Interview with Denis Kessler

The history of insurance is very much linked to the history of philosophical thinking. In this respect, the Great earthquake which famously devastated Lisbon back in 1755 – on the 1st of November to be precise - was a defining moment. Philosophers such as Voltaire were shocked by the fact that the earthquake had destroyed churches and in the process killed devout families praying during a church holiday, while it had spared the red light district of the town. They thought that God couldn’t possibly have wished to kill these innocent people, and they came to question the notion of Providence. At the same time, mathematicians were developing what was to become the theory of randomness and probability, and scientists were suggesting that Nature was governed by statistical laws. This laid the groundwork for modern insurance.

The links between philosophy and insurance still remain strong today. Many issues that the insurance industry addresses have a societal dimension that industry leaders cannot  ignore or  abstain from reflecting upon.  The role  of insurance vs. social security for health coverage, for instance, is a strategic issue for the insurance industry as well as an important debate for society as a whole. How far should public welfare go? What should be left to the responsibility of each individual? Wherever you look in the insurance industry, you find similar questions. Should today’s workforce pay for today’s retirees? Should each individual save for their own retirement plan? Actuarial and financial perspectives are useful, but they are only part of the  picture.

On a more personal note, I would say that philosophy helps me to react stoically whenever I am presented with huge claims following heavy insurance losses somewhere in the world…

After twenty years as a University professor, what made you decide to move professionally to the Insurance Industry? 

In the early 1980s, my academic work, notably the research I did on life cycles and retirement schemes, led me to work with the Geneva association, the main global insurance think tank, which regroups a number of industry CEOs and of which I am still a Board member today. I became its Deputy Secretary General and, following a conference I organized on the asset management of insurance companies, I was offered in 1983, at the age of  31,  a  seat on  the Board of  UAP,  at that time  the leading  French  insurance  company.  Although I remained  a Professor until becoming President of the French Federation of Insurance Companies in 1990, joining this Board was an important step into the insurance  industry.

Before the Eurozone treaties were signed, the basic economic principles contained in the Optimal Currency Area theory clearly showed that the Eurozone would inevitably run into trouble in the more or less distant future. Indeed, keeping a fixed  exchange  rate  between  a  group  of   economies   is sustainable in the long term only to the extent that  these  economies  converge  as  time  passes  by. Otherwise, the governance of the Eurozone did not provide any credible incentive for the weakest economies to keep up their competitiveness. On the contrary, negative real interest rates promoted by the ECB lowered the opportunity cost of delaying structural reforms: taking out more and more loans to finance the deficits became even more attractive than implementing painful competitiveness reforms, leading to a massive explosion of deficit and debt.

The viability of the Eurozone now hinges on its capacity to implement structural reforms to boost competitiveness. The European Stability Mechanism and BCE’s Outright Monetary Transactions have proven to be powerful crisis management tools, but can do nothing to improve diverging economic performances within the Zone.

In my view, monetary policy will never be able to replace crucial State economic reform in welfare protection, education, the labour markets, and so on.

SCOR is a global reinsurer, present in 140 countries. We also have a balanced and highly diversified portfolio split between life and non-life reinsurance. With our acquisition of Generali US, Europe’s contribution to our premium income moved from 43% to 39%.

We have a strong focus on innovation and the deepening of existing positions in mature markets, where we have a number of development opportunities - for example in longevity, cyber risks and CBI. Moreover, in P&C, there is a trend amongst global insurers to consolidate the way in which they buy reinsurance. They are buying from fewer reinsurers, and demanding more from those reinsurers.
I am pleased to say that with our technical expertise, local presence and client service we are already seeing a promising increase in our share of wallet from this sort of client. And we think that this trend will continue.
In life we see a good opportunity for financing business in mature markets. Some European life companies are facing pressure on their capital from Solvency II. And some owners of life companies, banks in particular, also wish to free up their capital commitment to their life operations. Also in the life segment we see a good opportunity in Europe to reinsure more longevity risk. As baby boomers age and move from accumulating wealth to funding their retirement, annuity products are getting more prevalent. This means that insurers need more help to manage that longevity risk.

We also continue to see good growth opportunities in BRIC countries and other emerging markets, where SCOR is already very well positioned. According to the strategic plan we published in September 2013, Optimal Dynamics, we expect our overall P&C book to grow at a rate of 8.5% over the next three years. Within that, emerging market growth should be higher. In our life book, we are looking for emerging market growth, well above the roughly 4% growth we project from mature markets. This life growth should come particularly from financing business in Asia – in other words primary life insurance companies are growing so quickly in Asia that they need help to finance all that growth. We also see good potential to grow our biometric business in emerging markets.

It wasn’t an easy decision to make at the time. I received an offer on a Sunday and had to give my answer the same day. I thought I would be able to succeed for two main reasons. First, SCOR’s difficulties were largely the result of a series of ill- inspired management decisions, mainly made in the US, rather than the result of a lack of capabilities within the company. SCOR had lost its focus on sound underwriting decisions in its P&C business in the US.
Excessive risks had been taken at the end of the 1990s, especially pertaining to US liability and workers’ compensation risks from the US and Bermuda operations of the Group.
Second, many of SCOR’s difficulties were one-offs. This was the case on the asset side, with stock markets so low that they could not fall much lower. This was also the case with losses such as the World Trade Center. I was convinced that if I could somewhat restore SCOR’s capital position with a rights issuance; there was enough talent and energy in the Group for a recovery. But the situation was so severe that another capital increase was necessary in 2003. By 2004 the Group was back on track, and since 2005 it has expanded by an average of 22% per year, thanks to organic and external growth. The Group has also moved up the ratings ladder, from BBB- to A+ today.

Certainly, the industry is facing a long list of challenges.

Some of these are economic. The main issue over the past few years has been low interest rates. But what insurers should be worrying about is how economies will transition from the current ultra-accommodative stance of central banks. There is a real risk of an upward spike in interest rates, which could be quite damaging for some players. At SCOR, we are positioned for an increase in interest rates.
We have a very conservative, short duration investment stance. Thanks to our internal model, which is fully integrated into decision-making, we can ride out an environment of low interest rates, and we are fully prepared for the resumption of higher rates. The worst case scenario if central bankers mismanage the exit from over-accommodative policies would be the resurgence of inflation, which is always costly for the insurance and reinsurance industries.

There are several important regulatory challenges as well. We all know about Solvency II. The delay in formal implementation is frustrating. But SCOR is ready. We already run our company in a Solvency II-compliant way. It is very expensive of course, developing the necessary tools and systems. But we have done that, our internal model is fully operational, and we are ready. It is a complicated regime, though, and it raises the minimum efficient scale across the industry. Smaller companies are having trouble implementing and funding the necessary systems. The other regulatory challenge I would mention is the rise of excessive consumerism: lawmakers and courts tend to systematically favour consumers over businesses, whereas they should be more balanced.

And of course there  are  industry  challenges.  The main talking point at present seems to be ILS and other types of ‘alternative capital’. For many reinsurers, this is regarded as a threat. We don’t see it that way at SCOR. Rather, we take a more nuanced view. We use ILS ourselves, as an effective and efficient way to purchase protection.
We were delighted, for example, by the strong demand we had for an extreme mortality risk transfer contract we issued in September 2013. We also offer our clients the facility of sponsoring their ILS issuance. This generates fee income for us. And thirdly, we invest in ILS, and manage third party money that is invested in ILS. SCOR Global Investments launched its Atropos ILS fund in 2011 and it has been highly successful to date. As interest rates go up again, this should temper investors’ appetite  for ILS, but we are nevertheless prepared for all outcomes.

First of all, I pay tribute to the reinsurance sector. It has shown incredible resilience over the past several decades. Despite the financial crisis, which impacted the sector on the asset side, and the high level of natural catastrophes that affected the liability side, there have been no industry collapses and no help from the government, unlike in the banking sector. Despite all of this turmoil and uncertainty, the industry has always been able to provide capacity and security to its clients.

Now, to answer your question, good risk management neglects none of the factors you mention. Good risk management is about being prepared, anticipating risks and taking action in good time. SCOR does this. Active risk management – with a 360° view - is absolutely at the heart of what we do.

The growing impact of weather damage is for sure a source of concern. For instance there are more and more floods affecting densely populated areas. The insurance industry must play a bigger role in the promotion of prevention measures in liaison with public authorities. I call for public- private partnerships to find adequate solutions.

Looking at regulatory changes, for the most part, this is a positive  –  again,  for  those  who  are  prepared  like SCOR.

Historically there has been so much uneconomic decision- making in the industry. Egregiously mismatched assets and liabilities back in the early 2000s nearly ruined a number of companies, particularly in Europe. And poor governance and controls also produced huge liability problems at the same time.
I can tell you from personal experience, SCOR was in a very difficult position when I joined in 2002. More sophisticated regulation, the enforcement of economic thinking, and also Pillars 2 and 3 of Solvency II, which address governance and controls, will lead to a better run industry, I am sure of it.

But regulation isn’t all good news. There is still some misguided thinking out there regarding how systemic reinsurers are. Let me tell you, reinsurers, certainly reinsurers with business activities like SCOR, are not systemic. If capital surcharges or other controls are imposed, this might force us into a pattern of decision-making that is sub-optimal. And it could force higher costs onto buyers of  reinsurance.

SCOR recently acquired Generali US to become the US Life reinsurance leader. Do you plan to make more acquisitions?
The objectives set out in our new strategic plan, baptized Optimal Dynamics, do not include new acquisitions. Our ambitions can be fulfilled organically. That’s not to say that we won’t act opportunistically. The Generali US acquisition is a good example. But acquisitions are not a priority.

When we do think about a potential acquisition, the first thing we take into consideration is whether or not it would respect the Group’s four cornerstones, namely a strong franchise, high diversification, a controlled risk appetite and a robust capital shield. And any acquisition must respect our two financial targets – a return for shareholders of 1000 basis points over the risk-free rate and a strong level of security, i.e. a solvency ratio according to our internal model of 185-220%.

SCOR Business Solutions is a longstanding and well established player in this segment: SCOR has elected large corporate risks as a strategic segment to be in since 1970, and continues to invest in the resources necessary for success: technical expertise, underwriting tools, services (claims, risk assessment).

Its value proposition is based on a flexible approach to client needs, with the ability to act either as reinsurer or insurer, depending upon the countries and the structure of the program targeted by the client/insured, advised by their broker. This is the reason why my company was successful in expanding its brand, SCOR Business Solutions, which provides insurance (direct) and facultative reinsurance to industrial and commercial clients and their brokers. SCOR has a chosen approach to the lines of business where it is recognized as a leader, based on genuine, industrial expertise.

The environment in which SCOR Business Solutions and its clients operate is undergoing changes. In respect of complex segments, including large corporate, major insurers have broadened their risk appetite and optimized their reinsurance needs accordingly, particularly for facultatives. In parallel, large corporations have been increasingly willing to develop relationships with the ultimate capacity providers and carriers for their risks and to make use of their captives. Traditional reinsurers are therefore keener to go direct and to have more offers to do so, blurring the traditional frontiers between insurance and reinsurance. The approach is to acknowledge.

The different risk appetites expressed by the risk carriers and their differences in terms of the ability to propose the right products to carry the corresponding exposures.

As mentioned earlier: reinsurer s are shock absorbers in an expanding universe of risks, and SCOR itself leads an active risk management policy to understand, contain and absorb its own risks. As such, reinsurers have indeed risk management expertise which is a key part of their value proposition to their clients. Together with brokers, we assist our clients in managing their risks by providing them with adequate solutions, sharing our expertise with them and engaging with them on concrete business matters and situations.
Understanding the true nature of risks and their correlations is a source of competitive advantage. Recent events such as the Sandy superstorm in the US and the Thailand floods illustrated the interconnection between risks, and the fact that Contingent Business Interruption and interdependencies were yet to be fully understood by the industry. In a global world there is more and more interconnectedness.

SCOR’s expertise on natural catastrophes is backed by heavy IT infrastructure and modeling investments: SCOR has invested a significant amount of time and money to build its own natural perils modeling platform. This is an open architecture platform, which can use internal or external models, and blend them to go beyond the strict modeling view. This allows us to roll up our worldwide portfolio of risks and monitor, measure and manage our gross and net exposures at all times towards the optimum diversification. Knowing precisely the risks to which we, as economic agents, are exposed, is the first step in building an efficient risk management framework.

Separately, we have defined a very clear, and very tight underwriting framework that is followed throughout the organization. Finally, we protect ourselves very actively: just like any industrial business, we buy insurance for ourselves through various ways and means in order to respect our risk appetite level, as defined by our  Board.

These awards, especially since they are the result of votes by the industry, are a great source of encouragement, to me but also to all SCOR underwriters. As far as I am concerned, I feel the same drive and energy as I did when I joined SCOR in 2002. We have come a long way but I am convinced that we can push horizons even further. I love this industry and I feel good in this fascinating universe of unpredictable risks governed by underlying laws. Voltaire was  right!