Fried defies downgrades and forecasts upswing for insurer’s Asia division

It has been a busy couple of years for David Fried. In December 2011, he was just finishing up at HSBC, a company he was with for almost three decades; he ran its Asia-Pacific operations for six of those years. Then last Christmas, he was entering the final few months of his stint as chief executive of Allianz Asia-Pacific. Now as 2013 draws to a close, he is marking eight months as the head of the Asia-Pacific operations of QBE Insurance.

“It’s been a bit of a whirlwind,” Fried told StrategicRISK, “but at the same time, Asia-Pacific gets in your blood and that’s something that has definitely happened to me.”

The 52-year-old American with a penchant for classical music is charged with orchestrating QBE’s new strategy for growth in the region, something the insurer is betting on to help kick-start a recovery of its troubled global operations. Ratings downgrades, profit warnings, goodwill impairments, ongoing operational problems and constrained financial flexibility are all issues being faced the QBE Group. Despite this, Fried makes it clear that it is “very much business as usual in Asia-Pacific and in most of the divisions in QBE”.

“Asia-Pacific presented very strong results to the group and I can only say that we continue operating quite positively,” he said.

Indeed, Fried is confident that what QBE is calling its Asia-Pacific Profitable Growth Strategy will see it become “one of the leading multinational non-life insurers” in the region. Fried said that QBE also aims to become a leading broker centre in the key markets of Singapore and Hong Kong. “Here we will be able to write regional and global business in Asia-Pacific,” he explained. “For this we have already launched what we call our international broking centre in Singapore where we have built up the capability to underwrite and lead in the core classes of construction, marine and liability.”

‘Doubling of the numbers’

Fried sees opportunities right across Asia, with increasing corporate expansion and the rising wealth of individuals set to fuel the growth of the region’s insurance industry. “The predictions are that we will continue to see non-life insurance growth at approximately 8% per year out to 2021,” he said. “If you extrapolate that, you’re probably looking at over $700bn worth of non-life insurance premiums by that time, which effectively is a doubling of the numbers that you had last year.”

Investment by multinationals in emerging markets and increasing penetration in both life and non-life markets are factors helping drive this growth, Fried points out. “But probably one of the greatest changes that I have seen has been on the macroeconomic side,” he explained. “Since the global financial crisis, we’ve seen a fundamental shift of trade flows. Asian trade flows to and from America and Europe used to be the dominant direction; today, what you see is the trade flows throughout Asia are greater than to the Western world.

“There’s a much greater independence in Asia-Pacific economically, which is allowing countries to basically fund their own growth and to manufacture, import and export amongst themselves, which will continue the development of the insurance industry for years to come.”

Dramatic development

Fried notes that changes in the geographical and social landscapes of Asia in recent years have been “really quite dramatic”. “Consider the major cities of Asia-Pacific, whether it be Shanghai, Beijing, Hong Kong, Singapore, Jakarta or Kuala Lumpur,” he said. “Look at pictures of these cities 10–15 years ago and then look at them today. There has been dramatic development.” Fried said the same could be said for the insurance industry: “Look at the fact that the non-life industry in Asia-Pacific has grown from about $150bn of premium in 2003 to over $350bn this year. This is a growth that has continued at approximately 10% across a spectrum of awkward cycles, including the global financial crisis.”

Despite the undoubted profit potential in the region, Fried cautions that the risk environment has become more challenging. “We have lived over the past few years through quite a few natural catastrophes, some of which in more developed areas like New Zealand and Japan produced risks that people had not recognised prior to now,” he said. “You might have expected such a plethora of events to impact the solvency of the insurance industry, but what these have shown is the strength of the insurance industry and its capital positions and its ability to meet the demands of its customers.”

Unforeseen risks

Fried believes that there has been a gradual development of understanding in the risk-management area in the past few years. “A lot of the push by the insurance industry to get more data and build up more risk management capabilities flowed from the Thai floods,” he said. “Because most insurance companies, most reinsurance companies and most cat modellers did not consider Thailand a flood risk.

“It is the unforeseen risk that I have to say is probably in many ways the risk of the future because there will be a continued growth of natural catastrophes because of the geographic diversity of Asia-Pacific as a whole.”

Fried tells the story of a large manufacturing plant in the Philippines that was effectively destroyed by Typhoon Haiyan last month. “Everything was built to Japanese and Western standards, and it was thought that it was protected from total loss due to a known or expected type of risk,” he said. “But never in the risk management discussion within that company was it ever expected that they would have a seven-metre storm surge.

“These are the types of situations that we in the risk industry have got to be much more proactive about as we will be challenged with them time and time again.”

Fried believes that it is incumbent upon both insurers or brokers to understand the systemic risks that exist in the countries they operate in. “It might be corruption, infrastructure weaknesses, bureaucratic inefficiencies, labour pool depth or communications,” he said. “Without clear understandings of these risks, it will be very difficult for companies to meet their goals.”

Insurers and brokers must focus more on risk management as opposed to “just being capacity and price driven”, Fried concluded. This means advising customers on, and protect them from, major risks. “In that way, they can be successful and this will reduce the risks that we will be taking on as insurers,” he said.