound copies of Risk & Reward for the discounted price of £19.99 (equivalent to about $26) plus £9.99 ($13) shipping and handling, by ordering directly from the publisher, Iskaboo Publishing Ltd. (iskaboo.co.uk). Please enter Coupon Code LE01. All major credit cards and PayPal are accepted.

Leonard heads the foreign desk.
 

Adrian Leonard Contributing Editor Read More

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