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 .

2 FINANCIAL SERVICES CONFERENCE 2016

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 .”

4 FINANCIAL SERVICES CONFERENCE 2016

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.