Demand creates new risk carrier
Run-off expert Arndt Gossmann has launched his latest venture in response to market demand following the introduction of Solvency II and to help dispel any stigma associated with using run-off as a strategic tool, he told Baden-Baden Today.
The former DARAG CEO and current chairman of Schwarzmeer und Ostsee Versicherungs-Aktiengesellschaft (SOVAG) is creating a new risk carrier focused on helping non-life insurers in Europe restructure their portfolios. It will be backed by Munich Re as a reinsurance partner.
His company, Gossmann & Cie, is basing its offering around a new product, which has the working title ExPRO (Expiring Policy Roll-Over). It is designed to enable the transfer of insurance contracts to an external risk carrier as they expire—as opposed to waiting for entire portfolios to accumulate.
This enables insurers to release equity by directly neutralising all business on their balance sheets that will no longer generate revenue in the future. The product was designed by Gossmann & Cie supported by mathematicians and structuring experts from Munich Re.
Gossmann said that the seed for the idea came from many discussions with insurance executives in which it emerged that many potential run-off deals do not happen because there a stigma attached to such transactions.
“Many insurance executives see the benefits of capital release and getting rid of legacy books through run-off deals and see that it is becoming a valuable instrument. But they often believe that by undertaking such transactions it looks like as if the company has a problem,” he explained. “In fact, it is ultimately a very useful instrument for solving problems.”
This prompted Gossmann to create a solution that runs in parallel with a business. ExPRO will offer insurers an opportunity to optimise their portfolios long before entire portfolios accumulate for run-off. The approach is expected to be easier and quicker, as well as more cost-efficient than the sale of entire legacy portfolios.
Through the new instrument, the ceding insurer can release capital and operational resources tied up by the ex-client immediately after the termination of a client relationship. This allows the insurer to focus the use of capital on active client relationships and future growth, Gossmann explained.
“It is widely accepted that capital management is a very relevant part of the insurance business, particularly after the introduction of Solvency II,” Gossmann said.
Data management plays an increasingly important role in insurance operations and the opportunities have grown significantly in recent years, he noted.
To price forward policies, Gossmann will use data analytics tools for pricing. In fact, the development of more sophisticated tools of this nature has been key to allowing this new platform to be developed.
“It would have made sense to introduce such a run-off carrier years ago, but the analytics tools that exist today had not been around before,” Gossmann said.
The pricing for the portfolios will be based on a new data analytics model using a specific algorithm instead of actuarial data, he explained. The tool will calculate the returns that can be expected for taking the policy over considering potential new future clients, he said.
“Today we have the ability with data analytics tools that can autonomously find correlations in the data that you would never have noticed otherwise,” Gossmann said.
This clean database can then be analysed properly which will be of great benefit to management; it can also be used for the pricing approach and later for claims management, Gossmann said.
The new solution has been developed in conjunction with Munich Re which acts as the exclusive reinsurance partner in the new venture. The reinsurer will assume the majority of the risks as reinsurance partner.
The new carrier will focus on Europe initially as it needs a harmonised market to produce useful results, particularly focusing on German-speaking countries, France and Italy, he said.
Gossmann & Cie estimates the volume of expiring policies at around 4 percent of the insurance business, which corresponds to a market potential of more than €10 billion per year in Europe. The new solutions are set to be offered from the second quarter of 2019 by the new risk carrier headed by Gossmann.
The specialist insurer will operate throughout Europe. Initially, the focus will be on the German, Austrian, Swiss, French and Italian markets. Expansion to other countries is also planned in the medium term. The management team will be introduced in March 2019.
There is already substantial interest across the industry, Gossmann said.
“We have pitched the idea to selected insurance directors in recent months and have met with lively interest. We expect a dynamic course of business as soon as the product is launched in the second quarter of 2019.”
Gossmann is currently chairman of the management board of SOVAG in Hamburg, working on the company’s restructuring. He plans to leave the firm on March 31, 2019 once all measures have been implemented.
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