Pro Global’s Niemczewski: Correlated to change

12 | Jan | 2017

Efficient and cost-effective premium collection, and optimising reinsurance and other recoveries, are critical to survival

Pro Global Insurance Solutions (Pro), which provides operational outsourcing and consulting services to global insurers and reinsurers, is a business that is very much in the right place at the right time.
The reason why Pro is so favourably positioned, according to the company's chief executive, Artur Niemczewski, is that unlike the vast majority of businesses in the London market - including a great many other insurance service providers - the company's prospects are not correlated to the state of the economy nor the vicissitudes of the re/insurance pricing cycle.

'Our business is correlated to the level of change in the market. The more change there is, the more insurers and reinsurers will require our help, and there has never been a time of greater change in the market as there is now,' he says.

'The soft market and the more demanding capital, compliance and regulatory environments are putting massive pressure on companies. Our business is based on helping our clients in situations like these.'

For Niemczewski, just how well Pro has positioned itself in the market over the past three years was most emphatically affirmed by the announcement just before Christmas that the firm will be acquired by private equity group Acuity Investment from its owner, Tawa Associates.

Acuity's investment activity is focused on the insurance and specialty lending sectors. The company, most notably, made a highly successful 10-year investment in Lloyd's insurer Canopius before it was acquired by Sompo Japan Nipponkoa Holdings in May 2014.

A big advantage for Pro in the present environment, Niemczewski says, is the company is set up to operate across the entire spectrum of insurers' and reinsurers' activities, ranging from market entry to exit and from live to legacy business. To support that range of activity, Pro operates through four service divisions: risk, audit and compliance; operational consulting; technical outsourcing; and run-off or legacy solutions.

Niemczewski describes Pro as a niche firm, which mainly supports reinsurers and London market specialty lines players. The top five global reinsurers in the world are all clients of Pro, he adds.

A significant development for Pro over the past year has been the imposition by Lloyd's of more rigorous rules and requirements around binding authority arrangements and the activities of coverholders. One of the consequences of the new framework has been the consolidation of the delegated authority service sector in the London market. There is now a much smaller number of players in the market. 'The management of these arrangements has to be more transparent and consistent; there are now a lot more checks and controls,' Niemczewski says.

'The lines of responsibility are also much clearer. In the event of a mistake or fraud, there is not only clear legal recourse for the client but the service provider must also demonstrate it is financially strong enough to redress the situation. Everything is now on a much more professional basis in that area.'

For Niemczewski, another reason why Pro is so favourably positioned to support insurers and reinsurers in the current market environment is that the company and its management gained significant insight into the challenges facing the insurance sector after Pro demerged from its parent, the legacy investment and insurance services group, Tawa Associates, in 2013, when the board decided to change the strategy of the business.

The subsequent experience of transforming the company from a loss-making business into a profitable independent entity with a service offering that was more relevant to the needs of the market provided a number of valuable lessons, Niemczewski says.

The Tawa board concluded running an insurance business, whether a live company or a company in run-off, and running an insurance services business, are two completely different activities.

Independence

The issue of neutrality is particularly important for Pro. In the past, Niemczewski says, there was always the potential that in negotiation over some legacy issue, Pro - as a subsidiary of Tawa - could find itself with a conflict of interest. 'But now we are an independent entity. We don't take principal positions. We don't buy and sell portfolios of business.

'We exist essentially to fulfil the wishes of our clients and we maintain very strict 'Chinese walls' between accounts and between various parts of the business. As a result, we are able to work concurrently with companies which would normally compete with one another. We are a genuinely neutral service provider - we don't take sides,' he says.

The acquisition of Pro Service Companies by Acuity, which is subject to a shareholder vote, as well as to Financial Conduct Authority and other regulatory approvals, will provide Pro Service Companies with long-term financial stability and eliminate all long-term debt, Niemczewski says. In addition, Pro Service Companies will no longer be listed on the London Stock Exchange's Alternative Investment Market; The PLC will remain on AIM and will be renamed. This, he adds, will result in a simpler corporate structure which will enable more effective governance and make the firm more responsive to client needs. Following the closing of the transaction, the firm will be renamed and its financial debt will largely be paid off.

In all of this, he says, what really matters for Pro are three important points: one, that the firm is now a neutral entity; two, that it has one, very clear objective of being a service provider that addresses the complex, technical operational challenges faced by global insurers and reinsurers in today's market environment; and three, that it has shaped its corporate culture in such a way over the past three years that it is able to attract and retain the best people.

Diversification

The process of the diversification of Pro's business had already started in 2013. It accelerated after Niemczewski joined in February 2014 and, over the following two years, the size of Pro's legacy solutions activity reduced from 85% of the overall business mix to 43%.

But this was less the result of an actual reduction in the size of Pro's run-off services business, more the result of an increase in the size of the company's consultancy and live portfolio servicing operations, according to Niemczewski.

Many people, he says, both under- and overestimated the potential of the legacy solutions sector in certain markets. 'In 2014 it was widely accepted the legacy market had peaked in the UK and the US and that the market was in the process of opening up in Germany. Two years later, guess what? Nothing has really happened in Germany, but there has been a significant resurgence in the UK market and a strong flow of business in the US.

'In many ways, trying to anticipate the direction of the legacy market over the past two years has been like trying to predict the outcome of the recent American elections,' he says.

Pro has a very strong claims servicing business in Germany, which focuses on long-tail liabilities, according to Niemczewski. More recently, the company has expanded into processing German accident and health claims, providing audits and some consulting support to the market for both live and legacy business.

'We would like to be stronger in the local German market. The potential of the German legacy market is huge and, while we remain poised for the market to take off in a big way, it has not really done so. There is a lot speculation,' he says.

'The only significant thing that is happening in Germany is that the German life legacy market is starting to move, with a number of transactions taking place. However, little is happening in the property/casualty market.'

An ongoing challenge for legacy services providers is that, by definition, any legacy administration project will naturally come to an end. For example, Pro was the manager of both the English American and the Willis Faber Underwriting Managers' run-off pools - two of the largest run-off schemes in the world. 'These were massive, highly complex legacy portfolios. It took a number of years, but the work came to an end because every legacy contract you take on, no matter how complex, is on a declining trajectory.'

The secret to success for a legacy services provider in the current market environment, according to Niemczewski, is first to diversify into other areas of the market, and second to work out an effective strategy to maintain the flow of legacy work.

'Our approach is to deliver to your clients' requirements. As legacy administrator, your objective is to run down the liabilities as quickly and as cost-effectively as possible. Our view that as long as we do that well, there will always be work for us because client recommendation is the single biggest factor in terms of sourcing legacy administration work.'

In this regard, Niemczewski describes the opening of Pro's new centre for UK disease claims management in Glasgow last November as a significant milestone for the firm's legacy services business. The new office, he says, represents significant growth in headcount for Pro, as well as a new regional hub in Glasgow from where the firm will manage all UK long-tail disease claims.

Bearing fruit

Pro's substantial investment in business development, in improving client relationships, in developing software solutions (such as the firm's 'state of the art' IT system for employers' liability) and in growing its capabilities in the US (which remains an important market for Pro) over the previous two years bore fruit in 2015, according to Niemczewski, when Pro was awarded the contract to service a very significant book of employers' liability business for Swiss Re.

At the same time, Pro was also working on a plan to set up a protected cell company, ProTucket, in the US state of Rhode Island. Indeed, last June Pro became the first company to file an application - via its US subsidiary - for a new domestic insurance company in Rhode Island, to facilitate insurance business transfers under the August 18, 2015 amendment to Rhode Island Insurance Regulation 68 (which is modelled after the Part VII portfolio transfer arrangement in the UK).

According to Niemczewski, ProTucket will open up the $100bn US legacy market for Pro and represents a significant investment in future growth for the company. 'ProTucket is presently the only the US fronting carrier for cedants that want to isolate and dispose of their legacy books of business. Those risks can be placed into one of a number of protected cells which are collateralised or reinsured, often on a syndicated basis.

'ProTucket will not bear any of the underwriting risk; the risks will be borne 100% by those protected cells following a statutory novation. For many companies, the Rhode Island Regulation allows more effective management of legacy portfolios and an opportunity to release previously trapped capital.'

The objective, he says, is for Pro to be a market-maker in the US legacy sector. 'The market is completely nascent. The idea is to help bring together the sellers and the buyers and to create a reliable market. This is an example of us as an independent service provider which helps its clients solve their problems. It is also an example of Pro being exceptionally innovative. We have already had a number of expressions of interest from Bermudian-based companies, who see ProTucket as a very convenient way into the US legacy market (instead of having to be domiciled in the US to access that business).'

Niemczewski sees Solvency II, which came into force at the beginning of last year, as another major opportunity for Pro in 2017. The implementation of Solvency II, he says, has now reached the stage where insurance companies, with the help of their accountants and actuaries, have put all the necessary systems in place.

'But insurers still have to figure out how best to integrate these systems into the day-to-day functioning of their management processes and business platforms. In other words, how do they best operationalise Solvency II? How do they best make it work for their business? That is our job. There are other people who are much better accountants and actuaries than we are, but our specialty and expertise is in advising on and managing the operational side of the insurance business.'

Pro is currently supporting two large insurance groups - one European, the other Japanese - to manage the operational risks and other related issues around the implementation of Solvency II. 'We are not helping them with the financial or actuarial side of the business; that has already been done by the accountants and the actuaries. Clients engage us to help them manage the operational risks around Pillar II and parts of Pillar III. As such, we are combining risk management (including IT security) with compliance and operational know-how.'

The current tough trading environment and the pressure to maintain premium revenue is putting a great deal of pressure on insurers to increase their technical accounting and, particularly, their financial reconciliation capabilities.

'These days, efficient and cost-effective premium collection and optimising reinsurance and other recoveries are critical to a company's performance. This is where our experience in run-off can be a huge advantage. If you think about it, one of the main issues around the management of legacy portfolios is the scrutinising of accounting records to maximise recoveries,' he says.

'We have those skills already. We are experts in technical accounting; one day we are working on legacy portfolios, the next we are working on portfolios of in-force business to address various issues. All we are really doing is deploying existing skills, but applying them effectively to new problems created by the current market environment.'

Outsourcing

Niemczewski emphasises the importance of establishing a 'smart value chain' in a world where insurers prioritise their objectives in terms of dealing with the challenges they face in the current market environment. 'If, as a big writer of business in the market, I find myself under pricing pressure, the areas of my business that I really want to focus on are my risk selection, my underwriting and my aggregate exposure management. If there is someone out there who can take the burden of data manipulation and cleansing and who can not only do it cheaper but can do it to a 99.9% quality standard, why wouldn't I want to outsource it?'

Companies in the London market, he says, are increasingly outsourcing some of their technical functions to third-party service providers. 'In the UK, outsourcing used to be confined to the large personal lines insurers sending work to India. Historically, the London market insurers outsourced very little and reinsurers almost nothing,' he says.

That approach is now changing. 'Companies understand that in order to stay competitive, it is better to segregate the value chain. They retain what they do best while outsourcing the rest to third-party specialist companies, which can perform that function better and cheaper. If you look around the market, there is no escaping the tough trading conditions. A lot of companies are under pressure because of declining premium and interest rates, and the flood of new capital into the market.'

Indeed, the big challenge for the specialty lines insurers and reinsurers in the London market is to find ways to maintain their competitiveness in the current environment. 'Part of the answer is not just to cut costs blindly, but to evaluate every component in the business process to try to improve the efficiency and cost-effectiveness of the chain,' Niemczewski says.

Outsourcing for reinsurers and specialty lines insurers is a very different consideration from out­sourcing for personal lines carriers. Niemczewski cites the example of data cleansing - a labour-intensive and repetitive process: 'You have to understand what you are doing. If you make a mistake with the data for a motor policy, the cost of that mistake could be £1,000. If you make a mistake with the data around a reinsurance policy, that could cost your client £10m. Therefore, in this area of the market you really have to understand what you are doing; there is no room for errors.'