Last month I presented the keynote address of the International Cooperative and Mutual Insurance Federation (ICMIF), Meeting of Reinsurance Officials (MORO), in Miami, USA. The theme of the presentation, The Current State of the Reinsurance Market, focused on the impact of the influx of capital into the reinsurance business and the various company models that have emerged as a result of this dynamic.

Until recently the inflow of capital has been mostly utilized for property cat reinsurance coverage, encompassing:

• Catastrophe bonds
• Collateralized reinsurance
• ILS
• ILWs
• Collateralized sidecars

Hedge funds

A more recent development has seen the emergence of hedge funds partnering with companies seeking to write multi-line reinsurance, and the economic drivers behind this was explained.

These non-traditional markets are now seeking to write long-tail reinsurance business and apply an aggressive investment strategy with the funds generated to support or supplement underwriting returns. Using slides (attached) as well as real-life examples, James was able to underline just how dramatic an effect this influx is having on the reinsurance marketplace.

What does this all mean for mutuals?

The likely impact of these trends on the primary market will be disruptive, so be ready for a seismic change in insurance market conditions.  This will impact your members directly—e.g., what will you do when your competition is 25% cheaper than you?

What to do

How to take advantage of the emergence of this new capital to support and enhance your unique business models? At the end of my presentation I shared some strategies mutuals can use to ensure they remain relevant to their members in the face of ever-increasing competition:

Seek a closer fit with your policy conditions

• Many mutuals give “non standard” coverage
• Reinsurance shouldn’t restrict what you give to your members
• Some reinsurers (still) don’t understand what you do

Leading edge analytics are vital

• If you don’t have it, your broker should!
• No longer just for property – casualty & other lines as well

Look to the strengths of the movement

• Latin American Reinsurance Group
• ICMIF member reinsurers
• Shared Catastrophe Purchases
• New opportunities, e.g. Africa Risk Capacity Insurance Co

Consider multi-year coverage

• Significant capacity now available
• Lock in favourable pricing
• Formalise long-term relationships

Bottom line: Reinsurance remains the most flexible source of capital for mutuals.

I discussed these points with A.M. Best in this video.

Download the MORO 2014 Keynote presentation: Current State of Reinsurance Market

Guest blogger James Kent is President of Willis Re North America, where he runs the property, casualty and specialty operations throughout North America. James has been with Willis since 2004 and is based in New York City, USA. This blog was originally published on the WillisWire website on 24 June.

ILS products have as their hallmark a freedom from solvency concerns. The risk of counter party insolvency and inability to perform under a contract is removed by security being provided. The automatic collateralised payment that occurs on the happening of a trigger event is not, however, a guarantee that ILS products are free from litigation risk.

Catastrophe reinsurance, in the traditional sense, comes with solvency risk but with little or no litigation risk. The product is effectively commoditised. Wording have evolved on a market wide basis. Perils are known and understood. Relationships are long established.

When a catastrophe occurs, insurers must pay quickly for commercial, social, regulatory and political reasons. Oftentimes, the adjustment will be hurried and leave open areas which might not stand the scrutiny of a pedantic reinsurer. Despite this, reinsurers generally pay what is asked and that is because, if they pay, they are able to renew and recoup their losses in increased premiums that follow the catastrophe.

ILS products do not generally enjoy this level of relationship. The investors may be anonymous entities who subscribe for the short term and then trade their position. They do not need renewals to recoup their losses. They are not restricted to investing in reinsurance. Instead, they may seek to make good their investment by putting money into the construction companies making good the damage caused by the catastrophe or participate in a whole spectrum of other investment activity.

Products are new and often unique. There are no market standards. Even when ISDA form derivatives are sold, the key clauses are contained in the bespoke Confirmation Letter. New products and bespoke wordings as opposed to wordings developed over decades and accepted by the market as a whole, can lead to individual disputes on interpretation.

Even when claims are automatically paid, litigation to recoup payment can be commenced. In some instances, spent SPVs could be acquired with the right to sue being their only asset.

To combat these risks, considerable care must be taken. Wordings must be scrutinised with an abundance of caution. Ambiguities in the wording must be eradicated.

One of the most difficult areas is the trigger mechanism.  Trigger clauses should be tested to ensure the trigger exists and works.

Particular attention should be given to termination provisions which can be tested if an investor has a change of strategy.

Their novelty and the important role that they play in safeguarding solvency margins requires that additional care is taken in reviewing ILS wordings. While traditional catastrophe wordings are very familiar and often agreed without legal intervention, ILS wordings require careful professional review. Care taken before the contract is completed can avoid major difficulties when a catastrophe occurs.

This week’s blog has been written for ICMIF by Clive O’Connell, Partner, Goldberg Segalla. Clive was a panelist during the recent ICMIF Meeting of Reinsurance Officials (MORO) and took part in the final panel debate on the future of reinsurance.

This was one of my favourite comments made by the Chief Executive of an ICMIF member during a series of interviews conducted last year with a total of 34 CEOs from ICMIF member organizations (see the outcome of these interviews in ICMIF’s Chief Executive InSights: perspectives on leadership in the fastest growing insurance sector report)

I particularly liked it because while it may not be the most obvious way to describe strategic success, it accurately reflected the overall attitude of our CEO interviewees towards staff satisfaction, motivation and development. Getting the right people, with the right skills and the right attitude to create a sustainable, successful business necessitates providing employees with the right environment, incentives and investment.

It seems that, as people-owned, socially responsible businesses, ICMIF member organizations should be more naturally inclined towards adopting good employer practices. Indeed, over the years, we’ve published many stories about ICMIF member companies receiving recognition through regional, sector or national awards for being good places to work and employers of choice. But we have very little evidence, on a broader scale, to support the notion that cooperative/mutual insurers are, either in fact or in the eyes of the public, “better” employers than their stock company competitors.

Furthermore, we know that regulations, legislation and employee expectations are always changing; we cannot ignore the challenges in building and maintaining a reputation as being employers of choice. But we do know that there are success stories to share with fellow cooperatives/mutuals, and that we should work together to improve our social impact as employers. This will be the purpose of a session which ICMIF will be holding on Thursday 9 October 2014, at the International Summit of Cooperatives in Québec. We will present the findings from an e-survey* of ICMIF member organizations, and hold a panel discussion about their employee programmes, to consider just how different cooperatives/mutuals are to their competitors (if, indeed, they are) when it comes to looking after their employees.

The Québec Summit will be the perfect opportunity to demonstrate that, for cooperative and mutual insurers, a great place to work is also the best place to build strategic success.

*The e-survey will be sent out to member organizations in the near future. Please look out for this and your participation will be greatly appreciated. Some member organizations may have already taken part as the survey has been issued once. Thank you to those who have contributed already.

A common refrain is that insurance is not banking and doesn’t deserve to be treated in the same way. I am sure that many in the industry would agree with this statement, however, this is also the age of LIBOR, miss-selling and mistrust in all things financial, so separation is not that simple in fact it’s complicated. Not only do we have bank and insurance combinations but also there are mono-line and multi-line insurers. Moreover, there are distinctions in how businesses can raise capital and what their relationship is to their customers (policyholders). For all of the above reasons and many more besides, the context of good regulation for insurance melts away under the heat of public disquiet over effective regulation of financial services.

However, there is some good news. The principles of insurance regulation which are the focus of regulatory concern are common to all; whether a small business or large, the magic ingredient which must be recognized by policy-makers is that of “proportionality”. Up until now the rule applied has been a “one-size-fits-all approach”. However, the effects of this could be to pitch medium-sized national businesses against large multinational conglomerates, especially when it comes to raising of capital. Mutuals might depend on the surplus funds generated for their members and stock companies on the capital markets for theirs. Small insurers may only have premiums written in the millions on an annual basis while a large corporation is dealing in the billions. Use of an actuary for a small business may be on an occasional basis while a large organization employs many on a daily basis.

All these factors mitigate against rules being applied consistently and fairly. Instead (and this is the reason why local regulators need a more “hands on” approach) prudential supervision needs to consider what principles are being applied to risk management alongside the asset/liability mismatch because most situations are simply different. Principles can cover a multitude of situations while rules tend to be fixed and often lead to simple tick box approaches which help neither the regulator nor the regulated.

The new Solvency II regulation in Europe, abandons the fixed rule approach in favor of a “principle-based, economic-based and risk-based approach”.  It issues new thresholds for the scope of the law including the size of the premiums written and new emphasis is given to the reporting and transparency standards as well as governance.

For insurance to be deserving of separate treatment from banking seems pretty elementary, but a sophisticated approach can work only if regulators understand how such regulations work in local regimes. Building back trust doesn’t begin with just good businesses but starts with good regulation and even better regulators. Large capital buffers and rules can be static and can give the wrong impression of what has been done to protect the consumer, principles on the other hand cannot be merely ticked-off in a box by a regulator. Insurer’s and the insured need regulations at a global level which reflect principles so that the application of acknowledged good practices can be effectively promulgated and so differences can be both understood and potential problems seen and dealt with.

This week’s blog has been written by Peter Skinner. Peter is a Labour Euro MP and works on behalf of people living across areas of the South East of England.

Peter has been a Member of the Economic and Monetary Affairs (ECON) Committee for 15 years and a European Parliamentary Labour Party spokesperson on financial and economic affairs.

Within the ECON Committee Peter takes a very keen interest in financial services legislation. Most recently he was the Rapporteur (Parliamentary Sponsor) for the creation of the new European Supervisory Authority for Insurance and Occupation Pensions. Before that Peter was responsible for the Solvency II Directive. Peter was also Rapporteur on the Reinsurance Directive and the Transparency Obligations Directive (reporting standards in securities).

Peter plays a key role in the European Parliament’s relations with the United States and is a senior member on the Delegation for relations with the United States. Since November 2007 Peter has been the European Parliament’s adviser on the Transatlantic Economic Council – part of the Transatlantic Legislators Dialogue. Peter was also recently made a member of the Atlantic Council think-tank and a participant on its financial services task force. As a result he regularly visits the United States to discuss issues relating to trade and financial services with senior Administration officials and members of Congress.

Peter is a Substitute Member of the Industry, Research and Energy Committee and a Substitute Member for relations with Japan. In addition, he chairs the European Parliamentary Insurance Caucus and is a Vice-Chair of the European Parliamentary Financial Services Forum.

There is an element of indignation among financial cooperatives, and rightly so, because the unbridled greed which led to extreme risk-taking, aided by esoteric financial engineering, did not emerge from cooperatives. Rather, they originated from their philosophical (and real-world) competitors in the capitalist financial system whose assumed efficiency in allocating capital and risk has oft been held up as a benchmark. Should the “tsunami of regulation” (see Shaun Tarbuck’s blog), the purported cure for the ills of the commercial financial system, become a malaise for cooperatives?

But cooperatives need not be defensive. If anything, the crisis of modern capitalism that was borne out most dramatically in the 2008-9 global financial meltdown has opened an opportunity for the cooperative movement to remind the world of a better way of doing things. In 2009, the United Nations General Assembly proclaimed that 2012 would be the International Year of Co-operatives under the slogan, “Cooperative enterprises build a better world.” The International Co-operative Alliance (ICA) has adopted a Blueprint for a Co-operative Decade that promotes cooperatives as the preferred form of enterprise. Capital strategy is one of five pillars in this Blueprint and the ICA has established a Blue Ribbon Commission on cooperative capital to study the issue.

Cooperatives have much to offer the world as it searches for alternatives to capitalism in the philosophy underpinning our economic organizations. As a community, we have consistently asserted that cooperatives are better for the world because we put People at the core, and not Profits. This is our heritage. The earliest cooperatives that were born in the Dickensian throes of the Industrial Revolution were all about workers and farmers coming together in a spirit of collective self-help – as consumers, producers or borrowers – against the oppression of the times. Through principles of democracy and autonomy, the cooperative safeguards the dignity of the individual human person over money, which means one vote per member, not one vote per dollar (or unit capital); and by making decisions solely in collective rather than selfish interests.

These values and perspectives contribute to greater stability and sustainability. Because more capital does not buy more control, cooperative managers do not try to please capital providers. We are neither compelled nor incentivised to take large risks with the money of depositors and policyholders, or to use excessive leverage to maximize return on equity. Instead, we focus on maximizing value to the right People, by providing the right product or service, at the right price or cost and even in the right place. There is less pressure to secure short-term financial gains, which means that we need not borrow from the future to do so.

In a nutshell, the raison d’etre of cooperative capital is to serve a collective purpose (People) and not to extract maximum gain (Profit) for itself. Without the monolithic pursuit of financial gains, we are less inclined towards the depletion of finite resources (Planet).[1]

But is our People-centred philosophy adequate to assure the world that we would never run into a systemic crisis as capitalism has done? Clearly, this would be too much of a presumption that is easily invalidated by both logic and instance. We risk self-conceit if we assert that our cooperative alternative is perfect or even sufficient. In the real world, not all individuals will remain members of their cooperatives all their lives; not all members will be active participants of their cooperatives without succumbing to dormancy or apathy; not all cooperatives will have enough members or adequate resources to fully fund their operations in a scalable manner; and not many outside capital providers will quietly proffer their resources without an acceptable return.

So perhaps what we need is a new paradigm for capital, not only in our conversation with regulators and the capitalist world, but also internally within the cooperative movement. It is not enough to juxtapose the cooperative’s People philosophy against the commercial world’s Profit orientation. We need to find new principles to effect the paradigm shifts from benefiting either solely shareholders or solely members only, to promoting the interests of all stakeholders; from just one “P” or either People or Profits, to an optimal relationship involving at least the two “P”s of People and Profit, such that People remain core but Profit is not anathema; and from short-term opportunism to long-term sustainability. The ICA’s Blue Ribbon Commission on cooperative capital will make a start on this.

When The Economist runs a lead story on what its author sees as the over-regulation of financial services, as it did on 12 April 2014, entitled Leviathan of last resort, you know there is a problem. The Economist is often seen as being a champion of the free market and the author of this piece is very concerned with the level of current state interference in financial services.

The lead article and the associated in-depth essay, The slumps that shaped modern finance looked at the last five major financial crises of 1792, 1825, 1857, 1097 and 1929 and sought to find the lessons learnt. The article concluded that “the more the state protected the system, the more likely it was that people in it would take risks with impunity”.  In other words, more regulation is not the answer as it leads to financial services businesses being de-risked by the state as the state takes a greater role, through regulation, in running the global financial services sector.  Where states have too much power, protectionism becomes an issue, which means risk management (insurance) becomes political, and therefore inherently relationship driven rather than business driven.

In The Economist’s article the one thing it failed to point out was that in all five of the financial crises mentioned, and I would also argue in the 2007/8 crisis, it was the banking system that was the cause. Not once was the insurance sector mentioned as a cause. This is a point which is increasingly being made by insurance leaders around the world and, in particular, vociferously made by Mike McGaverick, Chairman of the Geneva Association, at their conference last month. However, I feel that the message is falling on deaf ears as far as the regulatory industry is concerned.

Without doubt the regulation industry is in a huge growth stage. Nobody disagrees with the aim of harmonizing regulation on a global basis; it is just the speed at which it is currently being driven that will be damaging to the insurance industry. We all know about Solvency II which started life back in 2002 and may be operational by 2016, a long time yes, but an iterative process worked on with the industry to get the best solution.

The International Association of Insurance Supervisors (IAIS), in contrast, is hoping to have a harmonized global financial regulatory system in place by 2019. Starting by defining the Basic Capital Requirement (BCR) in 2017; then the Higher Loss Absorbency (HLA) by 2018; and, finally, the International Capital Standard (ICS) in 2019.  An ambitious timescale given the Solvency II experience. Now, the IAIS say that they are under instructions from the Financial Stability Board (FSB) to achieve this target by 2019, which they are, and that the rules will only apply to global systemically important insurers (G-SIIs), but is this a little naive? Many will hold the belief that these rules will eventually apply to all insurers.

So, the insurance regulatory system that has been evolving over 200 years is about to be totally renewed in less than five years simply because of another banking crisis!!  It somehow doesn’t feel right or make sense to me.  The really worrying bit for me is the immense drive to make progress that the regulatory industry seems to have already generated with FSB and G20 political support. This is before the insurance sector has even had chance to become involved.  They are empire building without telling the foot soldiers that run the industry, all in the name of protecting the customer.

I wonder does the customer know what the regulatory industry is doing and how much it is costing them to have this new regulatory system. I heard the CFO of a large, global insurer say that the cost to his organization is one percent of total premiums. The proportionate cost to smaller insurers (and most are smaller) will be even greater. And it is the customer that pays in the end.

Apart from the disproportionate increase in costs that will affect mutual insurers, another disturbing rumour circulating is that the regulators only want to see an industry of large players as this is easier for them to manage and understand.  Could it be that regulation is being actively promoted to support consolidation and drive out medium- and small-sized insurers?  For ICMIF, in our role as the voice of the mutual and cooperative insurance sector, this is deeply concerning as many of those medium- and small-sized insurers are mutuals or cooperatives.

There is, therefore, indeed a great challenge ahead for the insurance industry – possibly the greatest yet. For the mutual and cooperative sector in particular we must slow down the tsunami of regulation heading our way and turn it into something eminently more fit for purpose. The stakes are indeed high and we will need to collaborate with the other insurance industry players and utilize all the collective power and political influence we have within the membership of the Federation. The recent creation of the new ICMIF External Relations team, with their remit to focus on influencing the global regulatory arena, could not have been better timed.

Mutual insurers face increasing pricing pressure so must differentiate themselves to remain competitive, according to David Thomas, CEO of Market Services & Solutions at Willis.

Speaking in a video blog on WillisWire, he says: “Mutuals generally take a long-term view of their customers, so tend to create a stable product over a long period of time. As a result there are periods when mutuals’ pricing is considerably cheaper than the commercial market, and other periods when they are more expensive.

“At a time like this mutuals are faced with enormous pricing pressure. In this environment they must emphasize how they differ from the competition in terms of understanding the dynamics of a homogeneous book of business, and how their risk management and claims services are bespoke to the needs of their clients. If they do these things well, I think that they can weather the current environment.”

John Haydon, Executive Vice President at Willis Re, explains why  analytics are absolutely critical to mutuals, which, by their very nature, tend to be relatively undiversified.

He says: “Mutuals usually have a particular geographic territory or membership base that means that they are narrow in focus when compared with a typical commercial lines carrier. As a result, they tend to suffer when being considered from a Solvency II or rating agency standpoint. This means they must use all of the tools at their disposal, such as analytics, to minimize that disadvantage.”

Robin Swindell, Executive Vice President at Willis Re, describes the work his team has undertaken in researching the needs of mutual insurers, and also how Willis is involved in the wider mutual insurance industry.

He said: “We’ve spent a lot of time working to understand both what makes a mutual insurer tick and why they are different from their commercial competitors. Over that time we’ve formed deep and strategic relationships with mutuals, as well as with key industry representative bodies such as The International Cooperative and Mutual Insurance Federation (ICMIF). We’re very proud to be a Supporting Member of ICMIF and attend its conferences as well as providing thought leadership materials for its publications.”

Second, these trust relationships enable the flow of capital in the industry, particularly after losses. In a long-term relationship reinsurers get to know the cedent and their portfolio – the way they handle their claims and contain their losses – so that in the event of a payout there is a mutual understanding that it is fair, appropriate and should be settled quickly rather than resorting to legal processes. Moreover, the trust in long-term relationships counteracts opportunism in the pricing of reinsurance programs. Reinsurers in long-term relationships are less likely to walk away when prices go down during flat or soft markets, confident that they will make good with shares from trusted cedents when prices increase after losses or in hard markets. That is, neither cedent nor reinsurer ‘shop around’ annually for better prices and this kind of give-and-take in long-term relationships has been important for stabilizing and securing a flow of capital in this industry.

That said, recent changes in the industry put the relationship model under threat or at least changes who is having relationships with whom. Reinsurance relationships can be differentiated according to the significance of cover for both parties. One of the critical findings in our research is that as big global cedents are growing and consolidating, bundling their risk into massive programs, it is progressively becoming very difficult for anyone, except the largest reinsurers in the world, to be truly significant partners to these cedents. The meaning of relationships is changing for these big cedents. Their relationships are being concentrated in a handful of big reinsurers around the world that take the overwhelming majority of their risk across their various programs. These big reinsurers have the technical know-how and the capital to be significant partners for the largest cedents. Then, the rest of the reinsurers on their panel, while they may be long-term, are each only taking a small share, which means they are largely replaceable by other reinsurers or even substitutable by other forms of capital.

As the biggest cedents are shopping around for the best price of capital and for relationships with partners that can help them with the technicalities of their program, small or mid-tier reinsurers essentially become market-followers on those programs. Therefore, mid-tier reinsurers look to consolidate their relationships with the smaller cedents where they can continue to be significant partners. What we are seeing is not only relationship differentiation, with closer relationships between smaller cedents and reinsurers and closer relationships between bigger cedents and reinsurers, but also increased opportunism at the peripheries of these relationships. We expect high prioritization of core relationships while opportunism in the peripheral players is increasing acceptable.

In lots of ways, we see these changes as an opportunity for mutuals and cooperatives to strengthen the relationships that they have with their core partners. As mid-tier reinsurers become less significant for large cedents, their relationships with the smaller, longer-term players become more precious. Competitively, this market change can be advantageous to mutuals and smaller cedents where the relationship model and the capital stability are valued. Sharing information and getting deep knowledge of each other are critical when building relationships to last across the ups-and-downs of the market cycles. Aiming to be the most attractive cedents for long-term relationships, mutual and cooperatives have to do their best to ensure the quality and transparency of the information that they provide to their reinsurers.

This week’s blog has been written by Paula Jarzabkowski, Professor of Strategic Management at Cass Business School, City University London.

Professor Jarzabkowski will be a keynote speaker at the ICMIF Meeting of Reinsurance Officials (MORO), 9-11 June 2014, Miami, USA. The theme of this year’s event is ‘Expect the Unexpected’. For more information about the MORO agenda, please contact Mike Ashurst, Vice-President, Reinsurance. For more information about the event in general, please contact Yvonne Hautenne, Vice-President, Events.

Professor Jarzabkowski has been studying the competitive dynamics of the global reinsurance industry since 2009 with reinsurers, brokers and cedents around the world. Her research has been the subject of many industry presentations, reports, and media articles. The relevance of her work was recognized recently with the prestigious Economic and Social Research Council Outstanding Impact on Business Award.

In the 19 years that have since passed, many ICMIF members have been at the sharp end of major catastrophes such as the Indian Ocean earthquake and tsunami (2004), Hurricane Katrina (2005), the Tohoku earthquake and tsunami and New Zealand earthquakes (2011) and very recently Typhoon Haiyan, also known as Typhoon Yolanda in the Philippines (2013). Weather and seismic activity have wreaked yet more havoc for ICMIF members in the last few months. The horror and destruction of such events continually appals me; the recovery work that the cooperative/mutual sector does still amazes me. It is, I believe, one of the most remarkable aspects of our sector.

Current science tells us that catastrophes are set to continue extending their geographical spread, taking more lives, and incurring higher recovery and rebuilding costs. Business sense tells us that our sector needs to continue playing a crucial role in reducing disaster risk – but with a new reality. The recovery programmes which have marked out cooperatives and mutuals as insurers of choice in the past are no longer enough on their own: we also need to contribute, as a sector, to the broader issues of policy development and risk prevention. If we ignore this opportunity, we ignore our organizations’ business needs and our member-owners’ socio-economic needs.

ICMIF is already working hard on the sector’s behalf in these areas: many of you will have read the recent blog by Shaun Tarbuck about our recent meetings with, among others, the United Nations, the World Bank, the OECD, the European Commission and the International Insurance Society. The meetings were organized by Willis Group to create a powerful “resilience triumvirate” of capital, policy and science which will make a real difference to the way in which disasters are managed in the future.

ICMIF is now a key partner in the preparations for a two-week series of high-level events in London this summer, which will bring together these three sectors, plus their knowledge and capabilities, alongside their commitment and influence. We are proud to be representing the cooperative/mutual insurance sector and are looking forward to actively contributing to the debate on disaster risk reduction and resilience. But we also need ICMIF members to join us there, to demonstrate that our sector’s commitment to this global issue isn’t just about words, but is real, committed and active.

So what’s happening and when?

• 23-25 June, The International Insurance Society 50th seminar, “The Impact of Science and Technology on the Industry”
• 25-26 June, United Nations Office for Disaster Risk Reduction; Hyogo Framework for Action review
• 26-27 June, UNEP-FI Principles for Sustainable Insurance meetings
• 30 June – 4 July, World Bank Understanding Risk forum

We will also be organizing a meeting for all ICMIF members who will be in London, on 26 or 27 June, to prioritize ICMIF’s next actions in the international work on resilience; to agree where and how we should focus our energies; and to explore how to maximize the value of reducing disaster risk for the benefit of our member-owners.

We will be using the ICMIF Sustainability Leaders’ Forum (SLF), established late last year, as our platform for members to participate in our sector representation (while acknowledging that resilience and disaster risk reduction are only part of being a sustainable insurer).  No formal participation or permanent commitment is required to join us – just the energy and passion for reducing disaster risk, protecting lives and (re)building strong communities that we know are an inherent part of being a cooperative/mutual insurer.

Please contact me at faye@icmif.org if you would like to join us at any of the London events, if you are interested in helping us represent our sector in the resilience debate, or if you want to be part of the ICMIF Sustainability Leaders’ Forum.

This was the second meeting of this group which has taken on the remit of creating a new paradigm in building resilience, with insurance playing a crucial role in enhancing the understanding of risk and ways it can be managed. Two of the speakers made statements that really hit home for me: that the time for change is upon us and that the financial services industry will take centre stage.

Margareta Walhström was the key guest at the meeting. She is the United Nations Special Representative of the Secretary-General for Disaster Risk Reduction and Head of the UNISDR (United Nations Office for Disaster Risk Reduction). Margareta is responsible for updating the UN Hyogo Framework for Action* in 2015. She predicts a significant shift of the cost of disasters from the public sector to the private. Governments are failing to deal with the increasing number of disasters, as they are reacting to the circumstances rather than understanding the risk, planning for potential disasters and mitigating them.  Why don’t they do this? Because it costs!  This is, of course, a false economy: the cost of reacting post-disaster will continue to grow dramatically, whereas introducing pre-event risk reduction measures would reduce overall costs in the longer term. Unless government strategies change drastically then disasters will continue to affect a nation’s ability to grow sustainably.

During the meeting, our host Rowan Douglas, whose other international roles include Chair of the UN Hyogo Framework for Action – Financial and Private Sector Working Group, stated that 85% of the world’s assets were in the hands of the private sector. Furthermore, 2011 had the highest ever recorded insurance losses. To its credit, the (re)insurance industry paid out on all the claims with minimal insolvencies, demonstrating its capabilities in understanding, managing and pricing risk.

Alanna Simpson, Senior Risk Assessment Specialist, Global Facility for Disaster Reduction and Recovery at the World Bank, predicted that the amount spent on construction globally in the next 20 years will equal the amount spent in the last 6,000 years. This means we must seize the opportunity to significantly influence global building regulations as they relate to disaster risk reduction.

Going back to Rowan, our meeting host, he believes that sustainable environmental change will be a key driver of disaster risk reduction; smart capital is crucial for underwriting disaster risk; smart science will generate an ever more accurately modeled world; and smart policy will ensure risk mitigation through regulation is built into government action.

So why, I hear you ask, does this affect us as cooperative and mutual insurers? Well, I believe that two things are key. Firstly, ICMIF is an important industry partner in developing the new paradigm along with the IIS and the Geneva Association.  The top scientists present at the meeting each have their role to play in modelling the world and the key policy players from the UN, the World Bank, the IAIS and the OECD are all involved already.  ICMIF has been handed the opportunity to influence strategic global change by being asked to join this eminent and essential group, and we are now very much involved in it. ICMIF and its members will bring crucial case studies and data to the group from our many experiences in recent years of unexpected disasters in Japan, New Zealand, Philippines, UK and USA, to name just a few. We will also be able to share examples of innovative practices for sustainable risk mitigation which our members have already implemented as they seek to give value to their members and their communities.

Secondly, as with any global change, there are business opportunities for those who are close to the change and willing to embrace it.  As ICMIF is already engaged in this process, our members will be well positioned to seize these opportunities.

As business leaders we all look for ‘game changers’ in our industry, I firmly believe that by being involved at the beginning of the process of building resilience on a global basis we can not only influence the outcome, but also better serve policyholders.  Any ICMIF members who wish to be actively involved should let me know; we will need the help of ICMIF’s best and brightest strategic thinkers as we work together towards the post-2015 framework for disaster risk reduction which will come into effect at the 3rd World Conference on Disaster Risk Reduction in Sendai, Japan, in March 2015.

* The Hyogo Framework for Action (HFA) is the first plan to explain, describe and detail the work that is required from all different sectors and actors to reduce disaster losses. It was developed and agreed on with the many partners needed to reduce disaster risk – governments, international agencies, disaster experts and many others – bringing them into a common system of coordination. The HFA outlines five priorities for action, and offers guiding principles and practical means for achieving disaster resilience. Its goal is to substantially reduce disaster losses by 2015 by building the resilience of nations and communities to disasters. This means reducing loss of lives and social, economic, and environmental assets when hazards strike.