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Original Risk: A Society for Change Agents

Disruptive innovation, technology supports ILS expansion: Walkiewicz, WCMA


Disruptive innovation and advanced technology has the potential to shift value in the insurance and reinsurance industry, and could support and accelerate the growth of the insurance-linked securities (ILS) market, according to Rafal Walkiewicz of WCMA.

Insurers and reinsurers are under threat from the rise of technology and the world of disruptive innovation, highlighting a need for companies to embrace the change in order to remain relevant and competitive in an evolving sector.

While the rise of technology brings about many challenges for the re/insurance industry, it also provides ample opportunity for companies to gain an edge, innovate, and really embrace the potential efficiencies that technology advances can support.

According to Walkiewicz, Chief Executive Officer (CEO), Willis Capital Markets & Advisory (WCMA), one area of the risk transfer landscape that could benefit from the rise of technology in the sector is the ILS space and capital markets, which continues to expand its global footprint and claim an increasingly larger slice of the overall reinsurance market volume.

“The insurance industry is already scrambling to respond as investors in search of higher yields pour money into insurance-linked instruments (ILS) in the capital markets, disintermediating reinsurers. Technology could accelerate this trend and broaden its impact on insurers.

“As a result, those who stick too long with the old model will fade as premiums and their balance sheets shrink. Those who thrive will learn to ride the wave of disruption to capture new opportunities,” said Walkiewicz.

In recent times ILS players have showed a willingness to get closer to the original source of risk, via the establishment of managing generals agents (MGA), for example.

ILS investors are far more mature in today’s marketplace, and their desire to better understand the risks and a continued appetite for uncorrelated, diversifying, stable returns, albeit reduced somewhat in the current market environment, has contributed to ILS essentially looking to disrupt the value chain and access the original risk more directly.

Walkiewicz feels that technology could accelerate this trend and enable capital market’s investors to access the underlying insurance or reinsurance-linked risk more directly, perhaps removing the need for intermediaries, such as brokers and reinsurers, resulting in a more efficient and attractive proposition to the ILS investor, but that could contribute to a potentially negative impact on re/insurers.

“Insurers’ and reinsurers’ skill and profits lie in dealing with uncertainty. But technology reduces uncertainty, allowing for much greater standardization by generating large, homogenous data pools and automated analytics and underwriting.

“For now, most third-party capital is invested in property catastrophe risk, but this standardization will make different types of risk increasingly suitable for securitization and attractive to investors,” explains Walkiewicz.

Improved data collection services, an ability to better understand and use the recorded data, and other technological advances that stand to disrupt the insurance industry, such as autonomous cars, for example, will enable risks outside of the property catastrophe space to become commoditised, suggests Walkiewicz.

As a result of better data and analytics and an increased understanding of risks, the pricing of risks and the securitisation of risks will become easier and more accurate, suggesting that the ILS space will have an opportunity to really expand outside of the highly competitive U.S. property cat space.

For the most part ILS plays in the property catastrophe space owing to a better understanding of the risks via advanced modelling capabilities, an also ease of entry when compared to other business lines. But as technology advances it has the potential to open up a whole new range of exposures to the ILS space, in both emerging and mature markets.

Walkiewicz uses the continued development of driverless cars as an example, explaining that telematics and driver data could result in a shrinking of car insurance premium pools, with the remaining liability likely being covered in the commercial market, or maybe even the capital markets.

“Some $80 billion of third-party capital is currently invested directly in insurance risks through capital markets instruments. That figure could rise to $150 billion by the end of the decade, according to forecasts. With so much money in search of an investment, why would a car manufacturer not bypass insurers and go straight to the capital market to cover its liability?” questioned Walkiewicz.

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