FINANCIAL SERVICES CONFERENCE 2016 - Health | Aon · Risk Rinsun un Rsous Aon Risk Solutions...
Transcript of FINANCIAL SERVICES CONFERENCE 2016 - Health | Aon · Risk Rinsun un Rsous Aon Risk Solutions...
Risk. Reinsurance. Human Resources.
Aon Risk Solutions
FINANCIAL SERVICES CONFERENCE 2016Speakers and presentation review
Your reputation precedes you… . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Dominic Christian, CEO of Aon UK Ltd and Executive Chairman of Aon Benfield International . . . . . . . . . . . . . . . 1
Insurance companies – hot topics . . . . . . . . . . . . . . . . . . . . . . . . .2
The satellite view . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Rob Kenyon – breakout Chair and Head of Private Equity Practice & Global Relationship Leader, Zurich . . . . . . . . . . 2
The 2015 insurance mergers and acquisitions boom . . . . . . . . . .2
Nick Triggs, Head of International Corporate Finance, Aon Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The rise of the Asian buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The numbers… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The verdict… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Will the UK become a hub for insurance linked securities? . . . . .4
Steven McEwan, Partner, Hogan Lovells LLP . . . . . . . . . . . . . . . . . . . . . . . 4
How do they work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
New opportunities in the UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
An attractive investment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Likelihood of success? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial services advisory panel . . . . . . . . . . . . . . . . . . . . . . . . . .6
Megatrends across the financial services sector . . . . . . . . . . . . . . . . . . . . . 6
Mergers and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Crime and punishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Politics and the free market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Talent to support corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distribution – doing right by the customer . . . . . . . . . . . . . . . . . . . . . . . . 7
Table of Contents
Aon Risk Solutions 1
Your reputation precedes you…
Dominic Christian, CEO of Aon UK Ltd and Executive Chairman of Aon Benfield International
On 25 May 2016, clients and colleagues
from the financial services industry joined
Aon and our co-sponsors Zurich for our first
cross-sector conference . The event brought
together experts from across the worlds of
insurance, banking, wealth management and
alternative finance to discuss the risks, threats
and opportunities facing these sectors today .
The following articles provide a taste of the
topics on display for delegates and reveal for
example in our panel discussion that whichever
risk factor the financial industry is currently
discussing; there is an inexorable pull towards
the impact it could have on our reputations .
The past several years have clearly been challenging
for businesses across the financial services sector .
Regulation, compliance and enforcement have
become a growing part of our daily lives and while
many delegates applaud sensible steps to drive
risk out of the system and protect customers,
our industries remain firmly under the spotlight
and cannot safely assume that reputations have
been repaired in the court of public opinion .
Nevertheless, we were all delighted to hear so
many stories of how the sector is deploying its
intellectual capital to provide new solutions that
will help drive forward economic growth .
In the world of capital markets, we discovered
from Hogan Lovells’ partner Steven McEwan
why the potential offered by insurance linked
securities could mean so much both to the London
insurance market and the FS sector as a whole .
Meanwhile, my Aon Benfield colleague Nick Triggs
guided delegates through the latest mergers and
acquisitions boom which last year saw $162bn
of deals take place across the global life and
non-life insurance markets, driven by a need for
consolidation and a healthy pool of buyers in Asia .
Our closing panel debate pitted six of the
industry’s best known advisors to the FS sector
to answer questions as to which megatrends
are currently vexing the industry most . As
alluded to in the opening remarks, concern
over reputation is a dominant theme and it is
clear that every step we take as an industry is
now being scrutinised like never before . There
is surely now a sensible case for FS assuming the
mantra of Caveat venditor “let the seller beware”.
We hope you find this review useful and warmly
welcome any feedback you may wish to make .
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Insurance companies – hot topics
The satellite view
Rob Kenyon – breakout Chair and Head of Private Equity Practice & Global Relationship Leader, Zurich
The global insurance industry is in a period of
transition where competition and the movement
of capital are exerting an increasingly powerful
influence . Traditional power bases remain
strong, with North American and European
markets resilient despite continuing pressure
on prices in non-life insurance and challenging
conditions for some life and pensions providers
looking for profitable growth . However, the
rise of Asia is an undeniable factor and the
changing face of the market from a capital and
operational perspective will be fascinating
to observe during the coming years .
As a key player on this industry stage, we
were delighted to join forces with Aon
to deliver a conference that would pick
out some of the key elements which are
impacting us at an immediate level .
Like a sudden uptick in share prices, M&A
activity shines a light on the sector like no
other and Nick Trigg’s analysis provides a
clear indication of the driving forces behind
last year’s unprecedented buy out boom .
Meanwhile, the search for profitable uses of capital
where investments can find uncorrelated assets
has led many to the doors of the (re)insurers
developing insurance linked securities . Hogan
Lovells partner Steven McEwen is an undoubted
expert in this field and his suggestion that the UK
could become a global hub for ILS development
sounded an optimistic bell for many in the room .
On behalf of Zurich, I would like to thank all
of our clients and colleagues for joining us
at this excellent event and I look forward to
hearing your feedback in due course .
The 2015 insurance mergers and acquisitions boom
Nick Triggs, Head of International Corporate Finance, Aon Securities
As head of international corporate finance at
Aon Securities, Nick Triggs is uniquely placed
to observe the latest trends on insurance
M&A . A niche investment bank or ‘broker
dealer’, Aon Securities provides third party
M&A advice to help buy and sell companies
and raises equity on the private markets,
specialising in all areas of the insurance
industry; property and casualty, life, non-life
and increasingly insurance-linked securities .
With an opening defence of M&A itself, Nick
reminded the audience how it is the “biggest
single risk factor a company can ever take .
“However much due diligence you carry out,
it’s still a leap of faith . Historically, a lot of
commentators labelled most M&A as failing to
generate promised returns . It’s difficult to argue
with this, but increasingly the quality of execution
that goes into M&A is improving and we can
be more confident about it in the future .”
Anyone observing the insurance sector in the
last twelve months will have noticed a huge
uptick in transactions . Pointing to “the return of
the big deal in North America”, Nick explained
how 2015’s combined total of $162bn deal value
in the insurance sector was, like other big years
Aon Risk Solutions 3
of the past, driven by major M&A in the US . “If
you look at the deals above $10bn by sector,
it’s really driven by healthcare mergers in the
US and one big P&C deal when Ace and Chubb
combined . Although 2016 has been largely quiet,
there is probably more of the same to come .”
The rise of the Asian buyer
So why is there such confidence for insurance M&A?
Nick explained that while mega-deals dominated
between US firms to push up the 2015 figure, a
significant part of the remainder was made up of
cross border transactions . “This illustrates the rise of
the Chinese and Japanese buyer,” he said . “In Japan
this is driven by an economy with even less growth
than Europe and the US; sovereign rating is under
pressure and they are taking an opportunity to buy
earnings abroad . Most cross border transactions are
highly accretive for Japanese buyers because their
domestic returns and borrowing costs are so low .”
Meanwhile, the target companies such as those in
Europe and the US are experiencing low organic
growth, very low interest rates and the need
for efficiency and cost reduction . “A soft rating
environment in the big ticket market is feeding
through to other ends of the industry and is putting
pressure on earnings,” added Nick . “In the P&C
market, the final piece of the jigsaw is low claims
inflation and a relatively benign catastrophe
environment . Having squeezed out efficiencies
many companies are realising it’s quite hard to
satisfy shareholders’ return expectations . This leads
to growth-seeking consolidation in the market .”
The Chinese story is a little different, with
conglomerate firms seeking diversification
and services to support their country’s broad
economic strategy . “Over the last two to three
years, it has become ‘policy’ in China to support
local companies in this regard and for a variety of
reasons, insurance is seen as attractive,” said Nick .
“Some conglomerates have little or no experience
of insurance which may seem unusual for western
eyes, given that our industry is heavily regulated
and capital intensive . However, as China moves from
an investment-led economy to a consumption led
economy, insurance is increasingly important . By
and large they don’t have this expertise in specialist
insurance and they want to bring it back home .”
Nick added there are probably “20 or so” companies
in China looking to buy insurance assets in the UK
and the US . “Aon securities launched a business in
Hong Kong to help follow the Chinese investment
out and into those markets where it is targeting
insurance acquisitions . They’ve been marginal
buyers so far who are price disciplined; they are not
going after the largest, most expensive properties .”
M&A is certainly not isolated to non-life targets . On
the life and pensions side, regulatory pressure in the
form of capital requirements under Solvency II has
forced many insurers to reassess their position . “This
has created more discipline and quite frankly a lot of
companies reviewed their position and realised they
cannot draw sufficient return from the asset and
are looking for an exit,” said Nick . “The buyers in
many cases are run-off specialists looking to create a
matched liability asset book . A lot of the buyers are
funded by pension funds or hedge funds and we’ll
see many of the larger legacy providers seek them
out for what is quite a complicated transaction .”
The numbers…
A final trend informing the current M&A activity in
insurance markets has been the sector’s declining
projected earnings per share growth and average
return on equity . While he admitted the insurance
industry has been “remarkably resilient” and has
maintained its $4 .1trn capital base, Nick said the
pressures mentioned before are making higher
EPS and ROE valuations increasingly difficult to
maintain . “Valuations, by and large are pretty fair
and this is why the sector has become so attractive
to alternative capital which attaches itself directly
to risk historically placed by insurance companies .”
The verdict…
In view of these compelling macro-economic
trends, Nick summed up his presentation quite
simply . “Transactions were on hold in advance
of the referendum in the UK, but in lieu of this
single concern we think there will be a continuing
trend towards M&A in the insurance market .”
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Will the UK become a hub for insurance linked securities?
Steven McEwan, Partner, Hogan Lovells International LLP
Hogan Lovells insurance partner Steven
McEwan presented delegates at the conference
with a question . With the right support
from Parliament, can the UK catch up with
established markets like Bermuda and become
a global hub for insurance linked securities?
These innovative financial instruments have
(no pun intended) taken the (re)insurance
market by storm, providing a means for
buyers to lay off risk against perils such as
hurricanes and floods, without necessarily
accessing the traditional reinsurance market .
“This offers opportunities to insurers and
other corporates with an insurance company
in their group looking to layoff risk, and for
investors looking for an asset uncorrelated
to their existing portfolio,” he explained .
Admittedly, ILS is not a new concept and
Steven provided a helpful potted history of
the instruments more commonly known as
‘catastrophe bonds’, when developed in the
1990s after Hurricane Andrew . “These structures
are designed to allow the capital markets to
invest in a way so that they assume the risk of
events like hurricanes, earthquakes or terrorist
events occurring, rather than leaving the
risk purely with traditional reinsurance .”
Despite its history and connections with property
catastrophe, Steven suggests this association is
not fixed . “If you can think of any serious event
that is difficult to get reinsurance cover for, then
these structures are a potential alternative . There
may be someone in the capital markets willing to
take that risk . This is why they are considered only
a type of investment for qualified investors .”
How do they work?
For those looking for a simple ‘how to’; An ILS/Cat
Bond works by way of investors putting in the full
amount of cover required as collateral into a special
purpose vehicle which is created specifically to
reinsure a single defined event . “The important
thing about an ILS is that it is fully funded,” said
Steven . “Let’s say, two investors put into the SPV
£100 each; the insurer or ‘cedant’ pays in £50 as a
premium to purchase the cover . The protection will
last for a certain amount of time (est three years) and
the reinsurance agreement says ‘if a hurricane of a
specified strength occurs within that geographical
region, within the period of cover, then the SPV
will pay £250 to the insurance company . All of the
capital is used to pay the claim and the investors’
money is used up . However, if the event does not
occur, all of the money is returned to the investors .”
The key element to ILS creation is to define what
the event is, with two ‘triggers’ available; Index
and Indemnity . “There are two different ways to
define an event,” said Steven . “The above example
is an index trigger in which it pays the full amount
‘if the hurricane occurs’ . With an indemnity trigger,
the cedant is paid the lesser of £250 or the amount
of loss that you suffer as a result of the hurricane
occurring . If the insurer suffered only £200 of
loss, then £50 will be returned to the investors .”
New opportunities in the UK
As Steven indicated, ILS have been around for more
than two decades and now represent a $25bn
industry with $6bn in bonds issued during 2015
alone . Among various examples the ILS transaction
structure has been adapted to provide protection
against the River Thames flooding and to provide
protection against the cancellation of the 2006
World Cup in Germany . There would potentially
be a vast range of further applications - for
example, pension funds looking to lay off risks
such as a change in longevity . There could be
considerably more opportunity for financial
Aon Risk Solutions 5
institutions ahead . One of the key enablers could
be the aforementioned promotion of the UK as a
global ‘hub’ for ILS transactions . In March 2016,
the UK Government published a consultation
paper proposing to tap into local expertise, and
make use of specific legislation in Solvency II
which allows SPV reinsurers to be set up in a very
efficient way . “The key thing is capitalisation,”
said Steven . “Under Solvency II and this new
category of SPV reinsurer, you don’t have to hold
any capital to become authorised . The process is
much simpler and the UK government has spoken
to the Prudential Regulatory Authority and thinks
it will be possible to grant authorisation within
6-8 weeks . If you compare this to the minimum
six months it would take to get a traditional
reinsurer authorised, it looks very attractive .”
A further benefit of the proposals is the creation
of the protected cell structure . “This envisages
the setting up of one company (SPV insurer)
within which you have a number of cells,” Steven
explained . “Each cell is not a separate legal entity,
but it is recognised in law as being ring-fenced
from any other cell within the SPV . Each cell can
do its own transaction . In six to eight weeks, you
set up your SPV and do a transaction, then you
don’t have to set up another one, you just set up
another cell . The government proposals suggest
this will be a rubber stamping exercise which clearly
is a real advantage for transaction timetables .”
With such advantageous proposals, Steven added
that while the UK government has so far stipulated
how this PCC structure will be restricted to
ILS-only, there will be “considerable pressure”
from banks and other financial institutions
looking to use it for their own securitisations
and manage them much more efficiently .
An attractive investment?
As Steven mentioned, the proposals will limit
ILS and PCC transactions to qualified investors
only . “These are complicated investments, but
they will be attractive . If you are investing in a
bond whose performance is directly related to
whether a particular event happens, then you
are in something quite uncorrelated to the rest of
the market . Investors may see this as an attractive
way to diversify away from typical markets; a
fall in equities isn’t going to be correlated to
whether an earthquake occurs . One is market
forces, the other is a natural catastrophe .”
Likelihood of success?
The main challenges facing the UK’s potential
to become a hub for ILS appear to be its long
established competition in Bermuda and what
Steven described as ‘minor tax shortcomings’ .
In addition, the reinsurance market is at almost
historic lows as capacity outstrips demand . While
prices are soft, the incentive to look for alternative
risk transfer by cedants is diminished . There was
also an elephant in the room as Steven explained:
“The US has already sought to promote various
states as ILS hubs; they had cell structures created
in a number of places and this really hasn’t
taken off so the question is will we do better?
Hopefully we will . If there is a chance of this
happening, London is certainly the place to try .”
Recently, Hogan Lovells and two representatives
of the UK government presented a webinar
on the ILS market and the government’s
proposals . You can view the webinar here .
6 FINANCIAL SERVICES CONFERENCE 2016
Financial services advisory panel
Megatrends across the financial services sector
Chair: Dominic Christian
Panellists: Tom Wallace, Partner, K&L Gates LLP;
Nick Triggs, Head of International Corporate
Finance, Aon Benfield; Andrew Massey, Partner
K&L Gates LLP; Ed Smerdon, Partner, Sedgwick
LLP; Andrew Myhill, Manager UK Public Affairs,
Zurich Insurance; Alexander Verweij, Managing
Director, Head of UK & Europe, Talent,
Rewards and Performance, Aon Hewitt .
In 2015 Aon’s Global Risk Management Survey
consistently placed ‘damage to reputation or
brand’ as the number one risk facing corporates
worldwide so it’s probably no surprise this
panel was continually drawn toward issues of
perception . However, it was also suggested
that damage to brand may not be a risk in
itself but merely a consequence of poor risk
management . So what are the real and emerging
risks that FS companies are concerned about?
Mergers and acquisitions
With growing M&A activity across financial
services already identified in Nick Trigg’s earlier
presentation, he joined the panellists to discuss
how concerns about risks which can ‘derail’ a
deal have appeared with increasing frequency .
Chief amongst these hurdles were regulatory risks
and failures of compliance, which, if committed on
a sufficiently grand scale can become uninsurable .
The tax position of target companies both in relation
to M&A activity and on a more general basis is
also a key concern . At a time when increasingly
high profile raids by tax authorities against global
brands have made worldwide headlines, panellists
reminded the audience that what may have once
been a sensible approach to tax planning, is now just
as likely to result in a significant threat to business
reputation and brand equity if the story gets out .
Remuneration
Maintaining the reputational risk theme,
remuneration has been a sticking point in the
sector for many years . Panellists commented on
how clients across the industry are often stuck
between a rock and a hard place at the mercy of
regulators . This occurs where there is regulatory
uncertainty, and also where regulators take
conflicting positions . The latter problem has seen
the European Security and Markets Authority and
the European Banking Authority take different
views on the interpretation of ‘proportionality’, in
the context of different European directives, which
ultimately affects what remuneration structures
are permitted in the UK and throughout Europe .
Supply chain
Almost every industry worldwide has been forced
to face up to supply chain risk and the challenge
of maintaining business continuity when a link
failure occurs . Panellists agreed that the financial
services sector is no different, particularly as
outsourcing has become more prevalent . The
adequacy of contingency plans in the event of
service provider insolvency or other failure has
been a key focus for businesses and regulators .
However, panellists observed an increased focus
on risks affecting service providers, particularly
risks that may affect multiple service providers
where the market is highly concentrated .
Crime and punishment
There are myriad ways to commit crime against financial
institutions . However the panel reminded the audience
that the industry is not only facing threats from outside
parties . They are now operating in an environment
where unprecedented levels of fraud have combined
with a global crackdown on corruption and bribery .
Aon Risk Solutions 7
The Bribery Act was described by panellists as
“just the beginning” . Regimes designed to fight
corruption and corporate crime worldwide
are being tightened up and large international
institutions are aware that they could be drawn into
scandals that negatively impact their reputation .
The advice was that if you want to be a global
business, you are going to have to build a robust
compliance programme which allows you to do
business in countries where views on acceptable
practice are not aligned with your own .
Politics and the free market
Fighting negative perceptions had now emerged
as the key theme of the day and on that basis, a
question was put to the group as to how financial
services will fare in the court of public opinion
when politics has become so polarised . Panellists
admitted that FS had suffered greatly since the
2007 crash and while there was a sense that the
industry had ‘come through the worst’ in terms
of its reputation being dragged through the mud
by lawmakers, the actuality was less optimistic .
The past few years has seen waves of anti-free
market, protectionist political parties stoke
anti-establishment feeling from the US and
across Europe . Panellists suggested this may
serve to encourage centrist governments such
as those in the UK, Germany and France, to
side against industries like financial services in
order to shore up their own public support .
There were even hints that the insurance
industry ‘could be next’ given its relatively
intact reputation since the crash nine years ago .
The result of this geopolitical trend? Panellists
agreed there can only be one direction; an
increase in regulation, supervision and control .
Talent to support corporate governance
Every risk identified by the panel has a relationship
with the availability of talent and panellists
discussed the challenges in finding the right people
to deal with these risks . Within the discussion,
conduct risk emerged as a topic where businesses
are seeking to build a culture of ‘pride in doing
the right thing’, which many see as a potential
means of differentiation . However, it was also
recognised that responsibility for hiring the
right people has to rest with C-suite executives
for the sake of good corporate governance .
Details on how corporate governance could
influence human resource policy included simple
suggestions like cutting down reporting lines .
The audience was also shown case studies to
illustrate where things can go wrong and why
hiring the right people for each job can be so
important . Firstly, a number of US directors’ and
officers’ claims have emerged recently as a result
of class actions brought against directors who
allegedly failed in their duty to employ staff capable
of protecting a company against cyber-attack . The
second example concerned a well-known UK high
street bank which was fined an eight figure sum
by the Financial Conduct Authority for significant
IT failures . A key deficiency identified by the FCA
concerned the inadequacy of the oversight of IT risk
by senior personnel due to limited expertise and
involvement . Panellists observed that such examples
emphasise the need to employ the right staff as
a way to strengthening corporate governance .
Distribution – doing right by the customer
Skilfully avoiding talk of the most controversial
protection product in UK financial services history
which has so far cost banks upwards of £27bn,
the panellists did discuss regulatory risks around
product distribution and demonstrating compliance
with ‘appropriateness and suitability’ requirements .
There was a suggestion that regulators like the
FCA have further increased their focus on product
distribution, and are investigating beyond the
basic question as to whether the distribution is
a permitted financial promotion, and looking
at whether the product is actually meeting the
customer’s needs . Demonstrating compliance
will be a major challenge for those unable to
justify their actions and panellists all agreed that
enforcement actions will increase as a result .
Risk. Reinsurance. Human Resources.
About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com/
Copyright 2016 Aon Inc.
© Aon plc 2016 . All rights reserved .The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate profes-sional advice after a thorough examination of the particular situation.