“The economic buzzword of the crisis is securing liquidity!”

Lisbeth Lorenz, GrECo expert for credit insurance, in conversation with Rainer Kubicki and Gerhard Weinhofer, Managing Directors of Creditreform in Austria, about credit risk management in times of crisis.

Lorenz: In its 140-year history, Creditreform has expanded its range of services from classic business information reports to credit and receivables management and insolvency representation. In 2020, there were around 40 % fewer insolvencies than in 2019. What development do you expect in 2021?

Weinhofer: Insolvency activity as a seismograph for overall economic development has decoupled from the real state of Austrian companies. Despite the biggest economic crisis since the Second World War and a massive economic downturn in the wake of the pandemic, the number of corporate insolvencies has fallen to just over 3,000 proceedings. The last time there were so few insolvencies was 30 years ago. The paradox of sharply declining corporate insolvencies in an unprecedented economic crisis can only be explained by the serious interventions of politics.

What can we expect for 2021? Creditreform has analysed its balance sheet database with around 150,000 companies subject to filing requirements. Taking into account the current economic development with an estimated GDP decline of at least 7%, this results in around 50,000 companies at risk of insolvency. They could and can only continue to survive because of the low interest rates and the current aid measures.

Lorenz: When will the insolvency surge come?

Weinhofer: That will probably be the case at the latest when state regulations ─ however well-founded they may be ─ are scaled back and the free play of market forces is allowed again. This development will largely depend on how quickly the pandemic is brought under control through vaccination and confidence in the economy returns. What is clear, however, is that payday will come, both for companies and for all taxpayers.

Lorenz: Creditworthiness and payment behavior are known to have an impact on the results of a company’s business. Which aspects of risk and accounts receivable management do you have to pay special attention to now?

Weinhofer: What is new is that in 2020 it was not management errors that were the main cause of bad debt losses and insolvencies, but the lack of capital. Insolvency liabilities have risen to over EUR 2.3 billion despite the decline in corporate insolvencies. The federal government also calculates that of the current EUR 11 billion in loan liabilities, around EUR 2.5 billion will fall due. The economic buzzword of the crisis is therefore securing liquidity. Only sufficient liquidity protects against one’s own insolvency.

Kubicki: Risk and accounts receivable management is even more important in times of crisis than in normal times. In general, there is a confusing volatility in the markets. The saying “trust, look, whom” should therefore be the guiding principle in business relationships. In concrete terms, it is a matter of constantly keeping an eye on the solvency of one’s customers and evaluating it on an ongoing basis. It is often neglected that suppliers should also be increasingly in focus. Just think of the effects on one’s own production chain if an important supplier fails.

Lorenz: What useful tips and advice do you have for companies?

Kubicki: Especially in times of crisis, even customer relationships that have been free of friction for years can quickly become a credit risk. It is all the more important now to also subject these credit exposures to a credit check. This is exactly where we come in. With our monitoring services, our clients can check their entire client base daily for current developments and react immediately to changes in creditworthiness, etc. A portfolio analysis also offers the possibility to get a general overview for a risk assessment.

Special attention should also be paid to accounts receivable management. A tight, professional dunning system reduces the risk of bad debt losses. Our team of experts, who can distinguish legitimate debtor interests from possible tricks of individuals, provides support in pre-court debt collection. Since every crisis also holds the opportunity to win new customers, we offer credit-checked marketing data to find new potential in a precise and targeted manner.

Lorenz: One more personal question in conclusion. How has the pandemic affected your life?

Kubicki: I was initially sceptical about the regular home office and had to learn how to deal with the new situation. But our IT department worked highly professionally, and so the changeover went smoothly at all locations within a very short time. The commitment and dedication of our employees impressed me and our entire management team. We also took measures at an early stage and communicated comprehensively from the beginning, e.g. with our own explanatory video. Since autumn, we have been almost completely home office. Personally, however, I am looking forward to meetings and customer appointments being possible on site again.

Weinhofer: I have gained new experience on how to lead a team from the home office and motivate it ─ especially in uncertain times. It was and is important to maintain social contacts in addition to my professional life in order to find a balance ─ even if it is only virtual.

Thank you for the interview!

Rainer Kubicki
Managing Partner Creditreform Wirtschaftsauskunftei
Kubicki KG
T +43 218 62 20 101
r.kubicki@wien-creditreform.at

While still studying economics in Cologne and Wuppertal, Rainer Kubicki trained as a managing director at Creditreform Düsseldorf and Neuss. Since 1982 he has been managing partner of Creditreform Wirtschaftsauskunftei Kubicki KG. Rainer Kubicki is also President of the Austrian Creditreform Association (ÖVC), Chairman of the Professional Group Committee of Debt Collectors in the Austrian Federal Economic Chamber, member of the Professional Group Committee of Credit Reference Agencies in the Austrian Federal Economic Chamber, board member of the Austrian Debt Collectors Association (IVÖ) and member of the Regional Advisory Board of AMS Esteplatz, 1030 Vienna

Mag. Gerhard M. Weinhofer
Managing Director Österreichischer Verband Creditreform
T +43 218 62 20 551
g.weinhofer@wien-creditreform.at

Gerhard Weinhofer studied law at the University of Vienna and then worked as a legal intern at the Vienna Higher Regional Court and as an intern at the European Parliament in Brussels. In 2005, he moved from the Federation of Austrian Industries to Creditreform Wirtschaftsauskunftei Kubicki KG as an authorised signatory. Since 2011 he has been Managing Director of Creditreform.

Creditreform
Creditreform is Europe’s most important creditor protection organisation and has been active in Austria since 1889. 4,200 employees in 167 offices in 22 European countries and in China provide professional services for 157,000 clients: from marketing databases to risk and receivables management, business reports and company ratings. In Austria, Creditreform also represents creditors in insolvency proceedings before the insolvency courts.

Related Insights

Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 5 04 04 280

Risk management goes hybrid & meets remote

How the new digital way of working has found its way into the world of GrECo Risk Engineering ─ ensuring the best support for GrECo clients in the future.

By now, we are used to many restrictions that this pandemic has brought. Risk and insurance management has not been spared either. Fortunately, most classic risk transfer activities are very suitable for home office and online meetings.

However, one very essential area of GrECo Risk Engineering (GREG) poses a particular challenge: the performance of risk surveys of operational site risks and the preparation of the corresponding risk reports as a basis for property and business interruption insurance. Comprehensive, detailed and up-to-date risk information is indispensable for the design of the corresponding insurance solutions, today even more than in the last decades with a comparatively soft market environment.

The pandemic has accelerated the hardening of the insurance market. In many cases, this means that without high-quality risk information, capacity cannot be purchased or can only be purchased at very high cost. Travel restrictions, the lockdown, and the understandable caution of many companies only allow very limited appointments at their own operating sites which makes it difficult to obtain high-quality risk information.

Special measures in special times

In the past year, replacement strategies emerged to provide the best possible support to national and international companies. In addition to traditional risk survey services with a pure on-site presence, GREG also focused on “hybrid” surveys, i.e. a combined approach of an online meeting followed by a personal site visit. Particularly abroad, “remote” models, i.e. purely digital visits, have already gained acceptance in the past year.

Hybrid is the trump card

The hybrid approach aims to minimize face-to-face contact and avoid large group meetings. Good preparation for the meeting is essential for success and largely outweighs any disadvantages compared with a purely face-to-face meeting. Experience shows that discussions on topics such as maintenance and repair, business continuation, and financial data are generally very well suited to virtual meetings. The on-site appointment takes place close in time to the online meeting so discussed information is still present. Care must be taken to keep the group small, as all internal areas are visited. This approach will continue to play a role in the future in order to achieve effective results very efficiently, even during the initial inspection of new locations.

Remote as an alternative or for follow-up

“Remote” risk survey services, i.e., fully virtual site analyses, are used when travel or visits are not possible due to pandemic constraints. Again, GREG starts with an online meeting and, as a first step, undertakes a detailed discussion of the available information and documentation.

What is new is that a detailed route for the virtual walk-through is planned during the meeting. GREG’s risk engineers work with the plant manager to determine critical or relevant infrastructure and other areas of interest. A responsible person at the site then walks all areas according to the plan, providing a live video stream.

The remote model is especially suitable for follow-up visits, if good site plans are available and ideally the people in charge on the site are familiar with the process of such visits. The equipment that is suitable for such video streams are, for example, cell phones using Messenger, Google glasses or GoPro cameras. Some of these devices require a WLAN connection, others work via mobile communications. It is also not impossible that certain exposed locations such as basement areas or more distant parts of the company premises cannot be covered if transmission problems occur. Using purely digital recordings such as video streams, it is incomparably more difficult to compile complete risk reports including recommendations. However, such reports are quite suitable and very helpful to provide a property insurer with up-to-date feedback on site risks as a follow-up.

What remains of the pandemic?

On-site, hybrid or remote risk survey services. The pandemic has created many forms of innovation, including in risk management. The GREG remains a toolkit of instruments that can be targeted in the future as needed or adapted to the situation.

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Markus Husa

Risk Consultant

T+43 5 0404 895

Architectural jewels made of wood, made in Austria

“With a pioneering spirit in engineering, we inspire our partners and customers for a sustainable future” is WIEHAG’s mission statement. The specialist for sophisticated architectural buildings made of wood is now continuing its successful path in the USA. Always on board: professional risk management.

The customer and event center Paneum of the Backaldrin company, the imposing dome-roofed green roof of the Scottish whisky distillery Macallan, and the fabulously beautiful Hans Christian Andersen Experience Museum in Odense, Denmark. What do they all have in common?

They are all pioneer timber buildings from the Innviertel-based timber construction specialist WIEHAG. The passion for wood has driven Erich Wiesner, the owner of the WIEHAG Group, and his family business for five generations. Together with internationally renowned architects, WIEHAG skillfully harmonizes form and function, and constantly redefines the limits of what is possible.

As the next milestone in the company’s history, the timber construction specialist is now venturing across the pond and playing a major role in the construction of an 88-meter-high timber hybrid skyscraper in the US city of Milwaukee.

US record-breaking building with Austrian participation

At nearly 90 meters tall, the “Ascent Milwaukee” apartment tower designed by Korb + Associates Architects will be the tallest wood-hybrid structure in the world. Jason Korb, managing director of Korb + Associates enthuses, “We are creating something extraordinary with the city of Milwaukee ─ a world-class residential project.”

The details of the project are as follows: The lower garage floors and the elevator shafts will be made of concrete. The main part of the building, however, is supported by the wooden structure. The entire supporting structure of the apartments, i.e. the vertical supports and the horizontal beams, will be made of glulam. WIEHAG supplies this wooden skeleton including all connecting elements.

The main challenges are the wood strength, which has to be two classes higher than in usual engineered wood structures, as well as ensuring a sufficient number of high-strength lamellas. Projects like these “rely” on professional project management. For the construction of the tower, ─ in addition to a sufficiently long lead time and excellent cooperation with the sawmill ─ the supply chain is also of great importance.

Quality from the Innviertel

More than 6.000 m³ of sawn timber, and only the very best boards, are used in Milwaukee for the required volume of 2.300 m³ of finished glulam. 1.150 columns and 1.320 beams will be shipped to Milwaukee in 65 sea containers.

The first components from WIEHAG will arrive on the site in April 2021, where one floor each will then be raised in weekly cycles. Ascent is expected to rise a total of 25 floors after its planned completion in 2022. This means that the residential tower in Milwaukee could replace Mjøstårnet, an 18-story hotel in Brumunddal, Norway, as the tallest wooden building in the world.

Where there is planning, risk management also plays a major role

Milwaukee is currently not the only international construction project of WIEHAG. At the same time, the largest timber construction in Asia is being built for the Technical University in Singapore, as well as a sports complex for the renowned Eton College in England, a huge shopping center for Abu Dhabi and a retail project on Tenerife. “Even as a technology leader with flexible capacity, this makes us sweat a bit” says Johannes Rebhahn, responsible for international business at WIEHAG.

So, it’s no surprise that for Johannes Rebhahn and Thomas Biringer, the responsible managing directors, project-related risk management plays a major role. The complexity of such projects requires a systematic approach to the entire process, from the bidding phase through the execution steps to project completion. An essential aspect of this is the risk transfer of project risks that can significantly jeopardize success.

WIEHAG has long since established itself as a leading timber construction specialist, and the order books are well filled even in these challenging times. Thus, the timber specialists from Altheim expect further high-rise orders in sustainable timber construction in the coming years.

“In 2021, we will invest in the expansion of our production buildings and facilities in order to meet the new market with larger capacities,” announces Brigitte Riedner, CFO of WIEHAG Holding. On board: GrECo as a trustworthy and powerful partner in risk and insurance management.

Dipl. Ing. Johannes Rebhahn
Sales Manager Engineered Timber Construction International WIEHAG GmbH
T +43 7723 465 375
j.rebhahn@WIEHAG.com

Johannes Rebhahn was born into a traditional sawmill family in Austria. He studied civil engineering at the TU Graz and in Lisbon before starting at WIEHAG in 2002. After several years in timber construction engineering, he started to develop the international market for WIEHAG and is currently Sales Manager for international timber engineering and responsible for all projects outside Austria and Germany.

Brigitte Riedner
Finance management
T +43 7723 465 1261
b.riedner@WIEHAG.com

After completing her training, Brigitte Riedner worked quite a long time for a medium-sized industrial company in Salzburg, with responsibility for finance and accounting, controlling, insurance, human resources, IT and internal organization. Since 2019, she has been Head of Finance and Accounting for the WIEHAG Group. Currently, the focus is on digitalization in accounting and investment financing. She has been working closely with GrECo’s Account Managers for two decades now.

WIEHAG
WIEHAG Holding GmbH is a traditional company of the Wiesner family in the 5th generation. Headquartered in Altheim, Upper Austria, WIEHAG has over 160 years of experience in timber construction and is a leading supplier of long-span load-bearing systems and complete roofs. Other business areas include roof, ceiling and wall elements, standard glulam and connector systems for beam girders. With a state-of-the-art CNC production plant, over 70.000 m³ of glulam and 80.000 m² of roof elements are produced annually. WIEHAG stands for wide-ranging competence in engineered timber construction.

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Karin Gaisbauer-Roth

Account Manager

T+ 43 5 0404 416

Cyber insurance comes of age

Cyber insurance, now out of its infancy, has become an essential part of risk management. Stephan Eberlein, cyber expert at GrECo Specialty, reports on how you can get tailored cyber insurance with the best conditions, even in the current market environment.

For years, GrECo has been concerned with communicating to its clients that cyber incidents can be major loss events with serious effects on the company’s success or reputation. Risk transfer via an insurance solution is an important measure for effective cyber risk management.

At the beginning, there was still a lack of risk awareness among domestic company managers, who were “still” convinced of the effectiveness of their firewalls & co. The available cyber insurances were also still in their infancy and their complexity was not easy to understand. However, there was a euphoria in the insurance industry, which provided plenty of capacity at very low premiums to generate market share.

Cyber threats: the No. 1 business risk

Since 2019 at the latest, the world has entered a new cyber era. Although the IT landscape has faced viruses, security breaches and other forms of cyber attacks for years, cyber criminals have become increasingly sophisticated. Meanwhile cyber threats now represent the top business risk (source: Allianz Risk Barometer 2020).

Due to the large number of reports of cyber attacks and their serious financial consequences, many business leaders around the world have taken out cyber insurance at favorable premium costs. In early 2020, Munich Re valued the European cyber insurance market at more than 1 billion USD.

The digitalization accelerated by the Corona crisis not only led to a further sharp increase in cyber insurance policies last year, but also to a rapid increase in claims. Insurers had to deal with ransomware attacks on a large scale. Acting as an accelerant to the negative claims figures are incidents such as SolarWinds, the latest global cyber incident that even compromised government systems. Experts estimate that the insurance industry will have to pay about 90 million USD for this incident.

Cyber insurers are now complaining that claims payments far exceed premiums. Insureds are now feeling the consequences in their policy renewals: capacities are being cut and premiums are being increased, sometimes sharply. In addition, the application process for large companies is becoming more and more burdensome. In other words, market hardening has not stopped at cyber insurance.

Key to best possible conditions

In the current market environment, a “risk-based” approach and transparency are the key to a tailored insurance solution at the best possible conditions, both for contract renewals and new contracts.

However, companies often do not have sufficient answers to questions such as: Which “crown jewels” need to be protected? What is the financial impact of an intervention on these assets? We therefore recommend assessing the cyber risk as part of a loss potential analysis in order to derive the insurance requirements.

Cyber security audits are used to determine the maturity level of IT security, because insurers now consistently demand minimum protection standards. This means that it is worth checking in advance whether the technical and organizational security measures correspond to the state of the art.

Regular awareness trainings for employees and penetration tests also have a very positive effect on risk assessment by the coverage market. On one hand, these measures serve to raise awareness, and on the other hand, they allow companies to test an emergency situation and derive important conclusions for their cyber risk management from the results.

Support in risk and insurance issues

GrECo’s experts accompany you throughout the entire phase of preliminary work up to the completion of the customized solution. They identify potential for improvement in IT security, shed light on the market environment and coverage options. They manage the marketing process, in which detailed questions often have to be answered. We are currently in a seller’s market. This means that the more transparent and better the company’s individual risk situation can be presented, the greater the insurers’ appetite for risk and the more attractive the outcome of the negotiations. So-called “underwriter meetings” also have a positive influence on the results of negotiations. In these meetings, the insurers’ risk engineers have the opportunity to ask detailed questions directly to the company’s managers. This facilitates the application process and promotes trust.

Cyber insurance, the new fire insurance

It is now undisputed that cyber insurance can effectively reduce or compensate for the financial loss in a cyber incident. The current loss events have demonstrated this clearly. Thus, it is more true than ever that cyber insurance should be a standard part of every company’s insurance portfolio. It is now considered the fire insurance of the 21st century.

However, it is important not to see them as a substitute for information security. In addition, companies should be prepared for the fact that insurers subject their risks to an individual review. The better the preparation, the more transparent the risk situation and the more comprehensible the corporate decisions in this area are, the smoother contract renewals and new contracts for cyber insurance will run.

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Stephan Eberlein

Group Practice Leader Financial Lines

T +43 664 962 40 60

Captive, the do-it-yourself insurance in focus

When established risk transfer solutions weaken, the search for alternatives begins. Can captives be an answer to the changes in the insurance market? Thomas Mayer, Managing Director of the insurance broker VMG, explores this question.

The hardening of the industrial insurance market with rising premium costs, a shortage of capacity and restrictions in the scope of coverage has long since arrived in Austria ─ to stay for the time being. Industrial property and business interruption insurance continue to be particularly affected.

“Captives & Virtual Captives in High Demand” was the headline in last October’s Spotlight issue. As a reminder, a captive insurance company, or captive for short, is an insurance or reinsurance company that primarily assumes the risks of the owners. There is continued interest from major industry in these alternative financing models, in response to global developments in risk transfer. So let’s take a closer look at captives.

Reinsurance captive as alternative risk financing

There are different types of captives. In October, we took a brief look at “protected cell” and “virtual captives”. This time, I would like to focus on the form that is most widely accepted internationally, the reinsurance captive. Worldwide, about 80% of captives are structured as reinsurance companies. In this model, a professional primary insurer is required to provide the usual services in the insurance business, such as policy issuance and claims handling.

Nowadays, so-called non-proportional solutions are usually chosen. This means that the captive bears 100 % of the risk up to a certain threshold value to be individually defined. As soon as this threshold is reached, the further losses are again borne 100 % by other insurers.

Of the various structuring options, I will briefly describe the simplest ─ and this is often the best:

  • Within the scope of a defined deductible, the policyholder bears small damages, especially in the area of frequency damages, himself.
  • Above this, the self retention fo the captive begins. It bears a fixed amount per claim and for all claims within one year.
  • As soon as the captive self retention is eroded, the risk transfer via external insurance

The advantages of such a simple structure are on one hand the simple and transparent calculation of the worst case scenario for the policyholder. Example: The annual maximum per insurance line is 2.5 million EUR in ALL RISK, and 1 million EUR each in liability and cyber, etc. On the other hand, the company can participate in a good claims history. This means that if the claims are lower than the captive self retention, the resulting profits remain with the policyholder. Last but not least, a certain independence from market fluctuations can be achieved with the right structuring and the right choice of captive coverage.

Good things take time

Captives are not suitable for a quick fix, because there are essential requirements to be met when setting up a captive. So, the captive must be very well embedded in the policyholder’s group, ideally directly under the holding company. This is particularly important for controlling, i.e., calculating deductibles and carrying ownership, as well as for monitoring claims. Since risks are borne up to the identified threshold value, risk management also plays a very important role.

Furthermore, the regulatory environment has to be considered. The captive is an insurance company and is therefore subject to relevant rules, in the EU this is the so-called Solvency II. Depending on the selected location of the captive, for example, the calculations of the capital adequacy or the premium requirement are influenced by the respective regulatory provisions.

What risks can a captive insure?

The good news is that, in principle, any risk can be insured via a captive. The only problem is the underwriting of the Directors & Officers insurance. If shareholders make a claim for damages, this would otherwise have to be paid in part by the group itself. However, captives can also underwrite risks that are either not available at all on the insurance market or can only be placed on very poor terms.

In any case, careful calculation of all key contractual parameters and risk management are of decisive importance.

Key question: What are the costs of a reinsurance captive?

The annual costs depend on one hand on the size of the group and on the other hand on the selected captive domicile, i.e. the country in which the captive is established. In general, the annual costs are between 75,000 and EUR 150,000 EUR.

There are more than 7,000 captives worldwide, around 50 % of which have a premium volume of less than 5 million EUR. In 25 % of them, the premium volume is between 5 and 20 million EUR. The remaining 25 % insure risks with a premium volume of more than 20 million EUR.

Conclusion: With a long-term commitment to ownership and mature risk management, captives are definitely interesting as alternative risk financing also for large Austrian companies.

Advantages of a captive at a glance

  • Formation of reserves for future losses = balance sheet smoothing
  • Basically, it is important to see a captive as a long-term form of risk financing, as the positive effects are often only visible after a few years.
  • Reduction of price fluctuations = better planning ability
  • Premium increases due to market hardening can be cushioned to a certain extent.
  • Insurance of “non-insurable risks”
  • Brings a balance sheet smoothing effect in this area as well, independent of the risk appetite of the insurance market.
  • Cost reduction
  • Provided that an optimally functioning risk management system is in place.
  • High transparency and a better basis for decision-making…
  • …about the insurance solution, costs, deductibles, claims, etc. Here, however, the embedding of the captive in the group is of decisive importance.
  • Insurance capacities
  • Bottlenecks can be partially compensated.

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Thomas Mayer

Financial Institutions

T+43 5 01 00 78013

The New Timber Construction Era

Why risk managers are taking up the cudgels for sustainable timber construction, and how the insurance market can be brought on board.

Although wood has been used as a building material for a very long time, the great construction success has only occurred internationally in recent decades. This has also put the insurance market on the map. But insurers have been slow to embrace the new developments.

In the absence of empirical values or broadly based studies, reservations were voiced at the beginning against the new timber construction era. On one hand, because of a supposedly increased fire risk or insufficient experience with the behavior of the building material in case of fire. On the other hand, because of the possibility of serial damage in the serial production of components, which could have massive consequences in the construction and assembly insurance, as well as in the liability insurance. Finally, design activity was also a concern for insurers.

In the meantime, empirical values are available. It has been shown that a differentiated approach to risk assessment is required in industrial timber construction. Glulam, for example, as used in the Milwaukee tower, achieves a fire resistance of 120 minutes and more. In addition, this wood has a higher stability in case of fire than steel. The outer layers do not burn but char, forming a protective layer so that the load-bearing wood core remains intact.

With regard to the residential tower in Milwaukee, specific tests were carried out by the U.S. Department of Agriculture’s Forest Products Laboratory. The results were positive, so that the authorities and public fire protection officers, who have the welfare and safety of the residents and fire departments in mind, also confirmed the feasibility.

Hard market for the construction industry

The occurrence of fire damage on construction sites is a significant risk. This damage is mainly caused by improper hot work but occurs to a much lesser extent during the construction of a wooden building. The construction industry is countering with appropriate processes to take precautions in organizational fire protection. Likewise, various interest groups have published guidelines that continue to sharpen conscious handling. In fact, there are no indications or statistics to prove that, despite the growing share of timber construction in the total insured construction risks, there has been a disproportionate increase in losses.

However, the construction industry is not spared from the hardening of the insurance market. The extent of the rising premium costs and the shortage of capacities sometimes lead to a massive impact on the profitability of individual project contracts or even entire companies. Even more so than for construction and erection insurance, this applies to the area of planning liability. Poor technical results of insurers, especially due to major claims, are negative for risk appetite. The consequences: a high need for information in the risk assessment phase, rising premium costs or deductibles, and coverage restrictions in insurance protection (for example, for fire damage in facade construction). A prominent example: the major fire at London’s Grenfell Tower in June 2017, where the facade construction, which, however, was built of conventional materials without wood, created a chimney effect and cost the lives of more than 70 people.

Magic word „risk transparency“

As the investigation results at the Ascent Tower project show, it is important to differentiate. Individual cases that are not related to wood as a building material must not lead to erroneous conclusions.

Also, in negotiations with the coverage market, it is essential to make the characteristics of the building materials transparent and to work out the sensitive points for the risk assessment. GrECo supports clients in placing corporate and project insurance policies on the national and international insurance market. A major focus is on the joint development of risk transparency; an aspect that is also served by the general education provided by organizations such as the “Structural Timber Association” or the “UK Timber Frame Association”. These educational activities are relevant for the London insurance hub and can positively influence risk appetite or lead to more open discussions with insurers.

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Richard Krammer

Group Practice Leader Construction & Real Estate

T +43 5 04 04 119

To lead the way in the hard market!

Rudolf Schiel, Competence Center Manager Property & Engineering at GrECo, spoke with Klaus Riechmann, Managing Director of the new Ecclesia Re, about the challenges of placing property insurance programmes and the role of the reinsurance market.

Schiel: Ecclesia Re is a young company. How did an own reinsurance broker come to be founded within the Ecclesia Group and what were the motivations behind this?

Riechmann: There were already noticeable capacity bottlenecks in the primary insurance markets in the 2019/2020 renewal, which led to enormous problems in completing some programs. These bottlenecks were caused by local insurers. In order to be better positioned for the future the Ecclesia Group has now established direct access to the reinsurance market by Ecclesia Re which has already borne first fruits in the renewal rounds on October 1st, 2020 and January 1st, 2021. Ecclesia Re was able to find solutions in more than 10 business cases and limit the influence of uncompromising primary insurers.

Schiel: As a reinsurance broker, you procure additional insurance capacity for the primary insurer. Which markets do you usually target and what are the advantages for our clients?

Riechmann: Usually we use continental European capacities, led by the three major German-Swiss companies (Munich Re, Swiss Re, Hannover Rück), and followed by the second league, based in Germany, Switzerland (here especially Zurich), France and Spain. These reinsurers conduct independent underwriting that is not congruent with that of the local primary insurers, and thus represents a useful complement. This expands the range of products available to policyholders.

Schiel: How do you assess the situation in the reinsurance markets in Asia and the USA compared to Europe? To what extent are these markets useful for European policyholders?

Riechmann: Due to the strong regulation by European regulators, which makes capacity from overseas complicated and expensive, overseas markets that are interested in European business have traditionally established themselves in London. However, as a result of Brexit, there are also an increasing number of companies in Zurich under European law. This largely eliminates the need to go overseas.

Schiel: In the industrial property insurance a further hardening of the market is clearly noticeable. Apart from the pandemic, what has led to this change in the market and how do you assess further developments in the next one to two years?

Riechmann: Even without the pandemic, market hardening was in full progress. The pandemic has only reinforced this development. The trend will continue for the time being. This means that alternatives in the reinsurance market remain extremely helpful. What is surprising, however, is that renewal of the treaty reinsurance per the January 1st, 2021 has seen only moderate price adjustments in Europe. Consequently, in contrast to previous market phases, this time the pressure is coming from the primary insurers and not, as in previous market phases, from the reinsurers.

Schiel: Which industries from your point of view will continue to be affected by these developments in the future?

Riechmann: Essentially all types of operations, only the extent of hardening will vary. The known problem industries such as recycling, wood processing, and coal will be hard up against uninsurability. In the D&O as well as in the cyber industries, the massive shortage of capacity will continue. In order to meet the needs of customers here, other concepts will have to be considered ─ also with the help of the reinsurance market.

Schiel: The reinsurers have also recently demanded clarifications or exclusions in the property insurance contracts, such as for “communicable diseases” and cyber risk. Do we have to be prepared for further requirements and coverage restrictions here?

Riechmann: Once again, it is surprising that the reinsurers must demand these clarifications. Surely the primary insurers themselves should have an interest in clarifying things. Now we have the situation that there are many different clauses on the issues. For the broker this means reaching agreement on an appropriate clause before the placement begins and presenting it to the market. Usually, the market just wants to see that the issue is considered.

Schiel: Which strategy you would advise to our clients to adopt in order to be well equipped for future developments in the insurance market?

Riechmann: Basically, I always advise the same strategy: get out of the claims frequency and introduce appropriate deductibles. Check whether deductible models and captive solutions make sense. And finally, pay close attention to your own convincing risk management concept.

Thank you for the interview!

Klaus Riechmann
Managing Director Ecclesia Re
phone: +49 2234 9955 220
klaus.riechmann@ecclesia-re.de

After 10 years in the industrial business of Allianz Klaus Riedmann joined the reinsurance broker Jauch und Hübener Rück in 1986. In 1993 he joined Marsh Group reinsurance broker Guy Carpenter as Managing Director of the Munich-based GmbH. In 2005, he took over as managing director of the German branch of the Benfield Group. Following Benfield’s takeover by the AON Group, he moved to König & Reeker, a Cologne-based reinsurance broker, again as Managing Director in 2009. Effective January 1st, 2020 he started to build up the reinsurance broker of the Ecclesia Group.

Ecclesia Reinsurance-Broker GmbH
Ecclesia Reinsurance-Broker GmbH, in short Ecclesia Re, is a new company in the Ecclesia Group and was founded in March 2020 with it headquarter in Cologne. Increasing customer value for (primary) policyholders and strengthening the competitiveness of the Ecclesia Group is the mission of Ecclesia Reinsurance-Broker GmbH. It acts group wide as a know-how unit for all questions concerning reinsurance. The Ecclesia Group has been a cooperation partner and strategic shareholder of GrECo International Holding AG since 2005.

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Practice Leader Property & Engineering

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“The interest rate environment remains the big challenge for insurers”

Stephan Korinek from the Financial Market Authority talks to Oliver Jug, Strategic Sales Manager, about the situation of the Austrian insurance industry: from the pandemic to digitalization and cyber security to climate change.

Jug: When you assess the situation of Austrian insurance companies as a whole, what is your summary and what developments do you expect in the coming years?

Korinek: The low and negative interest rate environment remains a major challenge for insurance companies. In addition, there is the climate change and the digitalization. The Austrian insurers have a relatively high capitalization compared to other European countries, but there are also compensating effects due to long-term guarantee and transition measures. And not to be forgotten: the uncertainty caused by the Covid-19-consequences. The insurers must also prepare themselves for the risks that will hit them when the government aid programmes expire. In this challenging situation, maintaining capital resources is essential.

Jug: You made a recommendation to restrict dividend payments, how was this dealt with?

Korinek: It is true that the European Insurance Supervisory Authority EIOPA and the FMA, have recommended refraining from dividend payments for 2019 and 2020, in view of the economic crisis in order to strengthen resources. The listed companies complied to varying degrees. Basically, they maintained the dividend ranges they communicated to the capital market.

Jug: In part, we observe premium increases with a reduction in the insurance capacities offered. Do insurance companies have to build up more reserves because of the changed circumstances?

Korinek: Basically, we have been observing increased pressure on commercial and industrial insurers for several years, which is reflected in premium increases and risk exclusions. On one hand, this is due to higher volatility in areas such as transport, fire and business interruption. On the other hand, efforts are being made to increase profitability in non-life. However, there is some expectation of price increases in the reinsurance market. All these developments are likely to be further exacerbated by the Corona crisis.

Jug: Another question about Covid-19: A direct consequence are business interruptions, where the cover was rejected by many insurance companies. How much do you estimate the insurers will have to pay?

Korinek: As of the cut-off date of 31 August 2020, insurers have estimated the benefits from Covid-19-related business interruptions at EUR 117 million. The exact estimates depend on the further development of the pandemic and the outcome of pending legal proceedings.

Jug: Keyword climate change. Where do you see the greatest risks for the insurers here?

Korinek: On one hand, climatic changes cause catastrophe losses to increase and are thus an actuarial challenge; on the other hand, transition risks can affect the investments of insurance companies. The FMA is therefore continuing its portfolio screenings in 2021 and is collaborating on a stress test regarding climate risks.

Jug: According to a study by the FMA, individual insurers have invested up to 50% of their assets in “climate-relevant” sectors. What do you understand by this?

Korinek: This asset screening was not based on a differentiation between “climate-friendly” and “climate-damaging” sectors. Rather, it identifies those assets that are invested in the fossil fuel, energy-intensive real estate, utilities or transport sectors. The sum of these assets is called “climate-relevant”. For about 20% of them, the performance towards a more CO2-neutral economy is exposed to a transition risk.

Jug: Keyword cyber resilience. What measures has the Austrian insurance sector taken for cyber security compared to other financial service providers?

Korinek: It is important that the security measures of the insurance companies take enough account of the sector-specific characteristics. For example, the protection of data confidentiality is particularly important for insurance companies, as they have a large pool of sensitive data and these represent an attractive target for cyber criminals. Data integrity is the basis or prerequisite for ensuring data confidentiality.

In order to be able to make a sound assessment of cyber security, the FMA developed its own “Cyber Maturity Level Assessment Tool” in 2019. This showed that the insurers have taken significant measures for cyber security. However, the large discrepancy between the technical and organizational maturity level was striking: In some cases, security measures have already been taken in practice that have not yet been fully considered in the control, documentation and processes. Our digitalization study showed that about one third of the insurance companies, banks and asset management companies insure themselves against the costs of cyber-attacks. We will update the study this year.

Jug: Do you see any other risks in digitalization?

Korinek: Besides the much-discussed cyber risks, we increasingly see outsourcing and concentration risks. For example, central aspects of IT systems such as infrastructure maintenance, further development and updating of applications or securing the company network against hacker attacks are often taken over by external IT service providers. While outsourcing can improve security and performance, it can also be associated with dependencies and concentration risks.

Jug: What trends do you expect in the coming years?

Korinek: We expect a greater weighting of non-life and health business at the expense of life business. In addition, we expect digitization and standardization to have a greater impact on both products and the entire value chain of insurance companies. We expect to see greater integration of insurance customers (self-service) and other partners (point of sale insurance) both in sales and in overall processing. We also expect a trend toward greater consolidation in back-office processes.

Jug: What do customers complain about most? And are there any changes to be observed here?

Korinek: The number of complaints has remained relatively constant over the past years. Most recently, the industry had to deal with a good 10,000 complaints, of which about 25 % each concerned motor vehicle insurance and household insurance and 13 % each life insurance and health insurance. The most frequent reasons for complaints came from the area of “cancellation/contract amendments and extensions” with a share of 25 %, followed by “advertising/consulting/application acceptance” and “claims processing/delays” with about 20 % each. An increase in complaints was also observed for the right of withdrawal in life insurance. In property-casualty insurance for industrial companies, significant capacity reductions and massive premium increases were observed in some cases.

Jug: How do you see the insurability of Austrian industry in the coming years?

Korinek: In their product policy, insurance companies must constantly take macroeconomic, technological, demographic, regulatory and climate-related developments into account and evaluate the changed parameters as well as the new risks. For the supervisory authority, the focus here is particularly on the issues of pricing, risk measurement and transparency. In view of the still very low level of information, adequate pricing of risks in cyber, digitalization, data protection and climate change is particularly challenging.

Thank you for the interview!

Mag. Dr. Stephan Korinek
Head of Department
T +43 1 249 59 2200
stephan.korinek@fma.gv.at

Korinek started his professional career as a university assistant with Professor Fenyves and then he joined CMS Strommer Reich-Rohrwig Karasek Hainz as an articled clerk before moving to the legal department of E-Control GmbH in 2001. Since 2002 he has been head of the department “Regulatory Supervision of Insurance Companies and Pension Funds” and deputy head of the Insurance Supervision and Pension Fund Supervision Division at the Financial Market Authority. Korinek is a lecturer at various universities. In 2016, he was appointed as a member of the Regulatory Commission of E-Control.

Financial market supervision in Austria
As an integrated supervisor, the FMA, founded in 2002, combines the supervision of all major providers and functions under one roof. On one hand, the FMA supervises banks, insurers, pension funds, occupational pension funds, securities firms and securities services companies, investment funds, financial conglomerates and stock exchange companies. On the other hand, it supervises that legal requirements, fairness and transparency are observed in the trading of listed securities; that comprehensive prospectuses adequately present the opportunities and risks of the investment to the public when securities are offered to the public; that the principles of good corporate governance and proper advice are observed; that unauthorized offering and provision of financial services is prevented and punished; and that all financial institutions have appropriate facilities that act preventively against money laundering and terrorist financing.

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Oliver Jug

Strategic Sales Manager GrECo International AG

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