Insurance and reinsurance broking power house Aon told insurers that they have two stark choices as the re/insurance industry moves into the next stage of its development. Innovate or perish, a message that definitely applies to reinsurance as well.
For a number of years now the entry of alternative capital and the convergence of capital markets with the reinsurance market has been one of the most innovative themes within the sector. The disruption that insurance-linked securities (ILS) and alternative capital have created is now forcing reinsurers to be more innovative while other forces are making insurers think the same way.
The whole insurance and reinsurance sector faces changes in the way people buy protection resulting in a need to be innovative, embrace product design and development, leverage the latest in technology and analytics as well as to embrace different sources of capital.
New and emerging markets coming online are also forcing insurers and reinsurers to think differently, with social acceptance of insurance entirely different in some regions and some concepts which have existed in re/insurance are now beginning to appear outdated.
Not only are people driving change, in their understanding and perception of what insurance and reinsurance should be and how they should buy protection, but new and emerging risks are also forcing change, as the industry needs to find analytics, tools, structures and mechanisms to understand and underwrite them.
Lambros Lambrou, CEO for Aon Risk Solutions in Australia, recently commented at an event; “Many of the risks that businesses list as their most pressing are uninsurable within current policy structures, which is both disappointing and cause for real concern. To remain sustainable and support clients, the risk industry must find ways of staying relevant as traditional risks get bigger and non-traditional risks pose new threats.”
The future of insurance and reinsurance may lie in ‘risk financing’ rather than in a concept which some feel is outdated for certain risks and client risk management requirements. The concept of insurance, of indemnity or ‘making one whole’ after a loss, is beginning to look like an outdated idea for some risks and in some of the non-traditional or emerging areas of the market.
The contingent business interruption issue is a fine example. Difficult to quantify or to re/insure on an indemnity basis without leaving potentially gaping holes in coverage, products like this perhaps need a different approach to thinking about the way corporations protect themselves.
A corporation may say: We know we have exposure, we know it could be a huge financial drag if a very large catastrophe event impacts our supply chain, but the indemnity products we are being offered just don’t look economical or truly fit our requirements and need for cash liquidity. Perhaps they should be buying parametric insurance covers to provide post-catastrophe event financing, that would give them cash quickly to make the necessary changes to their supply chain in order to maintain operations?
It is these large, complex and uncertain risks where the usefulness of insurance and its ability to fit into an enterprise risk management program can begin to evaporate, look expensive, not meet clients needs closely enough, so other options in terms of contingent sources of financing can begin to look much more attractive.
Lambrou said; “Our industry is very sophisticated in handling smaller risks, such as health, vehicle and even safety. There is a wealth of data and experience around these risks which informs decisions at all levels of the value chain.”
“However, when something goes wrong outside established “comfort zones”, while it may be less frequent, it is more likely to be catastrophic. And the truth is that the risk industry has struggled to develop strategies relevant to clients’ needs in the catastrophic risk space.”
Lambrou explained that part of the problem facing insurers and reinsurers is that the risk industry tends to look at the past as a guide to making future decisions. This practice can lead to a failure to innovate when it is needed to address new or changing risks, particularly risks that fall outside of re/insurers normal experience.
“Changes such as the increased connectivity between individuals, the accelerating accumulation of data and the speed at which information is sent digitally around the globe mean that all companies are now borderless and all risks are global. And that means the risk industry must stay ahead of clients and develop risk mitigation and financing strategies if they are to continue offering value and relevance,” Lambrou continued.
Lambrou’s comments are applicable to the insurance, reinsurance and also to the insurance-linked securities (ILS) markets. The forces which are bringing change and disruption to all financial markets are now affecting re/insurance on a wholesale basis.
Changes to the way capital, distribution and technology are used and implemented are all disruptive forces for re/insurers. So are emerging risks, the increasing interconnectedness of our world, the growing population and wealth in emerging markets and at the same time our changing climate and seemingly more severe weather extremes.
Some of the responses to this that are already manifesting themselves can be seen in the way insurers are dramatically changing their inwards reinsurance purchases, the way alternative reinsurance capital has penetrated the traditional market, the way traditional players respond by embracing new capital, the way new startups are trying to leverage different structures such as parametric triggers and the way technology startups are beginning to target the risk markets.
There is a general feeling that if you don’t innovate, adapt and strive to remain relevant, you will be left behind, risk being marginalised and potentially disappear entirely. That goes for insurers, reinsurers, ILS players as well and even brokers. Disruptive forces affect each and every one.
Lambrou’s comments that current policy structures cannot support some of the new risks the world is facing are particularly key, in our opinion. Here is the opportunity for all in the risk transfer markets, innovate, be forward-looking (not back), become product and customer focused, leverage technology and analytics and try to solve some of the difficult risk related problems the industry and the wider world is facing.
Those who can do this successfully, which will require a change of mind-set for some of the more traditional players in the re/insurance industry, can position themselves for a future which will look brighter for everyone. Those who can’t may perish.