Industrializing Corporate and SMB Cyber Insurance
I met Thomas in late 2006 when I was making my first steps in insurance. At that time, Thomas was already a partner at McKinsey and an insurance veteran with a deep understanding and experience in both the statistics/actuarial and business sides of the industry. Since then, Thomas has continued to enhance his expertise and provide value to the insurance industry in senior executive positions at Zurich and now Allianz – across functions and lines of business including underwriting, strategy, and claims. It was an honor to reconnect with Thomas and hear his thoughts on some of the latest challenges and opportunities in commercial insurance.
David Schapiro (DS): Could you please tell us about yourself and your key points of interest?
Thomas Sepp (TS): I am currently working as the chief claims officer in the board of management of Allianz Global Corporate and Specialty, which is the corporate and specialty insurance division of the Allianz Group.
With more than 20 years in insurance, I have to say it is an industry that still fascinates me in several dimensions. Firstly, I’m fascinated by everything that falls under technical excellence, meaning risk selection and underwriting, pricing, claims, as well as risk mitigation and transfer. I find the combination of model/data-driven decision making and leveraging expertise and experience a very interesting challenge. Secondly, the other topic that always intrigued me was the challenge of working in large international organizations and across different cultures. And thirdly, I believe insurance is a very valuable tool to make individuals, companies, and societies more resilient to adverse events. We often do not promote this enough, but it makes a big difference.
DS: How did you get into the insurance industry, was it a proactive decision or an opportunity?
TS: In hindsight, it was an unplanned turn early in my consulting carrier, but one that I was quite happy with. Here is a bit more of the story: After completing my PhD in hospital management, I started to work as part of the healthcare practice of McKinsey and worked in health insurance. After that experience, I wanted to do one or two projects in the “real insurance space” to gain some experience. This ended up being a 20-year journey.
My first P&C insurance project was about fine art insurance and really got me into it. Progressing over time, I also realized that a lot of the quantitative courses I did in my university education were very helpful and enabled me to have discussions on the hard stuff, e.g., risk models, risk assessments, and so on. And finally, I worked with many multinational or even global insurers, enabling a broad and diverse experience with people, cultures, and working environments.
DS: With such a diverse career in insurance, could you please elaborate a bit about your time at McKinsey, Zurich, and now Allianz?
TS: Coming straight from university, McKinsey was absolutely my training and business education ground in terms of culture and leadership. My early commitment to insurance provided great learning opportunities and a broad experience in many aspects of insurance. Not to mention, the many impressive individuals who I have met over the years on the client side, in the market, and within McKinsey. The years I spent in Cologne and in London resulted in working with 10+ different insurance companies and more than 50 projects. Those were ranging from general insurance to life, from large corporate to retail motor books, and from agent distribution to bancassurance in the commercial space.
Zurich was a great experience as well, and I found my way into a senior leadership role in the business. Many of the skills I learned in consulting remained helpful, but I had the opportunity to add other skills. Most notably, I learned how important consistency and persistence are to move an organization forward, while not forgetting your entrepreneurial traits, which I found essential to overcome blockages or the often low momentum in large organizations.
The job I had for the longest amount of time in Zurich was as chief claims officer, and I loved the learning experience, the global dimension, and the leadership challenge of it. Also, claims is often seen as the ugly cousin of underwriting. For me, it was important in that role to elevate the importance and contributions of claims, and I hope I succeeded in that space.
After having worked for almost a decade for Zurich, joining Allianz offered new opportunities. On the content side, it was a good way to move back into the underwriting and “technical excellence” space. Specifically, I developed and set the Property & Casualty technical excellence strategy for Allianz, built up a stronger focus on commercial business via Allianz Re, and most recently, I’ve been working hard with many colleagues on the turnaround of Allianz Global Corporate & Specialty, first as chief underwriting officer and since a few months as chief claims officer. It’s been a very competitive business in the long soft market decade but given market developments over the last 12–18 months, it is the place to be!
DS: What are the primary challenges and opportunities that you see in industrializing large corporate insurance?
TS: Over the last decade, the main challenge for large corporate insurers has been to earn their cost of capital given a combination of deficient pricing and adverse claims trends. With the significant market hardening that we have seen over the last 18 months, the situation is improving, but it is still a mixed picture in some segments. It will take some more time to restore an appropriate risk-reward balance in corporate & specialty insurance.
However, my thoughts are going more in the direction of how we must fundamentally move the large corporate insurance industry from a mostly bespoke production model to something that is an industrial production model, supporting reasonable and meaningful tailoring for clients. Insurance offerings for large international companies (say, the top 5,000 companies globally) require several capabilities. Among others, those are risk assessment, claims handling, deployment of own capacity, use of reinsurance capacity, a global network for policy issuances and claims handling, and a global financial transaction capability. The insurance contracts in these situations cover many aspects of risk transfer (a policy document with 100+ pages is not unusual), and many of them have
client-specific components. International insurance programs (IIPs) add further operational challenges.
All of this comes with a few consequences. Manufacturing a setup like that is expensive and often still done manually, partially due to outdated IT systems with all sorts of legacy issues. Also, the manual work makes the whole system prone to errors, which results in additional expensive non-value-adding re-work and error correction.
Combine this with the fact that expenses in the past have often been calculated as a simple percentage share of the premium. This has ramifications. In the soft market that we have seen over the last decade, the money available to do all the complex servicing has been squeezed with every price reduction. This means that the industry would be well advised to separate price into a cost of servicing and a cost for risk transfer.
But back to industrialization. What we need going forward is an operating model that is properly engineered and plays at a completely different level. We need engineered yet generic product models that are configured for clients and have a clear link to the wording that we give to clients. Such product models will also cater to the needs of an IIP, including own policies, assumed policies, and reinsurance cessions.
On the claims side, payments can then be more accurately assigned to specific coverage elements and ultimately support improved pricing and risk selection. Also, finance support with premium bookings and risk-attaching reinsurance will become more efficient. In addition, such an industrialized model will create stable and repeatable processes with no errors and no waste enabled by a fit-for-purpose IT system.
DS: How do you see the need for cyber insurance, particularly for mid-sized and large companies?
TS: What we can see in the market is a twofold story: one for large corporate customers and one for mid-sized companies.
For the large corporations, we have seen a relative increase in cyber incidents in 2020, particularly around ransomware attacks. Obviously, frequency is up. But also, severity is going up – higher business interruption costs, higher regulatory fines, higher ransom demands. This dynamic is impacting profitability and available capacity. Independently of the availability of insurance, large corps need to step up their protection game. On the insurance side, we have more data to lean on and more tools to quickly assess the constantly evolving cyber risk landscape so we are becoming more educated and mindful of the operating environment and making portfolio decisions with sustainability in mind.
For a mid-sized company with a turnover of say EUR 150–500 million, I see a very different story. Many of them underestimate the threat they are exposed to from cyber-attacks. Also, given their size, it will be very difficult for those companies to establish top-notch monitoring and defense capabilities as well as timely patching of vulnerabilities.
In this segment, it may need collaboration of industry partners resulting in comprehensive solutions that combine insurance coverage with operational cyber security services such as regular vulnerability scans, endpoint detection, and response capabilities. I am concerned that without such better security services in place, such customers might become non-insurable from a risk perspective.In a way, you can compare it to fire insurance, where you are expected to have sprinklers and other mitigation measures in place and maintain them accordingly. Cyber is a bit more complex and dynamic, though.
DS: Are there any final thoughts that you would like to share with other insurance executives in these interesting times?
TS: Well, we cannot let COVID-19 go unmentioned. From a professional experience, who would have thought that we could run insurance companies from home offices, kitchen tables, gardens, small flats, country houses, and many other places? It will be very interesting to see how we can further use that heavy push in going digital to make transactional interactions efficient. On the other side, I am truly looking forward to meeting people in person again. I miss those great moments where out of a nice conversation, you have some great takeaways and insights.
Dr. Thomas Sepp – Bio
Thomas studied industrial and business engineering at Karlsruhe Institute of Technology, Germany, majoring in statistics and operations research. He then went on to attain a PhD in public administration (hospital management) at the Vienna School of Business.
1996 – 2009 McKinsey & Company – Starting his career as a consultant in the insurance practice, Thomas later led both the German Insurance Practice and the European P&C Pricing Service Line, and was part of the European Insurance Practice Leadership Team. In London, he led the UK Insurance Group. He also served several insurance companies in Europe and the US, as well as broker and bancassurance clients.
2009 – 2014 Zurich Insurance Group – Served in several senior group roles, first as Chief Operating Officer & Head of Strategy, European General Insurance and later as Global Chief Claims Officer, General Insurance. He was also the director of entities including Zurich Insurance Plc, the company’s pan-European risk carrier.
2014 – 2017 Allianz SE – As Deputy Head Global P&C, he led Global P&C’s underwriting and performance management staff across retail and commercial lines. During this time, he also developed and implemented the technical excellence P&C strategy, a pillar of Allianz’s renewal agenda; launched the group’s technical price certification program; and established a strategic focus on mid-corp business.
2018 – 2019 Allianz Re – As Head of MidCorp Business, he oversaw the introduction of a new, digitalized business model that allows national Allianz entities to systematically upgrade local capabilities and drive profitable growth.
2019 – 2020 Allianz Global Corporate & Specialty SE – As Chief Underwriting Officer Corporate and member of the Board of Management, he was responsible for alternative risk transfer, energy and construction, financial lines, liability and property underwriting portfolios, and Allianz’s risk consulting and global portfolio management.
since 2020 – Appointed Chief Claims Officer in July 2020, a re-established role on the Allianz Global Corporate & Specialty SE Board of Management. Thomas leads AGCS´s claims function, overseeing all aspects of claims within the business, including technical excellence, customer experience, and claims analytics.