Inga Beale, Chief Executive Officer, Lloyd’s of London, and keynote speaker at the ICMIF MORO this year, says that the (re)insurance industry as a whole is facing the innovation challenge. She explains that Lloyd’s has a specific focus on emerging risks and works with the market to look at what innovation and new products are required to address these risks. “The simple fact is,” Beale says “that, if reinsurers don’t come up with the products that business needs, then clients will look elsewhere.
Providers of new forms of capital are looking to be part of the reinsurance sector as they look for diversification in their asset portfolios, Beale says, and, in the current economic climate of low returns, are seeking yield. She goes on to say that the attraction so far has been for portfolios that are highly modelled with enormous amounts of data. For business that is more complex and requires more bespoke underwriting solutions, modelling is not giving the same amount of comfort as to assessment of exposures and expected profitability. Hence, Beale says, mutual and cooperative ICMIF member portfolios are likely to be attractive to reinsurers.
James Kent, President, Willis Re Inc., a previous MORO keynote speaker told Voice that both the new capital entering the market and traditional reinsurers are going through an unprecedented period of innovation. “Examples include,” he says, “integrated reinsurance structures such as multi-line covers, new approaches to distribution with a greater involvement in direct insurance markets, and new capital structures such as the recently developed hybrid total return funds.”
Kent believes that traditional reinsurers still have the dominant share of the P&C reinsurance business largely as a result of established client relationships as well as their ability to support insurance companies across many different lines of business; but, he says, “any reinsurer (new or traditional) that does not seek new ways of doing business is likely to find themselves increasingly irrelevant to their customers.”
“Mutuals and cooperatives have traditionally aligned themselves with more traditional reinsurers,” says Kent, “but it is a good time to investigate the benefits of diversifying reinsurance partners even if clients ultimately retain their current trading partners.”
Kent says the world of risk is constantly evolving, and that mutuals/cooperatives, like all insurers, need to ensure they offer appropriate products and services if they are to remain relevant to their customers and members. “This may mean creating completely new insurance covers such as cyber liability, to respond to new exposures which previously simply didn’t exist,” he says. However, he also advises that cyber presents complex technical challenges in aspects such as coverage grants, pricing, loss prevention, managing accumulation and systemic risk.
“There are many emerging risks to think about,” warns Kent, “not just driverless cars and drones: what about nano-technology, e-cigarettes, genetically modified foods, trans-fats, social media abuse or slander, the list goes on. The important thing for mutuals/cooperatives and ICMIF members is to ensure their reinsurances are regularly reviewed for best practice.”
Paula Jarzabkowski, Professor of Strategic Management at Cass Business School (London), also a former MORO keynote speaker, was asked how this alternative reinsurance capital could dramatically affect the traditional reinsurance market and whether the traditional market is in jeopardy.
In her reply Jarzabkowski said, “Securitized reinsurance capital has definitely increased competition in the traditional reinsurance market. In particular, it has taken market share and reduced pricing in catastrophe risk, which is where reinsurers predominantly subsidized their portfolios. At the same time, both collateralized reinsurance and catastrophe bonds are themselves in a more competitive phase, in which reducing cost is a key driver.” This, Jarzabkowski believes, has had some advantages for insurers generally, including mutuals and ICMIF members, because it has driven down the cost of both traditional reinsurance and securitized risk cover.
“Additionally,” Jarzabkowski says, “small and medium sized companies that primarily buy traditional rather than securitized reinsurance programmes remain attractive partners for traditional reinsurers. Hence, in some ways, ICMIF members are in a very strong position to find cost-effective risk cover, including larger ICMIF members having access to securitized reinsurance for specific parts of their risk cover.”
Lorie Graham, Senior Manager, Enterprise Risk Management and Insurance Services at ICMIF member organization American Agricultural Insurance Company (USA) was also consulted as part of this reinsurance roundtable discussion. Graham told Voice: “I do believe we are seeing true changes in the reinsurance industry. In the continued soft market, reinsurers are focused more than ever on risk management, capital management, risk appetite and emerging trends. By establishing risk appetite and optimizing capital levels, an organization can position itself for long-term success.”
Graham continues, “Traditional risk management techniques may not work for emerging risks. Likewise, it may not be cost-effective to allocate resources to unknown exposures. However, there are several methods a company can use to identify, evaluate, integrate and respond to emerging risks. Companies can build resilience into risk models surrounding strategy through diversification and response plans. Routine assessment of emerging risks can also provide a competitive advantage; by increasing preparedness an organization can detect new risks and adapt with agility.”
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