Industry needs to give capital confidence in evolving risks, Baden-Baden told

As the world rapidly advances thanks to technology and the increasing interconnection this brings, the risks faced by the insurance and reinsurance industry are changing fast too, meaning market participants need to help capital providers gain confidence that it understands the exposures it is asking them to underwrite.

This important point was raised at a Reinsurance Symposium held by broker Guy Carpenter in Baden-Baden yesterday, where industry leaders were asked to discuss insurance and reinsurance market opportunities generated by so-called industry 4.0.

The re/insurance industry has historically fallen far behind helping its clients stay up to date with technology and change, but in 2019 is taking steps not to be left so far behind and wants to deliver greater confidence that it understands what this rapidly evolving world means for its own operations and the risks it underwrites.

Asked whether the re/insurance market is ready for industry 4.0, whether it is keeping pace with the rapid changes and evolving needs of clients, speakers highlighted opportunities and where their focus needs to lie.

James Nash, CEO, International, at reinsurance broker Guy Carpenter said that technology is “transforming radically” the nature of underwriting of risks, but at the same time generating huge market opportunities for incumbents.

“The quantity and quality of data associated with Industry 4.0 should enable more precise underwriting,” Nash explained. “This brings huge opportunities to grow and innovate, as well as enhance risk understanding and increase efficiencies.”

“To exploit these opportunities fully, we need to offer comprehensive solutions that mitigate these new risks and create effective underwriting and distribution systems,” Nash continued.

Ian Branagan, Senior Vice President and Group Chief Risk Officer at RenaissanceRe Holdings Ltd, explained that technology can help to drive more efficient reinsurance business models.

“The supply chain in our industry continues to be impeded by legacy inefficiencies, costs, duplication and poor integration,” Branagan explained to the assembled delegates in Baden-Baden. “There is great potential for positive change if we look at the supply chain in a holistic manner and as an integrated system; harnessing technology to support simplification, less duplication, automation, cost-efficiency, and more streamlined distribution networks. At RenaissanceRe, we believe our industry has an opportunity to enhance our collective value proposition to society by working together and leveraging digitalization, data and underwriting expertise to meet the constantly evolving risk landscape and nature of consumer demand.”

Also speaking at the Baden-Baden Reinsurance Symposium, Karen White, CEO of catastrophe risk modelling specialist RMS, said harnessing technology would be key to re/insurers ability to meet client needs as risks evolve.

White explained, “We’re at a pivotal moment. The dynamics of the risk market and our industry demand that we change and adapt while at the same time, technology has evolved so that it can be harnessed in new ways to drive change effectively.

“Fundamentally, tech-driven innovation is a key pillar to better manage the evolving risk life cycle and deliver greater value to customers, as we are hit with the impact of extreme weather, climate change, man-made disasters, a shift in value from tangible to intangible assets, emerging risks such as cyber, along with liability and litigation trends, to name a few. These kinds of market disruptions create new opportunities and open the door to new business models. The other side of that coin is that industry disruptions are often ruthlessly unkind to incumbents who don’t embrace change.”

Jon Hancock, Director of Performance Management at Lloyd’s, highlighted that the industry has failed to keep pace with technological change and the opportunities it presents before.

“Can we as an industry say that we have adopted technology and Industry 3.0 in the same way that many other industries have? I don’t think that we can,” Hancock said, adding that “The scale of the challenge ahead of us is enormous. However, we have a massive opportunity to leapfrog the third industrial revolution and get ahead of the game by fully embracing the fourth industrial revolution.”

“At Lloyd’s,” Hancock continued, “we are working to address this by setting out our Future at Lloyd’s program which provides a blueprint to make Lloyd’s the most advanced insurance marketplace in the world. Every marketplace and everyone in our industry should have a similar plan in place.”

Laurent Rousseau, Deputy CEO, SCOR Global P&C, explained that focus is also important in a time of rapid change.

Rousseau explained, “What is not going to change for reinsurers, is the need for greater sophistication and depth. When I see companies focusing purely on the transactional aspect of our business, in my view they are losing sight of what really makes a difference which is the ability to deliver our own in-depth view of risk. What is also not going to change is that clients will continue to demand better prices and faster delivery. We should approach what we do in a client-centric way and focus our value proposition fully on the needs of our clients.”

Which brings us back to our regularly discussed point of value creation and that the industry needs to work out how to better monetise the expertise it brings to clients, particularly as technological innovation is set to force an unbundling of some expertise and service provision, as has been seen in many other industries.

While the world rapidly changes and risks evolve, reinsurers and market facilitators still need to work out how best to monetise their offering, beyond pure capital and relationships alone (identifying the value they bring to the chain).

As technology advances, there are significantly increased opportunities to generate client value and loyalty, as service provision expands significantly.

The old bundled model may not work as well in an industry 4.0 world, meaning incumbents have to establish the best ways to unbundle and monetise some of this new-found expertise.

Part of that is in making yourselves invaluable to other market participants, a key one is reinsurance capital in both its traditional and alternative (capital markets) forms.

Importantly, Guy Carpenter’s Nash explained, “Industry 4.0 puts societies and economies on the cusp of one of the most significant periods of change, and we must work with capital providers to help understand how risks are likely to evolve so they have confidence in deploying their capital at acceptable risk parameters.”

This is absolutely key and the challenge of the next decade and more for originators and brokers especially.

Fail to get capital comfortable with the risks or how they are evolving (often accelerating) and the industry as a whole will fail to mobilise the significant investor appetite for insurance-linked investments, thus failing to take the opportunities that technology and industry 4.0 presents it to narrow and close both existing and new protection gaps.

That will not just be a failure to keep up with evolving trends. That will be a failure to serve their very purpose.

Which makes keeping pace with technological change and our rapidly evolving world the most important thing for insurance and reinsurance market participants right now (that goes for ILS market participants too).