MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | CHRIS GILES
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | CHRIS GILES
Striving for Growth
in a Challenging Environment PBEC 35th International General Meeting
Kuala Lumpur, Malaysia May 3-7, 2002 Chris Giles Thank you Mr. Chairman for your kind introduction and for inviting me to speak to you today about prospects for growth in Asia Pacific in these challenging times. We appreciate the opportunity to participate in this prestigious event and at such a fine venue. Before turning to the main thrust of my remarks today on enterprise risk management and the relationship between growth, investment and excellence in corporate governance, I would like to make some comments about the state of Insurance markets in Asia as this relates directly to the question posed by the organisers of the panel - "What can be done to improve access to capital and mobilise savings in the region ?" The truth is Asian insurance markets are in a state of real flux at the moment and not just as a result of September 11th. A number of factors have come to bear to create a situation which has been described by some commentators as the "Perfect Storm" for insurers. For years the game in Asia has been simple for many direct writers. Keep your net retentions low, buy extensive reinsurance protection and achieve profit through reinsurance commissions and investment income. The job of assessing risk was passed to reinsurers and the game was to generate as much gross premium as possible. This maximised cash flow, reinsurance commission and investment income. Underpinning the strategy was a ready supply of capital and capacity in the world reinsurance markets. Already before Sept 11th that supply of reinsurance was starting to dry up. Natural catastrophes around Asia Pacific as well as the rest of the world were hitting direct writers and reinsurers alike but the latter were bearing a greater proportion of the losses. September 11th was much more than a straw but it certainly broke the camel's back. It is no longer possible for many direct insurers to carry minimal net lines and pass the risk on. Reinsurance capacity is now expensive and requires the cedant to have much more skin in the game by taking higher nets. Investment returns have also been falling. In the Asian markets where Chubb operates fixed deposit rates have declined by, on average, 62% between December 1998 and April 2002 while Government bond returns have shrunk by, on average, 32%. The ability to offset underwriting losses with investment returns has virtually disappeared. Unless a carrier can make money on the underwriting argument the chances of achieving an overall profit are slim to non-existent. The third factor leading to the perfect storm has been customer demand for quality paper. Or to put it another way " a flight to quality". High profile collapses like Reliance National and HIH have lead customers to question the sense in ceding risk to weak Insurers who often possess a worse balance sheet than their own. The importance of strong financial ratings has never been greater. It adds real credence to a carrier's promise to pay when the claim occurs. In addition to having assets of just under us$30 billion and revenues of us$7.7 billion Chubb is intensely proud of having some of the highest financial ratings in the industry and for good reason. It is not just local Asian players who have been hurt by this "Perfect Storm". Many international insurers have had a very rough ride. Often focused on Natural Catastrophe exposures and heavy commercial risks, they have been badly hit by losses. With the ability to pass losses on to reinsurers falling away and the returns on investment dwindling, many have reassessed their commitment to Asian markets. The fact is that Insurance R.O.E.s over the past ten years have been in the neighbourhood of 11%, well below the hurdle rate of 13-15% more commonly seen in other financial sectors. Unless operations around the world start meeting these higher standards companies are now very prepared to exit markets. In fact failures of international insurers and withdrawals from Asian markets have out-stripped the numbers entering by more than 3 to 1. I am pleased to be able to confirm however that Chubb remains totally committed to Asia. We operate in 10 countries throughout the region including China and, along with our Joint Venture partner, have an application underway to open in India. We aim to achieve profit through positive underwriting results rather than investment income and by retaining significant portions of the risks we write. This reduces our reliance on reinsurance. Of course no one has been completely unaffected by the reductions in reinsurance capacities or interest rates but Chubb has been affected in Asia much less than many. In summary more than a few Asian insurance markets are reeling from a lack of capacity, a reduction in the choice of carriers and the availability of effective coverage. For example, in some market places insurance for Natural Catastrophe is just no longer available. Capacity is coming into the world insurance markets after Sept 11th but it is in Bermuda and the West rather than Asia. So what should be done to address this situation and get capital flowing back to and within Asia ? There are certainly many factors that insurers such as Chubb use to evaluate the relative risk of doing business in a local market. These include the regulatory environment of the country, market access, capital requirements, national treatment and form and rate freedom. But when considering companies or institutions to insure we look at how well the company is managed most of all. How well can we depend on the management to co-operate with us in helping to manage risk, not just transfer it, and to provide investors with accurate and timely information? This of course moves us to the topic of governance and transparency. We believe that what will continue to attract a flow of investment capital into Asia Pacific corporations from local, regional and international sources, including insurers, is excellence in the way companies conduct their corporate affairs. You may recall a 1998 McKinsey survey that showed that investors are willing to pay a premium for well-managed companies. The trend has held up in the years since 1998. In February this year, CLSA Emerging Markets demonstrated that the stock prices of corporations with high-and-improving corporate governance scores consistently outperform the main index for their countries. This was the case in nine Asia-Pacific countries. One can also reflect on the recent slide in share prices in the US. Part of that drop, I believe, has to do with investor concern over apparently dubious accounting and management practices. Clearly, corporate governance is becoming an investment criterion. Not just after Enron but in fact, since 9/11, smart companies and investors have been waking up to the fact that risk management is in the purview of CEOs and boards of directors. Understandably, most of the focus has been on such corporate governance issues as "disclosure and transparency," "protecting the rights of shareholders and stakeholders," and the "responsibility of the board of directors to ensure the strategic guidance of the company." While these are core corporate governance issues, as a leading global property and casualty insurer, we urge you to make risk management -- particularly enterprise-wide risk management -- a major part of your corporate governance. Companies need to consider putting in place processes to make themselves more aware of operational "red flags." We're not the only ones saying this. Dr. Carolyn Brancato, director of the Global Corporate Governance Research Centre for the Conference Board, made these points just two weeks ago before the U.S. Senate Committee on Finance. Fortunately, the smartest CEOs and boards are changing. They recognise that taking a much keener interest in risk management is a matter of good corporate governance. In these companies, security, disaster planning and the over-arching theme of risk management are becoming regular topics of boardroom deliberations. Corporate officers and directors are asking more and more questions:
Increasingly, they also are realising that their companies need to deploy an enterprise-wide, senior-management approach to managing risk. There is substantial overlap among many risks, yet often several different people in middle management roles are charged with managing risk purely within their respective areas. Often, someone in information technology is responsible for network and cyber controls. The Security department is responsible for protecting the physical premises and the people inside. Finance managers are responsible for the company's investment, credit, interest rate and exchange risks. One or more risks within or between these different areas could shut you down, damage your reputation or cause your stock price to go down perhaps as a result of a shareholder lawsuit. A holistic approach to corporate risk management is essential. Although it has not entirely played itself out yet, I recently heard that more than 100 companies that occupied space at the World Trade Centre have already gone out of business. Others continue to fight to stay alive. In many cases, companies had disaster recovery plans, but they were not adequate, or were stored on-site within the towers. Others had never been tested, and thus were unrealistic. For example, one firm's computer back up was stored off-premises, as it should have been - but within facilities a mere two blocks from Ground Zero, which could not be accessed. Many firms spent valuable time in the first weeks hunting for real estate in which to relocate their core teams and equipment; in the interim, they were barely in business. These were business management failures. Going forward, CEOs and boards of directors must make sure that their firms are protected from a substantial loss of - life, physical assets, revenues and reputation -- and even complete failure. A failure to act could render them personally responsible in the eyes of angry shareholders, customers and others should a disaster interrupt their firms' operations. Identifying and taking steps to eliminate, mitigate, and manage risks of all kinds must be a top corporate priority. Your CEO and board must get more involved in managing risk. Here are some of the things that our own CEO, Dean O'Hare, recently has recommended to them.
Let's face it. It's a riskier world today than ever before. Globalisation and the pace of technological change will continue to shape and alter the landscape in which we conduct business everywhere. Enron and its aftermath, much like the earlier Asian Financial Crisis, will have a profound effect on regulatory standards. A new standard for enterprise-wide risk management will be applied across industries and across borders. Investors increasingly will look beyond the balance sheet to see how effectively a company's CEO and board members manage risk. They will also look for evidence that risk has been mitigated by insurance coverage from a company known for its financial stability and superior record of claim payment. Thank you. Now, I'd be pleased to answer any questions you may have. |
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