More data needed to help alternative capital into new risks: Inga Beale

by Artemis on July 29, 2015

Intangible, complex risks to economies, insurers and reinsurers around the world are on the rise, owing to globalisation and heightened interconnectedness, signalling a need for greater data on emerging risks, says Lloyd’s of London Chief Executive Officer (CEO), Inga Beale.

Addressing re/insurance industry experts and analysts at a Financial Times Live event in London, 30th June 2015, Lloyd’s CEO Inga Beale discussed the challenges and opportunities facing the Lloyd’s insurance and reinsurance market, as competition and ample capacity continues to pressure and challenge the operating environment.

Beale stressed the importance of data within the sector, specifically that as an industry, insurance, reinsurance and the wider risk transfer landscape has perhaps too much data for certain risks, resulting in their commoditization, but far too little data for the complex, mega-emerging risks, such as cyber.

“If you look at reinsurance, even ever-better data modelling has given investors from outside the insurance industry the confidence to invest in things like index-linked securities and catastrophe bonds,” said Beale.

Evidence of increased investor confidence and acceptance of risk transfer solutions, such as insurance-linked securities (ILS), catastrophe bonds and collateralized reinsurance is apparent in the growth the alternative risk transfer sector has witnessed in recent years, helped by the influx of new, alternative capital from institutional investors and other capital providers.

But as noted earlier in the year by Guy Carpenter Chairman, Britt Newhouse, much of this alternative capital is still largely focused on existing, well-defined product lines.

“So this alternative capital provides us with an opportunity to pull in efficient capital, which we certainly need to solve some of the mega risks, which are now emerging, such as cyber.

“But of course, we don’t have the data they desire to be able to support that risk,” said Beale.

It’s an interesting argument, and reinforces Beale’s stance on alternative capital from an industry event in October last year, where she called for the third-party, or alternative capital entering the sector to be utilised to grow into uninsured and underinsured risks.

A notion also supported by XL Catlin CEO, Mike McGavick, who recently stated that alternative capital’s interest in insurance is absolutely necessary if the industry is going to break into new, emerging large-scale risks, such as cyber.

Until a series of large loss events, or perhaps an unprecedented, significant industry loss event takes place the glut of alternative capital; combined with sources of traditional capacity in the re/insurance space will continue to pressure pricing.

One-way to offset this challenge is to deploy some of the ample capacity into emerging risks; “That capital can be put to good use,” urged Beale.

While it’s still unknown if the abundance of traditional and third-party capital in the global re/insurance sector is enough to manage intangible, large-scale risks like cyber, without the necessary data it’s extremely difficult to accurately price and model such a risk adequately, effectively and efficiently.

The risk to insurers and reinsurers regarding the coverage of less-understood, unmodelled risks is overexposure, which in the case of something as potentially wide-reaching as cyber, due to the ever-increasing interconnectedness of the world, could result in seriously high, unexpected losses.

“Data modelling is getting more refined,” urged Beale, but the realisation is that a lack of historical data of intangible, emerging risks, owing to their unpredictability and relatively new existence, makes the pricing and modelling of these types of risks extremely difficult.

One thing that does seems apparent however, is that without the glut of alternative re/insurance capital the industry likely won’t have the financial power to successfully tackle the host of emerging, complex risks, regardless of the available data.

Looking forward, Beale said; “We plan to embrace the challenges by creating a global presence and specialising in those risks no one else can touch.

“We need to focus on the complex and bespoke, and the innovative risks that no one else can do, no one else perhaps has the courage to do. They are going to be commoditised last.”

Also read:

Cyber catastrophe bonds & a public-private sector solution.

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