AUTUMN 2019 ISSUE 71
12 Profile 18 InsurTech 22 Interview Convex, Catlin Reinsurance Emmanuel and Brand innovations Clarke
THE PRICING PUZZLE
Will 1 January renewals supply the missing piece for the 2019 rating picture?
The intelligent quarterly from the publishers of The Insurance Insider
1-36_IQ Autumn 2019.indb 1 27/08/2019 17:40 1-36_IQ Autumn 2019.indb 2 27/08/2019 17:40 COMMENT ON THE BEACH
s an old friend of mine recalls treaty rate increases have been It may have turned out to be less from childhood trips to Monte piecemeal and “highly specific to loss of a sure bet for investors in ILS ACarlo with his underwriter experience, geography and business funds than previously thought, but father, September’s Monte Carlo line”. despite continuing loss creep from Rendez-Vous was an excuse for And there is no certainty that the 2018’s Typhoon Jebi, “flexible capital reinsurance execs to take their key 1 January renewals will lock in the structures are here to stay”. spouses and children on a subsidised recent hardening of rates to the extent Which brings me on to my own beach holiday in one of Southern that all can declare the soft market is hobbyhorse – facultative reinsurance. Europe’s most exclusive resorts. All finally and truly over. You may not find many facultative the more luxurious as a child, when It’s a sobering thought that, the deals being discussed at Monte Carlo, you are cushioned from the eye- promise of a sunny few days weather- but you still find plenty of fac brokers watering prices demanded by café wise notwithstanding, the market may and underwriters mingling with their and bar owners in this playground for be reliant on loss creep from last year’s treaty colleagues in the Café de Paris. the rich, famous and tax-averse. major cat events as a backstop against A hard market in fac rates is by no Alternatively, taking a more any reversals on reinsurance rates. means guaranteed either, but interest cynical, adult’s-eye view, it’s an excuse Having characterised Monte in fac as a solution is undoubtedly for unaccompanied reinsurance execs Carlo as a treaty event, however, on the up. to have an all-expenses-paid, boozy it would be remiss of me not to Submissions have increased, few days in sun-soaked Monaco, free acknowledge the more minor, but rates have improved in many of the encumbrance of partner and not insignificant, role played by classes of business and across kids. the alternative capital markets. many geographies and, in the But whether the reinsurance As Trading Risk managing experience of Everest Re at least, industry is in truth here for business editor Fiona Robertson notes in part fac gross written premiums are at “an or pleasure, the talk on the terraces two of our lead: “This year marks the GAVIN all-time high”. BRADSHAW and under the parasols of Monte point when the narrative around the Editor, Insider As you survey the figures reclining Carlo is bound to focus on the ILS market started being rewritten.” Quarterly on nearby beaches, therefore – decidedly mixed picture at recent Previous boasts that the ILS market the bronzed children with their treaty renewals. has broken the reinsurance cycle and surprisingly relaxed parents, or the As The Insurance Insider’s Rachel brought on an era of perma-soft rates boozy, sunburnt gangs of middle-aged Dalton details in part one of our may have proved to be unfounded, men – you may well be looking at lead feature, while there has been but the so-called alternative market is treaty’s poorer cousins: the fac lads substantive hardening in the market, holding its own. and lasses.
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1-36_IQ Autumn 2019.indb 3 27/08/2019 17:40 CONTENTS IN THE AUTUMN 2019 ISSUE
EDITORIAL DIRECTOR Mark Geoghegan [email protected]
EDITOR-IN-CHIEF Adam McNestrie [email protected]
IQ/FEATURES EDITOR Gavin Bradshaw [email protected] 12 ACTING MANAGING EDITOR Catrin Shi [email protected]
EDITOR Laura Board [email protected]
ASSOCIATE EDITORS Christie Smythe [email protected] Christopher Munro [email protected]
SENIOR REPORTERS Fiona Robertson [email protected] Rachel Dalton [email protected] Lucy Jones [email protected] Emmanuel Kenning [email protected] Bernard Goyder [email protected] John Hewitt Jones [email protected]
REPORTERS Laura Sanicola [email protected] Sofia Geraghty [email protected] Anna Sagar [email protected] Samuel Casey [email protected]
COMMERCIAL DIRECTOR Sajeeda Merali [email protected]
HEAD OF MARKETING SERVICES Benjamin Bracken [email protected]
HEAD OF STRATEGIC PARTNERSHIPS Oliver Nevill [email protected]
HEAD OF MARKETING & ANALYTICS Lynette Stewart [email protected]
BRAND MARKETING & ANALYTICS MANAGER Aimee Fuller [email protected]
SUBSCRIPTIONS DIRECTOR Tom Fletcher [email protected]
PARTNERSHIPS MANAGER Joel Lagan [email protected]
SENIOR ACCOUNT MANAGER Georgia Macnamara 03 Comment: longer to develop than InsurTech, [email protected] On the beach finds Anna Sagar SUBSCRIPTIONS ACCOUNT MANAGERS Luis Ciriaco [email protected] 22 Rationality and relevance Chrishan Tailor [email protected] FEATURES PartnerRe’s Emmanuel Clarke tells SUBSCRIPTION SALES SUPPORT Paul Mansfield [email protected] 06 The pricing puzzle Christopher Munro the carrier is
EVENTS OPERATIONS MANAGER Rachel Dalton contemplates the poised to capitalise on a return to Holly Dudden [email protected] reinsurance pricing picture ahead reinsurance market rationality CONFERENCE PRODUCTION MANAGER Matthew Sime [email protected] of 1 January renewals
PRODUCTION EDITOR 10 An ever-bigger piece 27 Bermuda Roundtable Ewan Harwood [email protected] of the puzzle The Insurance Insider Bermuda SUB-EDITOR Alternative reinsurance continues (Re)insurance Roundtable 2019 Steve Godson [email protected] to affirm its importance as part JUNIOR SUB-EDITOR Simeon Pickup [email protected] of the reinsurance mix, writes INSIGHT SENIOR DESIGNER Fiona Robertson 38 Bright sparks Mike Orodan [email protected] 12 Geoghegan grills… Eleanor O’Shea and Neil Catlin and Brand McGeachie consider the potential Mark Geoghegan tours the of the Lloyd’s Lab for the Level 1, 29 Ludgate Hill, London, EC4M 7NX, UK “greenfield operation” of Stephen (re)insurance market Tel main: +44 (0)20 7397 0615 Editorial: +44 (0)20 7397 0618 Catlin and Paul Brand’s new 40 Remembering Christchurch Subscriptions: +44 (0)20 7397 0619 Annual subscription to The Insurance Insider – £2,995 + VAT/ $4,695 venture Convex The Christchurch attacks For subscription enquiries, email: [email protected] 18 Long horizons highlighted the need for the New All rights reserved ©2019 ‘ReinsurTech’ innovation may take Zealand market to adapt to the
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06 THE PRICING PUZZLE Rachel Dalton on the reinsurance pricing picture
GEOGHEGAN GRILLS… 12 CATLIN AND BRAND Mark Geoghegan talks Convex with Stephen Catlin and Paul Brand
RATIONALITY AND 06 22 RELEVANCE Christopher Munro speaks to PartnerRe’s Emmanuel Clarke
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changing nature of terrorism risks, cost and quality of business 59 Don’t rain on my parade says Jake Carter 50 Converting fallen Caspar Prestidge on why event 42 Coming of age? angels to saints organisers need to consider the Slow and steady has proved The alleged pending BBB crisis impact of bad weather the best strategy for InsurTech in the high-yield market is less a 60 Positive reinforcement initiatives, says Andrew Johnston threat than an opportunity, says Leslie-Ann Giovnilli on diversity 44 Shortening the chain David Newman and inclusion at IRLA and in the Reducing the length of the 52 Working your fixed legacy sector distribution chain will dramatically income assets harder reduce the cost of risk transfer, says Russell Baird on working to EXECUTIVE BRIEFINGS Jason Howard improve the yield and solvency- 62 The RSG value chain efficiency of your fixed income Ryan Specialty Group CUO TECHNICAL BRIEFINGS assets Kieran Dempsey on how RSG 46 Managing agents 54 Scoring with technology Underwriting Managers is breaking are from Mars... Insurers should clearly define new ground Aidan O’Neill ponders the their objectives with regard to 64 Mining for gold implications of the disconnect innovation, say Damian Cleary Gary Marshall tells Insider between the London market and its and Andrew Dunkley Quarterly about Risk Theory’s customers and partners 57 Capacity drain rejuvenated approach to 48 Real-time data hubs Conditions are getting tougher underwriting Tim Rayner says a real-time data in the PI market, writes Charles exchange can improve the speed, Manchester 66 Executive moves
055 REINSURANCE THE PRICING PUZZLE Rate increases have been piecemeal across the reinsurance sector, contributing to a confused pricing picture for the year to date that may only become clear at 1 January renewals, writes Rachel Dalton
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hile reinsurers have seen above-average cat losses, which property cat treaty were dashed for rate increases steadily reached $79bn according to Swiss the second year running. Overall, Wgaining momentum Re, reinsurers must be adequately property cat rates renewed flat to throughout the year, price compensated. slightly down, with loss-free accounts improvement has been piecemeal The added incentive this year for renewing flat to down 2-3 percent on and sources expect rises to remain reinsurers was the contraction in a risk-adjusted basis, while loss-hit highly specific to loss experience, retrocession capacity, partly caused business attracted minor increases. geography and business line. by the withdrawal of Markel Catco, As the market looks ahead to the Japan – a false flag? key 1 January renewal, all eyes will Creep from 2018’s losses, along As reinsurers moved towards the 1 be on the behaviour of European “ April renewal there were hopes of cedants and their reinsurers – who with events in this year’s storm more significant rewards than those have so far been untested by a large seen at 1 January. This spring there renewal – as the final piece of the season, could prevent further was particular pressure on Japanese pricing puzzle. cedants to pay increases following Despite rising hopes of a return to deterioration of prices across a record typhoon season, with five a fundamentally hard market with the board” significant storms between June and each renewal this year, as pricing September. at each showed improvement, Of those, Typhoon Jebi was the sources were quick to discourage a leading many reinsurers to bid for most destructive. Initially estimated universally sunny outlook. higher prices from their cedants as a circa $10bn insured event, loss “It would be a mistake to think to compensate. At the same time, creep on Jebi has been a feature we can compare today to any other primary rates showed some increases, of first and second quarter reports year,” one London market broking fuelling hopes of hardening. among European, US and London source said. In the event, however, hopes reinsurers, with the loss figure now Pricing will remain highly of significant price increases in anticipated to be greater than $15bn. dependent on loss experience of a When the April renewal arrived, line of business, geographical area Japanese cedants lived up to their or individual client, according to the Japanese natural reputation as “good” buyers, paying source. around 25 percent more premium “Premiums are not being fixed catastrophe events 2018 on loss-hit wind layers, although [according to] others’ losses,” they Events Date Loss estimate the overall movements on excess of added. Typhoon Prapiroon 28-Jun $1.65bn (economic) loss (XoL) covers were around 8-10 However, creep from 2018’s percent. losses, notably Hurricane Michael Typhoon Jongdari 23-Jul Up to $2bn (insured) Swiss Re, which writes a large and Typhoon Jebi, along with events Tropical Storm Leepi 10-Aug Unknown proportion of the $1bn aggregate in this year’s storm season, could Typhoon Jebi 04-Sep $10bn (insured) limit understood to be placed for “prevent further deterioration of Japanese cedants, said it achieved a Typhoon Trami 20-Sep $3bn (insured) prices” across the board. 7 percent price increase across its cat Fundamentally, capital is still Source: Industry estimates exposures during the July renewal. king when it comes to reinsurance, The most loss-hit wind and all- sources said. In primary insurance, peril covers renewed up between 20 changing risk appetites at large Japan versus Florida and 30 percent, while higher up wind carriers such as AIG and within and all-peril layers renewed with Lloyd’s syndicates have driven buyer behaviour single-digit percentage increases and pricing up. In retrocession, the loss-free wind layers renewed flat. Partnership withdrawal of a major player Aggregate covers also attracted buyers Japan Markel Catco has reduced supply. In significant rate increases after more reinsurance, however, there has been than $1bn in limit was wiped out no significant withdrawal of capital, by a succession of losses. However, and despite other factors at work, Traditional sources said at the time that even reinsurer- this may yet win out as the dominant ILS-driven with rates-on-line for the bottom one. driven layers of 30 percent, the covers remained under-priced. January – early hopes Florida On earthquake policies, owing to In the run-up to 1 January this Transactional the lack of recent earthquake events, year, the feeling among reinsurance buyers both proportional treaties and XoL underwriters was similar to that protection covers renewed flat. Source: The Insurance Insider of the year before: after a year of Continued on page 08
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All in all, the April renewal was price increases as “spotty” in a Q2 favoured buyers paying increases in described as “rational” by Willis Re in call to analysts and noted that some the high single- or low double-digit the context of recent losses versus a markets “have a way to go” before percentages, and worse clients paying worldwide surplus of capacity. they reach suitable levels. increases of over 30 percent. Pricing Although reinsurers before the A number of factors combined at was driven strongly by factors such as renewal hoped that a positive April the summer renewals to push pricing loss development on cat claims, loss- adjustment expenses and the quality Floridian and Californian cedants paid large of the leadership of cedants. “ However, pricing improvement post-loss pricing gains after last year’s wildfires was driven by the weak operating performance of reinsurers rather and hurricanes” than a serious shortage of capital, limiting increases to certain carriers renewal would set the firm tone up in a selection of lines and regions. in specific regions. needed to bring the more volatile Accelerating pricing in the In Australia, for instance, there Floridian market into line, the primary US P&C market was one was no sign at all of across-the- reality was less clear cut. The price such factor, as reinsurers were able board, significant rate rises, putting increases achieved must be seen in to successfully make the case that paid to ideas of pricing contagion. the context of historically low pricing they too should benefit from those Major Antipodean carrier on Japanese wind covers, bringing improved rates. Suncorp renewed its programme absolute rating adequacy in the class In property cat business, Floridian on essentially flat terms, despite into question and, in any case, the and Californian cedants paid large handing almost $400mn in losses to exceptional features of the Japanese post-loss pricing gains after last its reinsurers. market limited the value of reading year’s wildfires and hurricanes, with its behaviour across to other markets. continuing loss creep on Hurricane Casualty treaty momentum Michael a persistent factor. In casualty treaty this year, the story June-July payback Even loss-free nationwide has been slightly more positive. With the summer renewals, however, accounts paid very modest rate At the January renewal, shifting came a reprieve for reinsurance increases, while portfolios with large economic trends and rising loss costs underwriters. Sources reported California exposures and major combined to strengthen US casualty market sentiment as having hit wildfire losses commanded rate rises reinsurers’ resolve to push for pricing its highest level in years, with between 20 and 40 percent. improvements. confidence growing that pricing For example, Farmers, which has momentum seen this summer would around a 10 percent market share In Australia there was no sign be more than a temporary peak. in California across commercial and “ Despite optimism, it was clear residential property and auto, paid at all of across-the-board, across the June and July renewals a roughly 25 percent increase on that price increases varied across the annually renewing portion of its significant rate rises, putting geography and line of business. placement on some layers. paid to ideas of pricing Incoming Everest Re CEO In Florida, clients were clearly Dominic Addesso characterised the stratified in terms of pricing, with contagion” Property rate movements Terrority Pro rata commission Risk loss free % change Risk loss hit % change Cat loss free % change Cat loss hit % change Australia Varies -5% to 0% Varies -2.5% to 0% +5% to +15% Caribbean 0% 0% 0% to +10% 0% to +10% N/A China N/A N/A 0% -10% to 0% N/A Latin America N/A N/A 0% to +10% N/A 0% to +10% Middle East 0% +5% to +7.5% +15% to +35% -7.5% to -5% +5% to +7.5% South Africa 0% N/A 0% N/A 0% to +20% UK N/A N/A N/A -2.5% to +2.5% N/A US – Florida -10% to -5% 0% to +5% +5% to +25% 0% to +7.5% +5% to +25% US – Nationwide -1% to 0% 0% +5% to +20% 0% to +5% +5% to +20% Note: Movements are risk-adjusted Source: Willis Re
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Reinsurance underwriters were able to push quota share ceding US casualty rate movements commissions down by as much as 3 Class of business Pro rata XL – no loss XL – with loss commission emergence emergence points, although most improvements were smaller, while in XoL business, General third-party liability -4% to 0% 0% to 5% 5% to 15% rates increased modestly. At that Motor liability -3% to 0% 0% to 7.5% 0% to 10% point, loss cost inflation and adverse Professional liability 0.5% -5% to 0% 0% to 5% development were driving pricing Note: Movements are risk-adjusted increases. Source: Willis Re Come July, the trend continued. Reinsurance casualty underwriters Swiss Re, Munich Re, Hannover All eyes on Monte Carlo achieved further rate increases Re and Scor all reported rate While reinsurers will hope that rate although sources described the increases in the US at the June and increases achieved already this year market as firming rather than fully July renewals as two years of major are an indication of better pricing hardening. They did, however losses began to have an impact. to come, there is still a great degree predict that the slow and steady rise In response, Swiss Re, the of uncertainty as the market looks most bullish of the four carriers, ahead to 1 January 2020. A number of factors suggest that increased the capital it deploys A number of factors suggest “ for North American hurricane that pricing will continue to rise pricing will continue to rise at risk to $6.5bn, up 40 percent from at the January renewal, including the year before, and doubled its loss development and primary the January renewal, including exposure to California earthquake rate increases. The ferocity of the risks. hurricane season will also have an loss development and primary Rival Munich Re took a more impact on cedant behaviour. rate increases” cautious approach, but increased its However, market sources believe US hurricane exposure by 5 percent. it is likely that pricing will remain Hannover Re upped its North highly specific, as shown in the was indicative of a more significant American premiums by 26 percent patterns demonstrated at the 2019 pricing correction later this year if and its top line in cat XoL business renewals so far. But above all, balance sheet problems emerged by 39 percent, while Scor, though capacity will remain an issue, sources in directors’ and officers’, primary optimistic about rates, only said, with reinsurance capital still casualty and umbrella covers in maintained its exposure to US cat at plentiful despite the run of large particular. the summer renewal. losses in 2017 and 2018. The Monte Willis Re placed rate rises for All four reinsurers made positive Carlo Rendez-Vous will provide loss-free general third party liability assertions about further rate rises greater clarity over how the battle XoL at flat to up 5 percent, with rates this year, shoring up the theory that for reinsurance rate will play out for loss free motor XoL flat to up 7.5 market hardening will continue. this year. percent and professional liability flat to down 5 percent. Despite the momentum on European reinsurers: casualty treaty pricing, however, there are fears that after years of Q2 2019 GWP growth and rate movement downward pressure resulting in 35% underpricing, the recent increases 29.6% have not been enough for carriers to 30% achieve absolute rate adequacy. Q2 P&C GWP growth Sources have pointed to fears that 25% casualty treaty losses will continue 19.5% Q2 overall rate increase 20% to deteriorate. If they do, a stronger price correction is anticipated. 15% 11.8% Europeans taking a bet on cat 10% Optimism for the second half of 5% 3.8% 4.7% 2.0% the year and 2020 was perhaps 1.0% 0.5% most clearly expressed as European 0% reinsurers reported their Q2 results, Swiss Re (H1)* Hannover Re Scor Munich Re and the extent to which their bet on Source: Company reports, The Insurance Insider nat cat as a success will play out in Source: Company reports, The Insurance Insider *Q2*Q2 2019 2019 earnings earnings for Swissfor Swiss Re were Re werenot available not available the January renewal.
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1-36_IQ Autumn 2019.indb 9 27/08/2019 17:40 REINSURANCE AN EVER- BIGGER PIECE OF THE PUZZLE The alternative reinsurance market is driving rate change after two years of losses, affirming its role as a small but important part of the reinsurance picture, writes Fiona Robertson
his year marks the point when first hurricane in the narrative around the ILS more than a decade, Tmarket started to be rewritten. in addition to one of market over the Rewind five years or so, and the the highest cat loss years past couple of years, story being told about the surging ever. and has been a huge alternative reinsurance segment was But new losses kept unfolding, contributor to that it had definitively broken the with loss creep from Typhoon Jebi the shortage and reinsurance market pricing cycle continuing into this year and 2017 higher expense and set the scene for a new era of events, notably Irma, coming back of sourcing retro permanently low rates. around with a double whammy of capacity in 2019. What followed were headlines additional claims. But, in many respects, its problems from the Monte Carlo Reinsurance This created more concern among were a sideshow, and not necessarily Rendez-Vous warning that “the some investors who wondered if illustrative of the broader takeaways reinsurance market will always be these years represented a “new norm” from the revisions now being made soft”, following one broker’s press for disaster activity, and made it a to the ILS thesis. conference. harder sell for ILS managers looking For these more general learning One graphic in particular became to draw in new funds to replace lost points, let’s return to the martini ubiquitous in the dozens of slideshow or trapped capital. New investments glass theory – that an endless presentations at subsequent The were more likely to carry very specific supply of capital on the sidelines of Insurance Insider conferences – a return hurdles in order to draw down the market was just waiting to be variant of the “martini glass” image or deploy. drained. purporting to show the reinsurance This proved to be an empty market as a mere cocktail olive in the Retro lockup/shallow pockets promise. vessel of pension fund capital, with And so 2019 became the year the Such talk belied the reality that trillions of dollars sloshing around on market dynamic began to change. some elements of the ILS market the sidelines of the market. Retro capacity locked up, the were never that deep-pocketed. The And perhaps if the catastrophe Florida market saw a real stand-off sidecar market, in particular, was losses had stopped in 2017, 2018 over the renewal negotiations, and dominated by a couple of major US would have looked like the proof one of the ILS industry’s top 10 firms mutual fund managers, supported by of this thesis. At that stage, ILS was put into run-off after regulators independent advisers and high-net- managers had more than replaced moved to investigate its post-loss worth clients – a recipe for a more their lost capital from Hurricanes reserving policies. reactive capital base than long-term- Harvey, Irma and Maria, and the The latter example – Markel minded institutions. subsequent renewals produced a very Catco’s downfall – is one that has Second, rather than being an subdued pricing reaction to Florida’s drawn the most headlines on the ILS appealing aperitif, the small size of
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the reinsurance market remains a have emerged this year. underwriters are fully controlling the hindrance to attracting some of the The big question now – and a risks they are taking. world’s largest investment houses – if huge area of uncertainty – is how the they cannot build a significant stake market will respond in 2020. Closing the chapter without crushing market returns, Understandably, investors have Ultimately, even with 20 years of they won’t go into it. been disappointed by factors such evolution behind it, the ILS market Of course, there is still plenty of as loss creep, with some saying it is still in the early stages of maturing room for the ILS market to attract was not the size of claims that was a and some practices will have been investors and asset managers looking problem, but rather the drip-feeding reshaped and refined after the past to set up a stall in the sector, perhaps of claims over multiple years. The two years. best evidenced by the upcoming entry of Pimco to the market. The ILS market’s response to the back-to-back loss The bond giant will work “ alongside Allianz but also source years of 2017/18 have driven the changes that risk independently, and has said it sees more opportunity in the private have emerged this year. The big question now is collateralised reinsurance market how the market will respond in 2020 so it will not confine itself to the cat ” bond segment. Florida market in particular, has So it isn’t surprising that the M&A blurs boundaries much to prove to the industry in this broad-brush vision for the market Meanwhile, amid new players regard. that emerged in its heady growth entering the ILS market, M&A has There is possibly more riding on phase of 2014/15 is now being been a continuing theme for the the outcome of this year’s hurricane defined more carefully. Any lingering alternative segment. season, therefore, than there has view that ILS investors were naïve A year on from Nephila’s been since the Katrina-Rita-Wilma capacity must now have been landmark sale to Markel two further era. A clean year will give investors dispelled, along with the idea that independent platforms have sold, income that helps to offset – or even, rates would flatline forever regardless with London weather specialist for some, fully earn back – their of loss activity. Coriolis set to join Scor later this prior losses, while resulting in a The new era may be more year and White Mountains taking smoother rollover process for 2020 complex, as reinsurance returns face a minority stake in Chicago-based deployments. off against competing sources of Elementum. Another loss-struck year, however, diversifying income to attract capital. As a result of recent acquisitions may see investors questioning But the basic premise of the story and sales, the ownership profile of whether the returns from the sector – that flexible capital structures are the industry in the past five years has remain attractive, or whether here to stay – prevails. undergone a significant shift, pulling it closer to the reinsurance fold, with carriers now owning a large part of Top 10 ILS AuM 2014-2019 Top 10 ILS AuM 2014-2019 the market. This trend has only emphasised 80 the convergence of the two sectors, with access to balance sheets and 70 credit ratings becoming even more critical for ILS managers than 60 previously after the experience of 2017/18, as a means of managing 50 or avoiding problems with trapped capital and offering cedants more
options. AuM ($bn) 40 Looking past 2019 30 Ultimately, although it remains a minor (albeit increasingly 20 indispensable) part of reinsurance market capacity, it is the ILS market’s response to the back-to- Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 back loss years of 2017/18 that Source: Trading Risk has driven the changes that Source: Trading Risk
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…CONVEX’S STEPHEN CATLIN AND PAUL BRAND
Stephen Catlin and Paul Brand will tell you that Convex is a greenfield operation and not a start-up. So what are the duo’s plans for their new holding? Mark Geoghegan takes a tour of the estate…
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Mark Geoghegan: I would love classic case of, the worse it gets, the So we walked into this knowing that to hear about the moment when more opportunity there will be. we were likely to get quite significant you first decided to do what And then on top of that, there support. ended up becoming Convex. isn’t enough focus on clients and At the time we sold Catlin to understanding different client needs. XL, we’d been the largest Lloyd’s Stephen Catlin: It must have You think about more complex syndicate for about 12 years. We led been about two and a half years ago. clients, and the commoditised clients, over half our business in Lloyd’s, Brando [Paul Brand] and I went and how they’re going in different which was more than any other out for a beer one night and agreed directions – one set of clients wants a syndicate in the room. And we kept it would be fun to work together more hands-on approach and a more our leads over time. People knew again. We’ve worked together now bespoke service, and the other wants that if we became the leader, we’d for 32 years. The catalyst that got everything to be done seamlessly, most likely stay there. We’d treat me thinking about it really seriously automatically and absolutely the client properly, we’d treat the was a conversation I had with Stuart transparently. broker properly, we’d pay our claims Britton [senior managing director A lot of companies are dealing efficiently, we’d be proactive in of Evercore’s financial institutions with both sets of clients using the helping a client if there was a change group] at a Christmas dinner in 2017. same technology and the same in circumstance. Stuart, who is someone we know underwriters, which is causing well and respect, had said to me: enormous cost challenges, and are Mark Geoghegan: So is there a “Stephen, 2018 is your year.” almost over-diversified as everybody’s sense of unfinished business? He went on: “You’ve no idea what trying to do everything and be you could achieve; less than a handful everything to everyone. Paul Brand: We did a lot of things of people in the industry could do We started to think about how we which I’m very proud of at our what you could do. You’ve got the would build an operation that would previous organisation. But I think we respect, you’ve got the longevity, be more cost-efficient. There’s a can do it better and I like challenges. you’ve got the track record, you’ve got huge issue for the insurance industry the reputation, you’ve demonstrated regarding how much of clients’ Stephen Catlin: I think the answer you can keep a team together over a Convex:premium planned is spent on GWP costs and – base if you caseto your(early question business is, yes. Butplan) it wasn’t period of time.” solve that, that’s going to create a big the main driver. 5.0 $4.5bn And then the Lloyd’s losses came competitive advantage. $4.2bn 4.5 $4.0bn out, which were pretty horrific, with 4.0 $3.6bn Mark Geoghegan: So now every single product line losing 3.5 Stephen Catlin:$3.1bn I should probably you’ve got the clean slate and money, with the exception of energy 3.0 add to the backdrop and point out you can do things differently, (and that was purely luck!). 2.5 that around the end of 2018, both of what parts of insurance are So I rang up Brando and said: $bn 2.0 $1.7bnus were being approached, sometimes evergreen, and what should be “Maybe we should start thinking 1.5 collectively, sometimes individually, left alone? about this seriously.” He said: “I 1.0 by distribution brokers and clients think we should.” There were two 0.5 saying: “You should get back in the Paul Brand: With complex risks, decisions to make: one, if we were to 0.0 marketplace, it needs leadership.” clients want to know who the carriers start in 2019, would that be too early 2020 2021 2022 2023are and they want 2024 to form personal 2025 in terms of what’s going on in the relationships with the carriers and marketplace; and the second thing Convex: mature intermediaries. Whether that’s was, was it really achievable? insurance or reinsurance, I think So I rang up Stuart, and said: Convex:state business mature statemix business mix that’s a very special part of the “We’ll look at it.” business, and that’s got tremendous 4% We then spent some more time 4% value. If you’re going to make bespoke thinking carefully about where we Property reinsurance products for people, it helps if you 20% Casualty reinsurance saw the market going. Was 2019 too 11% understand them and their business early, should we wait for a year? But Casualty in depth. by that stage we were getting pretty GWP Specialty There’s only a relatively small sliver 12% c.$4bn-$5bn Property emotionally committed to the project. 19% of insurance premiums available By the end of March, we had Energy/marine out there. We think the addressable decided that actually 2019 was going 14% Aerospace market for our insurance and 16% to be the year because what we were Specialty reinsurance reinsurance business is about $130bn doing at the outset was building the out of a global P&C market of around toolbox. Insurance lines: 57% $5tn. So this is more of a rifle shot as Reinsurance lines: 43% opposed to trying to do everything for Paul Brand: The market’s been Source: The Insurance Insider everybody. creating more opportunity. It’s that Continued on page 14
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London is a really fantastic centre Paul Brand: When you think about choose to lead their business, it’s not for complex risks; it’s got the brokers commoditised business, it’s very something you can dictate. there, it’s got the carriers, has the unclear to me as to why you need so right lawyers, has the right claims many loops in the chain and who’s Mark Geoghegan: But you’d professionals and that feels pretty really driving maximum value for always want to have the evergreen to me as well. clients. The companies that might capabilities of leading, if a be able to solve that problem need to client wanted? Stephen Catlin: The other benefit be good with technology; neither the is the fact we have no legacy – there’s insurers nor the brokers are good with Paul Brand: We certainly intend to no legacy of liability, and no legacy of technology, as far as I can make out. build the capability to be able to lead process. There is a bit of a turf war going business and be able to lead it well. This gives us the resource to really on with the commoditised business. concentrate on technology in terms of As opposed to thinking about how Mark Geoghegan: Would that the underwriting decision rather than they best serve the clients, both mean that if you didn’t have the process. intermediaries and carriers are that capability, you’d actually We’re thinking a lot about data, thinking about how they can eat each say that’s not a class we want to how you collect data, how you other’s lunch. be in, because we haven’t got synthesize data, how you use artificial So you’re getting intermediaries that capability, we’re not good intelligence to do that, how you that are trying to underwrite, and enough? create algorithms to get better risk you’re getting carriers which are going modelling – to make better decisions to try and distribute. Paul Brand: Yes, more or less. for yourself, and indeed for the client. Client dissatisfaction with the If you understand the risk better, industry will drive change. There’s Mark Geoghegan: What do and you can talk to clients about their been too much concentration on who you think about portfolio risks as you see them, you can help gets what share of the spoils, and underwriting? them with their risk management and that’s where an awful lot of the effort risk mitigation. If you do that, you’re has gone. How do we create facilities, Stephen Catlin: As you know, delivering a value-added product to as opposed to how do we build things we were involved in the Aon Client the client beyond just risk transfer. that are a lot better for clients? Treaty. That wasn’t underwritten by the broker, it was underwritten by Mark Geoghegan: In an earlier Mark Geoghegan: Is the selected leads, and we had control interview, you said the game is strategy that you only want to over those leads. It was an attempt up for the industry; it’s got to be leading business? Would you to see whether you could do portfolio be restructured, it’s got to cut follow anywhere? underwriting, with the appropriate costs, and we’ve got to shorten underwriting leaders, so that you distribution chains. Can you go Paul Brand: We’ll absolutely follow. could save cost. Unfortunately, we into more detail? It’s up to clients as to who they didn’t get the opportunity to see
“ Client dissatisfaction with the industry will drive change. There’s been too much concentration on who gets what share of the spoils” Paul Brand
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1-36_IQ Autumn 2019.indb 14 27/08/2019 17:40 INTERVIEW
whether that really worked or not. The question of portfolio ConvexConvex: planned planned GWP GWP – base– base case case (early(early businessbusiness plan) plan) underwriting is really interesting but I think both of us are fundamentally 5.0 $4.5bn $4.2bn opposed to portfolio underwriting 4.5 $4.0bn when the broker is doing the 4.0 $3.6bn underwriting. 3.5 $3.1bn 3.0 2.5
Mark Geoghegan: What about $bn 2.0 $1.7bn third-party capital then, is that 1.5 forming any part of your master 1.0 plan? 0.5 0.0 Stephen Catlin: We’ve got 10-year 2020 2021 2022 2023 2024 2025 money, so we’ve got time and we’ve got perfectly adequate capital for the Source: The Insurance Insider time being. There are lots of levers we can pull, and third-party capital is Convex: reducesmature multiple state data business entry and mix data and analytics, and using this another lever. Over a 10-year period, makes certain that you’ve got the information to build a portfolio that 4% undoubtedly we will make use of 4% same version of the truth the whole is resilient. different kinds of capital. But that’s time. Property reinsurance an issue for tomorrow, not for today. So20% yes, it has itsCasualty risks but reinsurance it has Mark Geoghegan: By plugging 11% significant benefitsCasualty and if we didn’t into clients’ data? Mark Geoghegan: You’ve GWPdo it, we’d have a Specialtydifferent set 12% mentioned your outsourcing c.$4bn-$5bnof risks. We couldProperty not afford the Paul Brand: Yes, exactly. model leading to cost technology19% that we’re getting from Energy/marine advantages. But with this WNS [business process outsourcing Stephen Catlin: And we’ve got 14% Aerospace horizontal, single partner, does firm16% WNS Global Services] ourselves Mark van Zanden, our head of Specialty reinsurance that leave you vulnerable if at this stage, so by outsourcing we’re portfolio optimisation, who can they let you down? Insurancegetting lines: 57% top-end technology in a cost- concentrate on these issues and build Reinsuranceeffective lines: 43% manner. a team around him to do it. This Stephen Catlin: Well, I can will be one of our alphas – we’ve got remember a management meeting Mark Geoghegan: How do you the flexibility and the resource to where I was asking the difficult view the burgeoning InsurTech concentrate on this. questions and I said: “We need to space, and what sort of things have a plan B, and we need it in you might be looking for it to Mark Geoghegan: The Future writing.” I wanted it for myself in unlock for you? at Lloyd’s consultation, has it terms of my fiduciary duties and inspired you in any way? And if I was the regulator it would be Paul Brand: It’s going to have if so, what bits of it have you one of the first questions I’d ask, a huge impact across multiple found interesting? because we’re doing something that dimensions. It’s changing how clients hasn’t been done before. The team are operating, whether that’s with Stephen Catlin: Well, both of us came back with a very detailed piece the Internet of Things or whether are very supportive of Jon Hancock of work about what happens, our it’s by using telematics data to know [Lloyd’s performance management relationship with the technology more about risk. It’s changing the director] and John Neal [Lloyd’s provider and our relationship with way products are distributed in the CEO]. They’ve got a very difficult our data. commoditised risk space and it’s job because they’ve inherited some We’ve all asked ourselves the “what changing processing cost. nasties. Jon Hancock has been if?” question. Are you being sensible The ability to set everything up unfairly castigated for his decisions, putting all your eggs in one basket? in the cloud is an awful lot easier, but he had little choice given where And in one sense you say “no”, and in cheaper and faster than buying in the market was. Jon’s already shown another sense the advantage of it is servers. The most important change he can be positive and constructive that you can get your outsourcers to for us is the ability to predict, which and now we need to move forward. talk between the various departments will be transformed by InsurTech in I’ve known John Neal for a long, behind the scenes. the next five to 10 years. long time and he’s very capable; he So often people do this on a Insurance is about predicting knows what bad looks like too, which piecemeal basis and therefore they’re things and what we want is to be is a great advantage in this situation. discrete, and there’s no synergy. That really good at making decisions. It seems to us that in the time allotted cross-flow brings huge advantages, Typically, this is achieved through Continued on page 16
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1-36_IQ Autumn 2019.indb 15 27/08/2019 17:40 INTERVIEW
they’ve made some real progress, and Stephen Catlin: The answer is not Mark Geoghegan: Back to their thought process appears to be to say we won’t do any silent coverage Lloyd’s, the Future at Lloyd’s logical and rational. The proof of the – as the new kid on the block we document has had a positive pudding will be in the eating. would have a problem doing any reaction. Is that swaying your I was actually delighted to read business – but rather, that behind thinking? recently that Lloyd’s is coming down the scenes we have to keep on asking heavily on silent coverage for cyber, questions, time and time again – Stephen Catlin: I started in which has been an elephant in the have you thought about this? Have Lloyd’s, as you know, it’s given me room for years now. It’s an area you thought about that? You know, every opportunity of my life. Brando where the industry needs leadership, you and I were talking about this, actually started in the company and the arguments are so compelling. probably eight years ago. market so our emotional attachments I’ve been talking to the Prudential are not quite the same. We haven’t Regulation Authority about this for Mark Geoghegan: Yes, it was a said yes, and we haven’t said no to years, saying: “Look, if you want to long time ago. And standalone Lloyd’s. worry about downside risk to capital, cyber, is it something you’re When we first spoke to Lloyd’s, we worry about silent coverage. Because hiring for, or...? said: “We don’t see how, in the light nobody can aggregate it.” of what you are doing at the moment Nobody knows what could happen, Paul Brand: I think the cyber – which, by the way, we support and anybody who thinks that silent market’s an interesting one to watch. completely – and the restrictions coverage is no coverage is living in We don’t have a cyber underwriter on that have been brought upon the cloud cuckoo land. Go back to my board yet, and it’s one of those areas market, that you could approve a time in Equitas, go back to asbestosis, where the risks are growing very business plan which works for you go back to pollution, look at what rapidly… and works for us. That’s not a hostile the American courts did in terms comment – it’s just reality. You of rewriting the intent of the policy Stephen Catlin: And the don’t want to do something with us for something that hadn’t been understanding of the risks is growing that undermines what you’re doing contemplated. It will happen again rapidly as well. elsewhere; that won’t be good for the for cyber. market.” Paul Brand: There have not been We’re very supportive of the Mark Geoghegan: So it’s enough claims yet either – it’s very individuals and Lloyd’s is still the definitely not something that’s difficult to price insurance where epicentre of the wholesale market in your business plan? there haven’t been many claims. in London. If we can find a way of having a Lloyd’s syndicate which makes sense to our shareholders, particularly in terms of expense, then we would consider it. John Neal is doing “ Paul Brand: Lloyd’s also needs what he has to do, to clarify the purpose. It’s going but he is not in a through a great process of trying to think that through and is edging its position to change the way towards an answer, but it’s not culture of individual really answered it yet. companies – the only Mark Geoghegan: We’ve had some quite major consolidation people who can do in specialty broking, so does that changed landscape worry that are the leaders of you or excite you – how are you those businesses” reacting to it? Stephen Catlin Paul Brand: It comes back to the question of how strong is the London market. The consolidation is an affirmation that London’s got some very talented people and businesses. That fact that Marsh wanted to buy a broker, which was a global broker, is an interesting affirmation of our view
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1-36_IQ Autumn 2019.indb 16 27/08/2019 17:41 INTERVIEW
that London is a great place to have behaviour. Do you think that really seriously and have that as part an insurance/reinsurance business. there is a culture problem that of our alpha. And we aren’t going to And it also creates ripples, and those needs fixing at all? change that. ripples are going to lead to changes in quite a lot of places. Stephen Catlin: Culture is a Mark Geoghegan: Any rough company-specific issue. I’m not idea of how many people you Stephen Catlin: What’s your view? convinced that the insurance think you’ll have in Convex industry is better or worse than any colours by year-end? Mark Geoghegan: I think what other part of financial services, but it goes around comes around! needs changing. Comments about the Stephen Catlin: One hundred. So, what about culture? You’re failings of the industry are valuable starting a new business – what to the extent that it’s a recognition of Mark Geoghegan: One last sort of culture do you want to the issue, but the change won’t come question. You have patient create at Convex? from regulation per se. capital, but we have a John Neal is doing what he has hardening market, which must Paul Brand: Open, flexible, a lot to do, but he is not in a position to be welcome. Do you see the of fun, but at the same time we’ve change the culture of individual market firming accelerating at got to be good at what we do and companies – the only people who all? it’s got to be an environment where can do that are the leaders of we challenge one another in order those businesses. So it’s the group Paul Brand: As always, it doesn’t to provide the best products for our executive, it’s the CEO, the CFO, pay to be too generalist about it. clients. COO; how they behave, how they It’s varying a lot through specific treat each other, how they behave to classes of business, largely driven Stephen Catlin: We’re not a start- the outside world, how they behave by recent trading history. There’s up, we’re a greenfield, so there’s an with people that work with them in an expectation without seeing into embedded culture we bring with us the company. These are the things everybody’s reserves that reserves which you know a lot about anyway. that drive culture. could become an issue. The market is When you’ve got almost an Culture in financial service teetering on the brink of quite a big established base for culture, it’s a lot industries has slipped. It was very, correction, but which way it goes is easier than starting from scratch. very bad when you and I first joined anybody’s guess at the moment. It’s not to say that our culture was the market – it was horrific in those perfect but it’s a foundation; we’ve days. It then gradually improved. Stephen Catlin: Our gut feel is that learnt from it, and like everything Some of the consequences of M&A there’s a casualty story to come out else we do, we want to do it better and bringing cultures together has which is pretty horrific – and a lot than we did it before. meant that there’s less strength of worse than a lot of people realise. culture at a company level than there The thing that concerns most Mark Geoghegan: We’ve got a used to be and it is very important of us is if people get too euphoric huge amount of scrutiny coming that it’s rebuilt. about what’s happened in the last from outside our industry, with From our point of view, our six months – we’re not actually at even the general press writing experience is our legacy, and we’re adequate pricing yet. We’re on a about insurance employee well known as people to take culture journey together.
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1-36_IQ Autumn 2019.indb 17 27/08/2019 17:41 INSURTECH LONG HORIZONS
ReinsurTechs are on the rise, but the complexity of the reinsurance sector coupled with the longer term view of incumbents means the development phase for innovation may be long, findsAnna Sagar
nsurance has long had its foot come in and innovate. The goal is to help drive growth in the door when it comes to Here, Insider Quarterly examines and liquidity in the marketplace IInsurTech, with most big players some trends in the market to see by enabling parties to access more now having some kind of investment where the next wave of innovation products and share risk quickly and arm to partner and collaborate with may come from. easily. InsurTechs across the value chain in “It is an enabler, we are not doing specialty, wholesale and even personal The electronic marketplace the trades ourselves, the market is lines. One trend getting increasing attention there to do the trade. We are trying However, the waves of innovation is the idea of an independent to help grow the market so provide that have washed over the primary electronic marketplace in which liquidity to products that doesn’t have insurance industry over the past few risk can be transferred and placed huge amount of liquidity,” adds Pike. years may now be lapping at the digitally. This is something of which auction- shores of the reinsurance sector. An example of this is Akinova, the based marketplace Tremor is very More and more reinsurance London-based marketplace that aims aware. A graduate of the Lloyd’s Lab InsurTechs – or “ReinsurTechs” – are to enable the trading and transferring second cohort, the success of its model emerging, looking to address the pain of risk in the rapidly growing cyber depends on several users placing points that have afflicted the industry insurance market. bids to find the “true” price of a risk. in data and analytics, administration Akinova’s commercial director It has participated in January and and distribution. Alexander Pike says: “With products June renewals in Florida, and has Reinsurers are also looking like property catastrophe it is intermediated around $2mn of closed outwards to find solutions to established and works in a cyclical bids to date. their problems – for the next and seasonal way, but with cyber it “For us it isn’t so much about technology that will revolutionise the isn’t seasonal, it can be 24/7. How barriers, it is really education. The mainstream. Old concepts are getting then can people purchase cover or, if traditional insurance company a new lick of paint as electronic they have risk on their balance sheet, will typically have longstanding marketplaces look to gain traction. how can they transfer that to another relationships with reinsurers and However, as with any kind of capacity provider?” an intermediary they rely on very change there are hurdles that must be The platform uses a mixture of heavily,” says Tremor founder and overcome. Reinsurance is technical machine learning and proprietary CEO Sean Bourgeois. and complicated, and the logic mathematical frameworks, acting on Bourgeois argues that this means previously dictating the market’s behalf of cedants and intermediaries intermediaries may not be offering a direction of travel with respect to match risk to capital while competitive price, as insurers do not to InsurTech was that it was too providing news, data and analytics to know if it is the best price. challenging for external agencies to its market participants. “We are actually a marketplace,
1818 INSURTECH
we are a risk syndication. If you have partnered with around 12 Lloyd’s from its portfolio of companies last a single risk or portfolio of risk and syndicates, but as a new venture it is year. connect it with actors on the other still relatively untested. But just because you don’t have a side then we figure out what an Technology has also been a big balance sheet it does not mean informed risk would be for everyone,” barrier to such ventures in the past, you can’t innovate. he says. according to Bart Patrick, managing Smaller reinsurers are using director for Europe at Duck Creek innovation arms to forge strategic Hyper-connectivity Technologies, which has created a partnerships and make investments in Improving the connectivity of the reinsurance management platform InsurTechs so they can keep up with reinsurance marketplace is something with DataCede. trends. Riskbook, a beta-stage InsurTech, is “Sadly, the robustness of the Greenlight Re set up a tech looking to address. Founded in 2018 by former Aon Reinsurance is a mechanism for spreading risk, so it lends employees Jerad Leigh and Ben Rose, “ Riskbook describes itself as “the itself to the concept of a tradeable commodity that could Rightmove of reinsurance”, and looks to make actors in the reinsurance be packaged and sold in a derivative format” space “hyper-connected” so they can do more business. technology platforms supporting the innovation unit last year to partner It does this through a digital right idea was not there at the time. with and develop start-ups that could platform that connects brokers However, it is now,” says Patrick. bring new technology to reinsurance. and reinsurers to align distribution “Reinsurance is a mechanism As Greenlight Re Ireland CEO and capacity. It is innovating on an for spreading risk, so it lends itself Pat O’Brien says, “By partnering existing model, which co-founder naturally to the concept of a tradeable with InsurTechs we can get access Leigh believes is key. commodity that could be packaged to the technology that they have “Working alongside incumbents is and sold in a derivative format. and we can assist with capacity and where the biggest opportunities are There is no reason – outside of good distribution. Many InsurTechs are in and if your proposition is disputing underwriting and analytics – that the MGA space and they are selling incumbents and making them reinsurance could not in the future an improved product in this space, redundant you will struggle to gain be a traded commodity with its own generating revenue and improving traction,” explains Leigh. “When you liquid market.” efficiency.” are actually working in the spaces you The unit has made 12 investments realise the broker plays a fundamental Innovation units since its inception, ranging from role. We want to empower Innovation units are nothing new Australian property claims platform incumbents to do more.” when it comes to insurance or Handii to New Zealand-based Partnering with incumbents is reinsurance. Reinsurers such as personal lines MGA Cove. vital for many InsurTechs, but with a Munich Re have had digital ventures Being a smaller reinsurer in marketplace model success rests on arms for years, with Munich Re some instances could be seen as a independence – the more neutral a Digital Partners bringing in around Continued on page 20 marketplace seems the more likely it EUR100mn ($111mn) in premium is that participants will use it, Leigh says. QuarterlyQuarterly InsurTech InsurTech transactions transactions by target by target country country Akinova markets itself as an “independent marketplace created 2012 – Q2 2019 Q2 2019 with and for the industry” and, according to Leigh, Riskbook has a similar approach whereby 19% US independence is essential for the UK 27% US enterprise. 3% China UK However, ReinsurTech ventures 3% Germany 42% China need a critical mass of actors in the 5% 55% space to engage with their platforms India 6% France 6% because, as they are not actually France Other originating business, gaining traction 9% Other 9% in the reinsurance market can be 16% challenging. According to Bourgeois, Tremor 2012 – Q2 2019 transactions: 1146 Q2 2019 transactions: 69 has around 95 percent of the global Source: Willis Towers Watson market on the platform, and has P&C InsurTech transactions by subsector 2012 – Q2 2019 Q2 2019 1919
40% Carrier 43% 49% B2B 55% Distribution
5% 8%
2012 – Q2 2019 P&C Q2 2019 P&C transactions: 691 transactions: 49
Private technology investments by (re)insurers
140 Q1 119 118 120 Q2 Q3 105 100 Q4 33 31 26 80 66 28 26 66 60 28 22 40 32 34 36 29 19 27 20 14 30 1 4 24 26 27 0 11 2012 2013 2014 2015 2016 2017 2018 2019 INSURTECH downside, but the leanness of the Working alongside incumbents to rethink and drive significant organisation means that Greenlight “ change at scale. We understand can be nimble and make the most is where the biggest opportuni- enough about the industry for it to be of new technology, according to relevant, but we are not constrained O’Brien. ties are and if your proposition by historical thinking.” Another smaller scale reinsurer Looking ahead, innovation in that has taken the next step is is disputing incumbents and the reinsurance space may have a RenaissanceRe. It has partnered with QuarterlyQuarterlymaking InsurTechInsurTechthem redundant transactionstransactions you byby targettargetlong country countrydevelopment phase, as global InsurTech Gateway. Gateway was head of Willis Re InsurTech Andrew started as an incubator in 2017 by will struggle20122012 to –– Q2gainQ2 20192019 traction” Johnston explains.Q2Q2 20192019 venture firm Hambro Perks to reduce “It is still quite a nascent space. the lead time and cost of getting a historical claims to give (re)insurers To a lay person it is still just so business idea to market. 19%19%and brokers a more accurateUSUS view of unknown: you only think about 27% It works across the InsurTech their risk. UKUK 27%reinsurance if you understandUSUS 3% space, from cryptocurrency to fleet 3% Concirrus recently ChinapartneredChina insurance, and you have a UKlimitedUK 3% insurance and flood cover, and it is 3% with Willis Re to deliverGermany Quest and ability to innovate42%42% without Chinadomain 5% 55% Germany China precisely this access to niche markets 5% its benefits 55%to clients. IndiaAs part of the expertise and capital. France India 6%6% France 6%6% that makes it such an attractive partnership, Willis ReFranceFrance and Concirrus “A few companies are lookingOtherOther reinsurance partner. will develop products for the specialty 9%to be disruptive in the reinsurance 9%9% OtherOther 9% Vice president of technology market. market16%16% by digitising trade. Without ventures at RenaissanceRe Karl Concirrus CEO and founder controlling or originating the Stanley explains: “For us, the 2012 –Andrew Q2 2019 Yeoman transactions: says: “We have1146 a business,Q2 2019 however, transactions: this is a very 69 big Gateway is about our interest in 2012 – privilegedQ2 2019 opportunity transactions: to be 1146 able ask,”Q2 Johnson 2019 transactions: concludes. 69 new products, new models and new markets. It helps us to look ahead, P&CP&C InsurTech InsurTech transactions transactions by subsector by subsector and positions us to act as each area P&C InsurTech transactions by subsector evolves. For [Gateway], we bring the 20122012 –– Q2Q2 20192019 Q2Q2 20192019 benefit of industry relationships and can offer our expertise.” This strategy is typical of reinsurers’ approach to innovation, 40%40% 43% CarrierCarrier 43% according to InsurTech Gateway 49% B2B 49% director and co-founder Stephen B2B 55%55% Brittain. DistributionDistribution “Reinsurers appear to me to be thinking much longer term and 5% 5% 8% looking at the fundamentals of the 8% business models behind risk. They are a natural home for the more opaque 20122012 –– Q2Q2 20192019 P&CP&C Q2Q2 20192019 P&CP&C technologies of big data, cloud transactions: 691 transactions: 49 computing and blockchain that will transactions: 691 transactions: 49 Source: Willis Towers Watson enable a massive step-change in the complexity of calculating and trading risk,” he says. PrivatePrivatePrivate technology technologytechnology investmentsinvestments investments byby (re)insurers(re)insurers by (re)insurers New and future tech 140 140 Q1 While many InsurTechs focused on Q1 119 118 120 Q2 119 118 reinsurance are looking at improving 120 Q2 105 Q3Q3 105 the placement process, others 100 Q4 3333 3131 100 Q4 26 have their eyes on altering product 26 8080 6666 28 2626 66 propositions altogether. 28 28 66 6060 28 Concirrus is an InsurTech focusing 2222 on both the direct and reinsurance 40 32 3434 3636 40 29 19 2727 32 markets to deliver insights into real- 29 19 2020 14 time risks via Quest, its big data and 4 14 24 26 27 3030 11 4 11 24 26 27 analytics platform aimed at the motor 00 11 and marine markets. 20122012 20132013 20142014 20152015 20162016 20172017 20182018 20192019 Quest accesses wide-ranging Source: Willis Towers Watson data sets and combines them with
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Insider1-36_IQ 0519 Autumn option 2019.indb 1.indd 1 21 29/05/201927/08/2019 12:48:57 17:41 INTERVIEW RATIONALITY AND RELEVANCE
There has been a return to rationality in the global reinsurance market and PartnerRe is prepped to take advantage, president and CEO Emmanuel Clarke tells Christopher Munro
here is little doubt that the especially. There’s still more supply areas that have seen increases, we non-life reinsurance industry is of capacity than demand, and there’s have benefited directly from them. Tcurrently enjoying something of been no wholesale change across the And that’s the same for a number a moment. board.” of specialty classes as well. [The After years of depressed pricing, Instead, Clarke says, there has been increases are] happening in aviation, the past 12 months or so has seen a shift in the industry’s mindset. energy, marine and in energy onshore. an uptick in the industry’s fortunes, “What we see is more disciplined These sorts of markets where there with reinsurers deciding, “Enough is behaviour to bring corrections where are double-digit rate increases will enough” and refusing to countenance they need to happen. We’ve seen benefit both the primaries and the further wholesale rate reductions. increasing pressure on commissions reinsurers,” says Clarke. While there are improvements, on proportional business and we’ve it is certainly premature to say that seen increasing rates on excess of loss. Were we happy with the reinsurance is basking under blue That’s been driven by the underlying “ skies and glowing sunshine. Instead, loss experience of the various pricing and could more have a more apt description would be that segments and products, and the the clouds are beginning to part and market’s view of changes in frequency been done? I think the market there are some bright spots. and severity.” But there is certainly optimism These changes have not been could have done more on the about these rays of light. across the board, however, with reinsurance side” Talking to Insider Quarterly, Clarke noting that in some classes of PartnerRe’s president and chief business, geographies and operating executive Emmanuel Clarke says he is segments, there have been “some Renewals then and now bullish about the industry’s prospects major corrections”, whereas in others, As Clarke highlights, PartnerRe has in light of the shift in pricing trends. there have not. been a beneficiary of these recent rate “On the non-life side, I’m as “Broadly speaking, the US is rises, although he feels the market optimistic and encouraged as I’ve definitely moving up and so are a could, and perhaps should, have been in maybe the last 10 years,” he number of classes in specialty. The done more to bolster pricing further. says. latter is more being led by the London However, the recent loss creep on “There are some classes of business market,” Clarke says. events such as Typhoon Jebi means where we’re seeing significant price “In the US, we are seeing the next renewal will see additional improvements which we haven’t improving pricing in all segments, increases. seen since 2002 and 2003, and there but not workers’ comp which is still “In the recent renewals, what we seems to be an acceleration of that very competitive, so not a wholesale saw was broadly what we expected. momentum,” Clarke adds. change.” In Japan, Jebi saw some meaningful One of the interesting aspects of [loss estimate] increases after the Rational and disciplined the recent rate revival is that the renewal and so in hindsight, you The market is a very interesting one corrections have been more notable could say we should have charged at present, Clarke explains, noting it in the primary space rather than more. But the market will continue “is very positive and rational”. on the reinsurance side. That has to adjust next year based on what He continues: “It is a return to certainly been beneficial to those who we know, and we will know at the rationality after a sustained period of write proportional treaty reinsurance renewal next year what the ultimate inadequate pricing and substandard business. number for Jebi will be. returns. What is interesting with this “The majority of our book is “Overall, what we saw in Japan, market is that the balance between more proportional, versus non- in Florida and at the 1 July renewals supply versus demand is not modified proportional, so particularly in those was pretty much what we expected.”
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1-36_IQ Autumn 2019.indb 22 27/08/2019 17:41 INTERVIEW
However, Clarke also feels that reinsurers could have pushed harder to get even better terms than those ultimately agreed. “Were we happy with the pricing and could more have been done? I think the market could have done more on the reinsurance side. The primary players are the ones seeing the loss trends first, and they’re reacting in a good way. I think reinsurers will probably respond, but with a lag.” The tightening in the availability of retrocession cover for catastrophe exposures has already had an impact on reinsurance pricing for that segment, but Clarke predicts there may be more to come. “What’s interesting is anything on the cat side that’s loss-affected has had a meaningful increase in price,” he says. “Anything that’s not loss-affected and [where] there’s no capacity increase needed, [is] basically flat or marginally flat. Any accounts that are clean or non-loss affected but require more capacity are being charged for increased pricing. Every time anyone needs more capacity there’s a price tag to it because capacity has left the market.” Underwriting boost PartnerRe posted its results for the second quarter of 2019 in late July, and in its earnings announcement the reinsurer outlined how the improved underwriting conditions have benefited the business. In the announcement, Clarke said the company had been “encouraged by the better market conditions we are seeing in large portions of our non-life business”. That was evident in the Bermudian reinsurer’s numbers for the quarter. PartnerRe’s non-life net premiums written for the quarter reached $1.45bn, up 15 percent compared with the prior-year period. Of that $1.45bn, the P&C segment accounted for $849mn, an increase of 24 percent compared with the same three months in 2018. PartnerRe’s specialty reinsurance arm generated Continued on page 24
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22-24_Emmanuel Clarke.indd 23 28/08/2019 10:50 INTERVIEW
$598mn of net premiums written he predicts. “If I was a buyer, that’s insurance arm is also a boost for in the second quarter of 2019, up what I would do.” the business. 5 percent year on year. He adds: “Sometimes people try “Being a pure reinsurer carries a When asked to consider the to be smart and go last and it pays competitive advantage in the way next major renewal at 1 January off when people stay off capacity, but that a lot of our clients want to do 2020, Clarke returned to his initial I think this time people would be more business with us because we’re theme. better off going out early.” not competing with them,” Clarke “In a rational market, people says. will continue to reflect upon what Streamlined approach their true view of risk is based on Clarke says the company is in a A good partner what their experience has been. It’s strong position to take advantage of In the course of our discussion, almost mechanical. It’s not about the current trading conditions in the Clarke pinpoints terms such as whether there’s still a lot of supply of reinsurance market. “relevance” and “agility”, both capital. If the prices mathematically, Back in March, the company familiar buzzwords used to actuarially and experience-wise need removed a layer of management, describe certain companies and to increase, then I’m pretty confident which led to the departure of P&C businesses, but he is adamant that that they’ll continue to increase.” CEO Charles Goldie. The wider such descriptors are still key in the reinsurance industry. My expectation is clients and brokers will want to go out “Relevance is important,” he “ insists. “It’s always difficult to decide early and secure capacity on clean, non-loss affected where you draw the lines between the tiers because people tend to business with some price increases just to get it. If I was define them depending on where their company is, so I don’t like to a buyer, that’s what I would do” talk about the tiers. What matters is do companies have the ability to be a Obviously, any major losses arising move to streamline the business, core reinsurance partner to some of from the North Atlantic hurricane Clarke explained at the time, made the large, complex buyers? And we season would give underwriters PartnerRe more agile and put it in do have that.” further fuel to push for improved a better position to make quicker Clarke says the proof of pricing and terms and conditions. decisions. It also brought PartnerRe PartnerRe’s speed and agility is in But even without the potential closer to its clients. the trades and deals it is making. impact of any catastrophe activity, The structural changes saw “We aim to be a preferred Clarke believes the current firm PartnerRe split its P&C division reinsurance partner to our clients pricing trend will continue. into three segments: Americas; and we believe we have what it takes “Barring any abnormal loss Europe, Middle East and Africa; and to be that. We will do this by being experience over the next few weeks Asia Pacific. a global, diversified pure reinsurer and months, I expect the market to “The change has proved to be a with relevance and agility.” remain firm and rational,” he says. good one,” Clarke says, adding: “It At a time when there is increasing “What I see on the primary side is gives us that extra bit of agility to consolidation of reinsurance panels, that in June and July there was an interact with our clients.” Clarke says PartnerRe is “there acceleration in rate increases, and I That agility is important at a whether the clients want to pick five expect to see further momentum in time when the reinsurance industry reinsurers, 10 reinsurers or anything that. When it comes to reinsurance, continues to evolve at pace, with between”. there won’t be a lot of appetite for new risks coming to the fore, various “We have the capabilities and have any price erosion.” forms of capital increasingly coming been selected as a core reinsurance Given both the traditional and into play and M&A making ever partner for our clients. We have the alternative market catastrophe larger and, theoretically, stronger breadth of offerings and we have the capacity that has left the field of play, companies. solutions to provide, we have the there is little left for anyone seeking “There’s a need for relevance,” relationships, we have the history, we to grow their programmes. As such, Clarke says. “Companies like have the claims-paying ability and we Clarke anticipates that there will not ourselves that are well positioned have the balance sheet strength, so be room for any price erosion when it throughout the whole non-life we have everything we need.” comes to cat renewals. spectrum and can provide the whole The PartnerRe head says the firm “My expectation is clients and range of products clearly have an is growing the business “over time by brokers will want to go out early and advantage of benefiting from that.” being a good partner to our clients”. maybe secure the capacity on the PartnerRe is both global and “And that’s what will help us clean, non-loss affected business with diversified, but its existence solely as grow the value of the company,” he some price increases just to get it,” a reinsurer without the baggage of an concludes.
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1-36_IQ Autumn 2019.indb 24 27/08/2019 17:41 Rated A/Excellent by A.M. Best
Lumen Re Ltd (Bermuda) is sponsored by LGT ILS Partners [email protected]
LGT ILS Partners [email protected]
Lumen1-36_IQ Re_ad.indd Autumn 2019.indb 1 25 29/08/201827/08/2019 15:1717:41 1-36_IQ Autumn 2019.indb 26 27/08/2019 17:41 Autumn 2019 BERMUDA REINSURANCE ROUNDTABLE 27
BERMUDA (RE)INSURANCE ROUNDTABLE 2019 Embrace the future The (re)insurance industry has some catching up to do with the wider pace of technological change in the financial services sector
In association with www.insuranceinsider.com www.insuranceinsider.com
1-36_IQ Autumn 2019.indb 27 27/08/2019 17:41 PARTNERING TO DELIVER FINANCE TRANSFORMATION
“Insurers are increasingly relying Phinsys and PwC have developed on operational efficiency to drive a partnership that uses intelligent growth, but face the challenges of automation to help insurers improve additional calculation complexity, data financial control, reduce their operating granularity and systems impact created costs and meet the requirements of by IFRS17. The accounting and finance IFRS17. technologies offered by Phinsys enable insurers to respond to these challenges. To find out more about how our best- They provide an end-to-end solution in-class integrated solutions can unlock that automates processes and controls your data and future-proof your finance while reducing operational costs systems, get in touch with us now. and freeing up resources to focus on growth.” phinsys.com
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INTELLIGENT FINANCE AUTOMATION
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Participants On its toes Reeva Bakhshi CFO, Phinsys Group The pace of technological change within the the-moment data and information they need, or global (re)insurance industry has ramped up in is there still a time lag? If so, is that stymying the recent years, with the advent of the InsurTech growth of the ILS space? PARTNERING space keeping many in the market on their toes. Aside from issues around reporting, the Elizabeth Breeze But technology is not only shaping how roundtable participants considered what the the end-customer interacts with carriers and (re)insurance company of the future will look CFO, Hiscox Re & ILS brokers, it is also like. There has been transforming the back “For those who work in the considerable industry TO DELIVER FINANCE office by streamlining talk about matching functions and (re)insurance industry, the the right capital with David L. Brown processing data far more embracing of technology has the right risk, and Senior Partner & quickly than before. some roundtable Regional Insurance TRANSFORMATION This was just one of been a welcome development” participants felt that the Leader, EY Bermuda the topics discussed (re)insurance carrier of during a roundtable in Bermuda, hosted by The the future would have a dedicated platform that James Ferris Insurance Insider in partnership with software can tap into the ILS market. specialist Phinsys. As the discussion took place in Bermuda, Advisory, Director, For those who work in the (re)insurance it was only fitting that the topic of the island’s PwC Bermuda industry, the embracing of technology has been position in the global (re)insurance landscape a welcome development – market professionals was also considered. Bermuda remains the pre- now have far easier access to high quality data eminent jurisdiction for ILS, but its hold on the Martin Maringi than in the past. But the industry still has some crown is under threat from domiciles such as Assistant Director, catching up to do, especially when compared London and Singapore, to name but two. Supervision with the banking industry which has been As such, participants agreed that Bermuda (Insurance), BMA embracing new technologies for decades. could not be complacent and there was an The(re)insurance market is well aware that acknowledgement that the moves being made by Hinal Patel calculating expected losses takes time, and even the island’s regulator are a Group CFO and then exposure estimates are notoriously fluid – step in the right direction Bermuda CEO, Fidelis initial numbers issued are rarely accurate and towards it retaining its Insurance “Insurers are increasingly relying Phinsys and PwC have developed can shift significantly as time progresses. position of strength in That is in stark contrast to the banking the global (re)insurance on operational efficiency to drive a partnership that uses intelligent community which expects as close to real-time industry. Ritendra Roy growth, but face the challenges of automation to help insurers improve updates as possible on its investments and risk Managing Director, exposure. Christopher Munro Corporate Finance additional calculation complexity, data financial control, reduce their operating One interesting dynamic is in play in the Associate Editor, – Financial Services, granularity and systems impact created costs and meet the requirements of areas of the market where the banking and The Insurance Insider Alantra by IFRS17. The accounting and finance IFRS17. (re)insurance industries collide, for example in Anup Seth the ILS space. Are investors getting the up-to- Managing Director, technologies offered by Phinsys enable Aon Bermuda insurers to respond to these challenges. To find out more about how our best- They provide an end-to-end solution in-class integrated solutions can unlock EDITORIAL DIRECTOR SUBSCRIPTIONS DIRECTOR CONFERENCE PRODUCTION MANAGER David Silver Mark Geoghegan [email protected] Tom Fletcher [email protected] Matthew Sime [email protected] that automates processes and controls your data and future-proof your finance Vice President EDITOR-IN-CHIEF SENIOR ACCOUNT MANAGER EVENTS OPERATIONS MANAGER while reducing operational costs systems, get in touch with us now. Adam McNestrie [email protected] Georgia Macnamara Holly Dudden [email protected] Investment Banking, [email protected] ACTING MANAGING EDITOR EVENTS MARKETING ASSISTANT Alantra and freeing up resources to focus Catrin Shi [email protected] SUBSCRIPTION ACCOUNT MANAGERS Luke Kavanagh [email protected] Luis Ciriaco [email protected] EDITOR on growth.” phinsys.com Chrishan Tailor [email protected] PRODUCTION EDITOR Laura Board [email protected] Ewan Harwood [email protected] Richard Tyler HEAD OF MARKETING & ANALYTICS FEATURES EDITOR CEO, Phinsys Group Lynette Stewart [email protected] SENIOR SUB-EDITOR Gavin Bradshaw [email protected] Steve Godson [email protected] Alwin Swales BRAND MARKETING & COMMERCIAL DIRECTOR ANALYTICS MANAGER JUNIOR SUB-EDITOR Sajeeda Merali [email protected] Finance Transformation Aimee Fuller [email protected] Simeon Pickup [email protected] HEAD OF MARKETING SERVICES EVENTS DIRECTOR SENIOR DESIGNER in association with PwC Benjamin Bracken [email protected] Partner at PwC Sara Donaldson [email protected] Mike Orodan [email protected] Scott Watson-Brown HEAD OF STRATEGIC PARTNERSHIPS Asset Management Oliver Nevill [email protected] Leader, PwC Bermuda
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Bermuda (re)insurance Roundtable 2019
Christopher Munro Christopher Munro The reinsurance industry has seen a real increase in new It’s interesting that you talk about a flight to quality. David, forms of capital coming into the market, the most notable what are your thoughts on that development? example being in the ILS market in the growth of catastrophe bonds and similar ILS structures. How do you think this area David Brown is evolving, starting in the catastrophe space? To a certain degree it is a natural evolution. The initial phase of ILS included a number of years without significant Elizabeth Breeze catastrophe activity or catastrophe losses, so now you’re After two years of significant losses, the trend we are seeing getting people looking at the risk more closely and you’re is a pause and a reflection from our investors. They are going to get more attuned investors in the space going looking at the asset class and some of the challenges that forward. have materialised over the past couple of years, such as the Looking forward from an investor perspective, we’re going stability of NAV valuations and how rates have shifted after to see growth in products as well, but part of that is trying significant catastrophe events. to look at the tail risk on other products. We’ve had the issue The second thing I would say is there is a flight to quality. with trapped capital and to a certain degree that has driven They are looking at the quality of the ILS manager they are the rate increase in the broader market. investing in – how they prepare their NAV valuations, how they go about providing insight into the strategies being Hinal Patel undertaken – and really trying to assess more rigorously The 2017/18 losses have changed investors’ thought processes where they are allocating their money in the asset class. and behaviour. They are trying to understand the risk much more, and looking for differentiators. When you think about how you access a business, the question is – are you getting access to the good business or are you just one of the following markets? Is there a differentiation within your underwriting process, especially in terms of the tools you use? Have you got the capabilities to analyse risk on a live basis? When you get a risk in, does it suit your portfolio and can you optimise that risk- return trade-off? Investors are now wanting to see a greater alignment of interests through the fee structure and through ownership. Anup Seth At the end of last year we estimated there was about $100bn of capital in the ILS space, out of around $650bn. Now, with the trapped collateral and the losses the industry has incurred, that’s probably down to about $90bn. Last 1 January a lot of funds reloaded, whereas that wasn’t the case in 2019. I would also bifurcate the investor classes. One set sees this as purely an asset class and they’re reviewing the risk-adjusted returns. If those are still attractive, they will continue to invest. The second sees it as a long-term business. They are beginning to invest in infrastructure and they’re “At the end of last year we estimated there was making sure they have the right underwriting, origination about $100bn of capital in the ILS space. Now, and distribution. with trapped collateral and industry losses, that’s Christopher Munro Talking about property cat and the losses in the past couple probably down to about $90bn” of years, there’s been a lot of scepticism about whether, once the market has been tested, it’s going to go away and not Anup Seth come back. But there seem to be a lot of investors around for
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the long term. There’s been a lot of talk about moving into casualty, with non-damage cyber cover and the demand for a cyber ILS product. Are you seeing demand for that kind of innovation – and a broadening out of the sector? Anup Seth There’s certainly interest and they’re looking to diversify with pure nat cat. However, when you look at nat cat itself, there’s still a huge amount to be done – whether it’s weather- related or non-modelled – and those are areas where we’re seeing investments. We haven’t seen meaningful investment in the standalone non-property cat space as yet, but the industry will develop outside the property cat cul de sac. It has to because it’s such a large area of investment – they will naturally look for diversification. Scott Watson-Brown On the concept of a pause, I don’t see a massive rush of capital going into that market. Outside traditional cat, we see a lot of activity in the run-off P&C space – that’s where we’re seeing endowments and private equity groups come in and make allocations. But there are still some challenges around the concentration risk and due diligence on those books; having the right teams to undertake due diligence across a variety of insureds and navigate the regulatory risks is essential. A poor “After two years of significant losses, the trend acquisition can sit in the portfolio for quite some time. There’s still a lot of work to do in that area, and governance we are seeing is a pause and a reflection from policy, procedures, independence, non-executive directors our investors” and so on are a big piece on the operational side. Once you move away from the strategy there is a focus on investors Elizabeth Breeze pushing that institutional expectation about how they behave on to the managers. they are over-concentrated in private credit and would like James Ferris to diversify their portfolios. Second, especially in the US, That’s an interesting comment about catastrophe and they’re thinking that the life cycle of any ILS investment will [insurance-linked] securities. We are seeing interest from be less affected by recession because insurance markets are the market in exploring establishing vehicles and buying not closely tied to economic cycles. businesses that are doing that. As a classic consultant, I’ll The reason they’re not allocating more capital to ILS answer by asking a question. It was interesting to hear about revolves around the question of whether they are going the diligence that’s going on in terms of new investment. So to be fairly compensated for the risk. The issue of being I wonder what people are seeing in terms of all the trapped properly compensated relates directly to the quality of the capital and whether anyone is pushing to see whether more underwriter and whether the losses are quantifiable in a can be done to get that capital released. Or are the investors short period of time. If investors are comfortable about just accepting the fact that this is trapped for a number of getting money back within a reasonable amount of time years? and the underwriter they are picking is differentiated, more money will be allocated to the sector. Elizabeth Breeze Our investors understood the class they were investing in David Silver and that trapped collateral would materialise post-loss. They We’re also seeing a lot of interest on the life ILS side. also understand that they are likely to get returns from that Apollo is reportedly raising $9bn for its various strategies, side-pocketed trapped collateral. At the moment, they are of which more than half will reportedly be directed not willing to give up the value that is contained there. If towards ILS investments, including a portion towards you were to sell it off you would be doing so at a significant life settlements. It was [recently] announced that private discount. We’ve been approached by a number of parties on equity firms Reverence Capital and RedBird Capital had the island who are interested in trying to do something in this acquired Vida Capital, an ILS manager heavily focused space, but the reality is that it’s an investor-led decision, and on life settlements. So we’re seeing a lot of PE interest as there isn’t really the appetite to do that at the moment. That well in ILS and insurance-related assets. Private equity may change over the longer term. returns are starting to get squeezed as PEs are having to put more equity into their trades to be competitive so Ritendra Roy they are looking for niche opportunities where they We talk to a lot of large asset managers and they want to can generate returns, one of which is insurance-related allocate more capital to the ILS space for two reasons. First, investments and ILS.
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much stronger. You’re shortening the information flow from the actual loss point to feeding it into that NAV, so you can respond more quickly. Equally, history helps in terms of projecting how and where claims will develop, so you can build a cautious view of how to manage that investor’s expectations. Reeva Bakhshi Is anyone is under pressure to give NAVs more frequently than monthly? Because when I was doing this three years ago, they were settling on monthly but frankly we saw it as a benchmark expectation, and managing that two-monthly was an exercise in itself. Anup Seth We haven’t moved from more frequent than monthly. But what we have seen is investors demanding a more robust valuation or reserving process and an actual valuation policy. Before they invest they want to understand the valuation policy and have an independent review. The other point is having robust exposure management software and a strong technology base. When you look at how quickly you have to do these calculations, it’s not really a true reserving “If you look outside the ILS asset class, the analysis, it’s more an exposure management analysis. It’s really important that you’ve got the right technology to map pressure is building to raise the level and your exposures. frequency of information disclosure” Reeva Bakhshi Ritendra Roy That was all very much part and parcel of most of the due diligence assessment and the education process of bringing investors in. You’re competing with asset classes giving clear Christopher Munro valuations on a daily basis and they’re used to that flow of Reinsurers are increasingly using various forms of capital information. As an industry we’ve speeded up – we can do within their own operations as they try to match the right reserving quarterly or annually and roll that from month risk with the right capital. However, capital markets are used to month – but we’re uncomfortable with the degree of to up-to-the-minute mark-to-markets on positions. How are uncertainty within those. However, there is a point at which reinsurers keeping on top of the reporting criteria required demand will outpace [our ability] to compete of them? Scott Watson-Brown Hinal Patel That’s where keeping discussions real and making an Investors clearly want more up-to-date information. A lot investor aware of what risks are inherent in the valuation of them want at least monthly NAVs and we try to explain process is important. They need to understand that to them the volatility associated with that. For example, if uncertainty. When people get it wrong, we’ve had investors you look back to 2017 and the initial estimates that came are on the phone getting irate – whether new side pockets out for Hurricane Maria, AIR estimated $40bn-$80bn of have been created, or [there are] adjustments in NAVs for losses and then a couple of months later they were down events some time in the past. To the point about robust to half that. Last year we had Jebi where initial estimates policies and procedures, with the valuation process there are were $3bn-$4bn. By the end of the year they were probably even requests about who sits on valuation committees now nearer $7bn-$9bn, and now the market is talking about and whether they open that up a bit more. There is keen $13bn, $14bn or even $15bn. So, with more frequent NAVs interest in how you go through your valuation process and and even monthly NAVs there is a risk of losing investor how you’re applying it. confidence through constant revisions in estimates. David Brown Elizabeth Breeze There will continue to be a demand for timely and accurate Our investors demand and expect monthly NAVs and I do information. We are working with a number of the ILS not see this changing. However, I do think it is important to players on developing automated solutions related to manage expectations and be clear on the uncertainties that valuations which is not only going to improve the frequency exist in those valuations. and accuracy of information but also the corporate The quality of the ILS manager and the benefits of governance around it. an aligned model also come into play. Because of our longstanding relationships with our cedants, the quality of Martin Maringi claims insight you can get makes the NAV you can produce From a regulatory point of view, we see ILS as a hybrid
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between asset management and insurance. When we Anup Seth examine the insurance vehicle, one of the questions we Scott mentioned the side-pocketing. There are mechanisms ask is – how credible is the information the insurance available to address the accuracy and ultimately you’re company is providing? We are interested in understanding concerned about whether you’re going to trade or not on the the robustness of the valuation processes and the insurance basis of that NAV. If you’re concerned that certain policies vehicle’s process for judging whether it is producing credible are going to be exposed, once you’ve side-pocketed them you financial data in line with robust reserving practices and can’t trade them for a certain period of time and that gives standards. time for the claim to develop. Then you are able to develop an estimate with more accuracy that you can trade on after a Ritendra Roy certain period. So the industry is coming up with solutions If you look outside the ILS asset class, the pressure is for that type of challenge and more and more companies are building to raise the level and frequency of information using this hybrid approach. disclosure. Clearly, the job of the industry is to explain, if On the other side, ILS investors have looked at the monthly is the right standard, why that is, and then to stick challenges of the fully collateralised model and they have to it. So long as a consistent message goes to investors, with evolved, and are setting up their own rated reinsurers to the support of the regulator, we’ll be fine. However, pressure compete with the traditional model. from investors is going to increase. David Brown Richard Tyler It’s positive for long-term growth that we’re seeing a lot We supply an ILS provider with the systems that allocate of reinsurance companies in the marketplace continuing IBNR to the right level of detail, and changing the reserving to focus on ILS-type products, especially with strategic process to be more frequent than quarterly is unlikely to partnerships. happen. So what we’re looking at is how we get IBNR more But related to the combination of reporting, you have to accurately assigned to the risks it’s truly protecting and how look at the different investors involved and how you report you change that allocation as more information comes in to to them. Convergence is an old word but, at the same time, give a more accurate assignment. From there you get into when we think about the industry – especially with strategic the allocation to fund from within those risks. So it’s more partnerships – we think about it in total because reinsurers from that perspective that people are saying we’re not able have come to look a lot more like ILS and ILS is certainly to do this more frequently but we want it to be better in looking a lot more like reinsurance. terms of how we produce the NAV from that data at a point in time. Hinal Patel On the convergence side, if you look five or 10 years down Elizabeth Breeze the line, with low- or medium-rate-on-line products you The NAV I’m most focused on is when any investor is subscribing or redeeming from our funds and that’s the most critical point. But we involve an actuary every single month in our processes because we believe in the quality of that NAV we’re issuing. And we have a valuation policy and a valuation committee that meets every month. Richard Tyler That’s different from the rest of the insurance company? It’s interesting that you potentially have different practices for the ILS side than for the insurance company. Do you end up mirroring that across the insurance company ultimately? Elizabeth Breeze I wouldn’t have thought so. There’s a distinction between a property book and a casualty book, and when the rest of your business is casualty, anything more than quarterly makes no sense. I don’t see the practice changing globally for an insurance company. But certainly on the property side, for the ILS investors, that’s what they are demanding and it’s what we provide. “Changing the reserving process for an Christopher Munro We’re seeing growth in alternative forms of capital coming ILS provider to be more frequent than into the industry, and few reinsurance companies don’t now quarterly is unlikely to happen” have some sort of capital markets offering. Does that put pressure on companies to have separate types of reporting, Richard Tyler depending on who their capital providers are?
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going to be a big part of filling that void. When you look at places in the world that are just under-insured, or areas such as flood in the US, and you look at all these other exposures from a technology perspective – and cyber is just one aspect of that – there are opportunities for growth. Matching the right risks with the right capital sources will be key. James Ferris We’ve got a number of emerging insurance markets and emerging capital markets. Singapore is becoming bigger. China hasn’t yet made the moves it could. So the question is – what risks will they be covering? What will the capital markets that come into this industry look like? And, bringing it to Bermuda, what will the ILS business look like because ILS is a big player in Bermuda and we punch well above our weight, but there are people looking to take that crown. So we need to be looking to the future and where we’ll be in five or 10 years’ time. We need the regulators and the industry onside and the capital markets to come in to make sure that Bermuda stays ahead of its game. Christopher Munro Singapore has been keen to develop its own ILS market and has been pushing for regulation. London did so the year before last. There has been a lot of talk about Bermuda’s role as the pre-eminent market for ILS. Martin, what are your “The ILS market will develop into other areas of thoughts on what Bermuda can do to make sure it is the cat and other lines of business, and more carriers home for this? will have an ILS-dedicated or market-facing vehicle” Martin Maringi We have been tracking developments in other jurisdictions. Hinal Patel We also recognise that Bermuda continues to be a leader in insurance risk securitisation, but we cannot be complacent. still need a rated balance sheet because of the tail risk. That We are committed to continuing to be at the forefront of is going to limit the size of the ILS market because, at some innovation in ILS. For example, we spent the past 12 months point, there’s going to be too much tail risk going on to a having in-depth discussions with the ILS industry to explore rated balance sheet. When you look at how AM Best have how we should shape Bermuda’s regulatory regime to changed their rating process, even though their BCAR accommodate recent innovations that we have seen in the model uses up to the 1-in-250, when they do their rating ILS sector. The outcome was the introduction of a dedicated notching process their ERM criteria look further out on the ILS class called the collateralised insurer. scale – they’re looking at 1-in-500. So that tail element is This class has the operational flexibility to accommodate going to be very important. The two have to co-exist and it’s the continuing transformation of ILS products, structures not going to be the case that in five or 10 years we see ILS and origination models. With it, Bermuda will have the replacing reinsurers. licensing infrastructure to cater to the full spectrum of the differing and evolving needs of ILS capital such as structured Christopher Munro legacy covers, life and casualty-ILS deals. That’s a nice segue onto the next point which is what will the insurance or reinsurance company of the next five to 10 Richard Tyler years look like? As a software provider, and from a London perspective, we’re interested in some of the things that John Neal is saying Hinal Patel about follow-only syndicates, where in effect they’re not The ILS market will develop into other areas of cat and going to have to set up insurance companies. The question other lines of business, and more carriers will have an ILS- is how that goes in terms of the investment that comes in – dedicated, market-facing vehicle or other access to third- is it another vehicle that ends up having alternative capital party capital, along with their rated carrier. But as I said, the invested in it? two have to co-exist. Suddenly, we end up with more of a managing agency piece that is processing the writing of risk, premiums and David Brown claims, and then you apportion the result out to whoever has When you look at the evolution of the market, you see a lot done it and pay a managing agency fee. That’s quite a change of capital that still wants to come into the industry in some in the market, potentially separating out the insurance form or another. And then you have some pretty significant capital provider and the processing people. under-served markets. ILS or alternative capital is probably Do you see those changes from Neal as trying to get a chunk
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of that alternative capital going into Lloyd’s rather than into digital assets. Accordingly, the BMA has created a new Bermuda? category of insurance intermediary – the insurance market place – as well as an insurance regulatory sandbox to Martin Maringi position its insurance regulatory framework to address these Yes, we are watching that. Our job is to listen to our innovations. stakeholders and provide prudent solutions to address the needs of the ILS sector. The Bermuda market, including the Christopher Munro regulator, has innovation in its DNA and a record of meeting Do investors tend to lead the charge for changes in reporting, the needs of ILS-capital. One of our key success factors is which regulators then follow? a fit-for-purpose and flexible class regime that recognises sectoral differences. For example, the new collateralised Ritendra Roy insurer class offers more operational flexibility, but there is a The next generation of companies going into reinsurance trade-off; risk management, governance, and the operational are going to have both alternative capital capacity as well infrastructure will need to be in place to support the higher as traditional reinsurance. From an M&A perspective, risk profile. reinsurers are acquiring alternative asset management capabilities and vice versa. Lot of consolidation has taken Scott Watson-Brown place already, so for the next generation of Ed Noonans The listening part is key. Because the regulator is not there setting up vehicles it is not going to be pure reinsurance as a business development agency but it is up to the industry or pure alternative capital, it will be a hybrid. For a hybrid bodies to lobby hard, especially when there’s product vehicle, the reporting challenges will be more timely innovation coming through. They also have to educate the reporting, more data and having systems that communicate regulator because there is a lot of expertise out there in the seamlessly with external counterparts. marketplace and they need to draw upon that if they want to explain to the regulator why this is good for the jurisdiction Anup Seth and how they can help regulate the risk. Another trend we’re seeing is investors driving to get closer to the end risk. It started with the retro play and then moved Christopher Munro on to reinsurance; now some investors are saying they want What are the material shifts and changes in the (re)insurance to be the direct writer. So we’re beginning to effectively regulatory environment, and how are they changing the combine investors with MGAs, and a significant amount of landscape? investment has gone into Aon’s MGA business. They will retain most of that risk and the challenge there is making James Ferris sure there are sufficient risk-adjusted returns. The regulator has set up an insurance sandbox, which is there to support the industry to develop products. The FCA in the UK has a sandbox with a wider financial services scope and some big companies use it to try things out, and most of this isn’t insurance-focused. What I would like to see from the BMA is an expansion of that sandbox to get the best use out of it and see the market using it more. The FinTech industry should be taking advantage of the sandbox and coming to Bermuda, and start working alongside insurers and reinsurers to develop products. Reeva Bakhshi One of the things that’s made Bermuda more successful is its location and the proximity of everybody, but also its adaptability. When other jurisdictions come in and take on more available structures to respond, Bermuda responds in a different way again and a new class or a new area opens up. So over the next 5 to 10 years Bermuda is probably going to be the first place where those areas are kept in mind. While in other jurisdictions it takes a long time to do anything. Bermuda’s massive advantage is that it doesn’t. Martin Maringi In the technology space, we are spending a significant “When you look at the evolution of the market, you amount of time developing a number of regulatory solutions including the digital asset framework. Similar to the see a lot of capital that still wants to come into the convergence of insurance and capital markets in the form industry in some form or another” of ILS, we envision the next frontier will be the convergence of insurance, capital markets, AI and distributed ledger David L. Brown technology such as blockchain, both with and without
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1-36_IQ Autumn 2019.indb 35 27/08/2019 17:41 36 BERMUDA (RE)INSURANCE ROUNDTABLE
Ritendra Roy new types of insurable risks – one of which will obviously be The other metric being used is unit cost of risk on the cyber. Another opportunity is the gig economy and the new balance sheet. Traditionally, it’s costing a lot to get closer types of risk that are coming and will come from this arena. to that unit of risk, in terms of all the processes required to We are familiar with a start-up that provides a technology bring it onto the balance sheet. Investors can go much closer platform whereby consumers can share a risk with one through an MGA or a fronting company. Aon or a reinsurer another directly instead of taking out an insurance policy then places it onto their balance sheet and it’s the same unit – one example of where new reinsurance opportunities will of risk, but acquired at a much lower cost. come about. Christopher Munro Scott Watson-Brown Moving on to InsurTech, the majority of InsurTech The reinsurance industry is ripe for a shake-up of solutions have been targeted at personal lines and primary technology. Consider non-standard forms and agreements, markets. What has been offered to the reinsurance industry and the time wasted on that. If you look at the capital and what do you think the industry should be looking to get markets, once that was developed it took a lot of pain from InsurTech in the future? and suffering out of the admin around managing swap agreements and stuff like that overnight. But it really needs Anup Seth an aggregation of all the available technology into a usable One of the areas where we’ve seen a few companies develop form for the industry to take advantage of. – though none have taken off yet – is a trading platform for ILS solutions or policies. That would add to the liquidity of David Brown the marketplace and take it to another level if one of those When we talk about InsurTech a lot of it is at the front end platforms goes live and gains traction. on the primary side. But when you look at the underwriting When you set up an account with this entity you define your side, at the way some of the AI can explore what’s in the risk appetite. At the front end the entity acts as a reinsurer flood plain and the drone technology reinsurers can use and reinsures some risks. It then bifurcates that risk to to validate data they’re seeing from cedants and so on, allocate those exposures based on appetite to those tradable it’s going to play a big part. There are also significant accounts. opportunities to improve accuracy and efficiency in The concept hasn’t taken off yet but if it did it would processing and other back office functions. change the way you’re accessing or putting together capital and risk, and would be a great way to take the ILS industry Richard Tyler to the next level. There’s still a big opportunity for (re)insurance companies to channel a lot of the risks they want to access through an Hinal Patel exchange and share the direct risks they’re trying to cede From an insurance company point of view, having to other people without the need for a big reinsurance InsurTech to reduce expense would be great in terms of brokerage pass-through. There’s a lot of efficiency to be helping with the back office, but also in trying to produce gained in that market. data to enable underwriters to make better decisions. There is still a place for the reinsurance broker on There are InsurTech companies who use AI to mine data complex risks, to manage the whole claims process and the available on the internet to find out more information about cycle, but a ton of reinsurance could be written directly a particular risk. But the key thing is whether that data is between players. reliable. The second point is, once you have the data, how do you Ritendra Roy use it? InsurTech companies can take that data and use The one thing that is under-emphasised from the innovation machine learning and AI to produce pricing models to help perspective is the reinsurers’ ability to partner. Reinsurers underwriters with making those decisions. are never going to be the best venture capital investors. The incentives are not right for companies in Silicon James Ferris Valley to sell to reinsurers. On average, the investments We can’t get away with not talking about blockchain. In will have average performance and you’re not going to be five or 10 years’ time we’ll see it as a big cost saving to able to spend enough money internally on technology to the industry – a bit like spreadsheets in the day – and innovate across the value chain. The ability to partner with something everyone uses to make life easier. Think about technology companies is going to be the key differentiator. the amount of money that’s wasted in trying to ensure Partnering is a somewhat alien concept to the insurance that information that comes from the insured all the way industry today – suddenly it’s no longer a closed eco-system. through to the reinsurer is accurate. Using blockchain When AM Best talks about innovation, they tend to technology, there will be one version available to everyone, focus on how much you’re spending on technology dollars and we see that as extracting billions out of the cost of the and that’s a short-sighted way of looking at reinsurers. The insurance industry. reinsurers of tomorrow that can partner effectively are the ones that will stand out. David Silver A lot of InsurTech has been focused on processes and Christopher Munro driving efficiencies in the value chain. What InsurTech is I think that might be a good point to bring it to a close. also going to do is generate the opportunity and ability for Thank you very much for your time everyone.
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1-36_IQ Autumn 2019.indb 36 27/08/2019 17:41 Where smart technology meets the best legal minds.
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09187-0537-68_IQ AutumnBLM London 2019.indb Market 37 Insurance Insider.indd 1 21/08/201927/08/2019 16:2517:28 INNOVATION
BRIGHT SPARKS The potential of the Lloyd’s Lab for the (re)insurance market is significant, driving innovation that is set to spark real change, say Barbican’s Eleanor O’Shea and Neil McGeachie
eptember sees the third While this may seem a parts of the infrastructure of a major cohort enter the Lloyd’s considerable task, the potential the high-street bank and one of the most SLab. Composed of 11 teams Lloyd’s Lab is creating is significant prestigious car manufacturers in the across technologies as diverse as and, given what has been achieved to world. microweather™ forecasting, instant- date, could spark real change. That the Lloyd’s Lab should be settlement flood insurance and attracting such companies reflects cognitive automation, the latest 33 and counting the scale of opportunity the market tranche of start-ups and businesses The third cohort brings to 33 will seek to move the Lloyd’s the number of businesses that This group has been distilled innovation dial forward. have participated in the global “ Unlike the previous two cohorts, (re)insurance market’s innovation from hundreds of applicants which focused on market challenges accelerator initiative. This group across themes including customer has been distilled from hundreds from across the globe, each experience, back-office efficiencies of applicants from across the globe, undergoing a stringent selection and next-generation insurance each undergoing a stringent selection products, the direction of focus for process that culminates in a pitch day process that culminates in a pitch the new cohort is set by The Future at when the shortlist is whittled down to Lloyd’s programme. the final cohort. day when the shortlist is whittled The innovation remit for the While these are relatively new down to the final cohort companies is extensive, spanning the operations – given the nature of the ” full technical scope of the new market technologies and solutions they offer vision. Lloyd’s has charged them with – these organisations have already offers. In some respects, it has been “finding solutions with the potential demonstrated the value of their a relatively closed shop in the past, to contribute to the ecosystem of wares, through operating systems with much of the infrastructure, services as part of The Future at that are tried and tested in other systems and processes provided by a Lloyd’s vision”, targeting areas such markets. relatively small number of solution as data sharing, pricing and risk For example, the two most providers. models, claims processing costs and recent companies that Barbican Further, it is a data-driven market compliance. has mentored are already integral that is now recognising the huge
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analytical potential created by stream. Working closely with our Expanding the scope new technologies such as artificial fellow mentors, we have been able In many ways, the Lloyd’s market has intelligence and machine learning. to detail the multiple challenges we reached an innovation tipping point face – and in so doing, become aware and the Lloyd’s Lab is helping place The Lloyd’s benefit ourselves of just how similar our these companies at precisely the right The challenge that many of these issues are to those of other market place to help push it over. innovative companies have faced, participants, irrespective of size or That the Corporation has however, is how to gain access to that scale. announced plans to expand the scope market. While some have evolved As practitioners, we are able to be of the Lloyd’s Lab, making it “a hub within the walls of the (re)insurance hands-on with their technologies and for the latest news on emerging risks market, the majority have earned capabilities, allowing us to develop a and new products and services”, their spurs in very different sectors working understanding of the scope as well as “a product development incubator”, is not surprising. The While some [companies] have evolved within the walls platform is gaining traction. “ Lloyd’s recently announced plans of the (re)insurance market, the majority have earned to invest in Layr, a cloud-based commercial insurance platform for their spurs in very different sectors and have little insight small businesses, which was part of into the workings of Lloyd’s the first cohort. Further, it stated ” that in December that six Lloyd’s syndicates had subscribed to use and have little insight into the of what is possible. So intense is this Parsyl’s Internet of Things solution workings of the Lloyd’s market. learning process, that one senior following its successful Lloyd’s Lab And that is fundamentally what figure described it as like drinking trial. the Lloyd’s Lab facilitates – direct from a fire hose. There is no doubt that what the contact between these start-ups and The companies we worked with Lloyd’s Lab is achieving is significant. market practitioners. It is only at that had had no previous contact with As one team member said, what we point where these two forces meet the Lloyd’s market. But it quickly are creating in a matter of weeks in that tangible solutions to ingrained became apparent that the problems this environment would normally take problems can begin to take shape. we were describing were similar to months, if not years. However, time is at a those they had already addressed premium, with each cohort in other sectors – and while Working closely with restricted to a period of 10 weeks the market is a unique working “ in which to develop a viable environment, the adaptive our fellow mentors, solution to a specific challenge capabilities of the solutions the we have been able or range of issues. Barbican has companies already maintained been part of the mentoring team meant they could be moulded ELEANOR to detail the multiple since the initial cohort, and our first O’SHEA relatively easily to meet the demands piece of advice is to hit the ground is group of our challenges. challenges we face running and optimise the time procurement Working with one start-up, – and in so doing, carefully – spending the initial few manager over the 10 weeks we were able at Barbican weeks getting an understanding of Insurance to develop a working example of become aware the issues before stepping back to Group how a compliance-related solution develop the possible solutions. could deliver enhanced oversight, ourselves of just how From our perspective, the level better control and more effective similar our issues of dynamism and creativity that monitoring, while being able to the initiative has helped foster quantify the cost savings based are to those of other has been astonishing. By on current procedures that this walking through the doors of delivered. market participants” the Lloyd’s Lab, the start-ups For another company, we are instantaneously opening helped develop four use cases But if we are to gain market- the doors of dozens of companies for their in-house technology advancing momentum, we must in the market that they would solutions, including a new submission all play our part. The Lloyd’s Lab is not previously have been able to NEIL workflow tool which supported the bringing new capabilities to our very approach. MCGEACHIE effective capture, categorisation and doorstep. We must take advantage is managing prioritisation of submission data, of that, set aside our competitive director, Fast lane to success Barbican Group plus capabilities to ‘red flag’ any interests, and move forward together This work with the start-ups has Operations potential issues that might impact the for the greater good of our market and opened up a two-way learning Services underwriting decision. the broader (re)insurance industry.
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37-68_IQ Autumn 2019.indb 39 27/08/2019 17:28 TERRORISM
REMEMBERING CHRISTCHURCH The aftermath of the Christchurch attacks is a time to reflect on terrorism risks and how the New Zealand market must adapt to the unthinkable, says Jake Carter
here are many lessons to be removed until 23 March. trading, suffered losses due to learnt from the tragic terrorist Following the incident, all these closures, as consumers Tattack in Christchurch, New mosques in the country were understandably avoided the area. Zealand, on Friday 15 March 2019. required to close for safety reasons In addition, sporting, cultural One of the biggest lessons is perhaps and all Air New Zealand Link and musical events were cancelled the need to understand the broader services departing Christchurch and St Patrick’s Day celebrations implications of this kind of terrorist airport were cancelled as a due to take place across the country attack and how insurance policies precaution. Schools were placed in were cancelled and replaced by more respond to the significant and lockdown in the aftermath of the subdued community gatherings. widespread disruption caused by such attacks, and a cricket test match incidents. and Super Rugby match, both Policy response When a gunman live-streamed scheduled for 16 March, were The tragedy serves as a chilling his attack at the Al Noor Mosque cancelled. The final day of The reminder that terrorism can happen on Facebook, businesses across Polyfest Polynesian culture festival, anywhere. In light of the significant the Christchurch Central Business which was scheduled to be held in damage and loss caused by the District (CBD) were forced into Auckland on 16 March, was also incident, insureds looked to their shutdown. The police erected cordons cancelled with security concerns insurance policies to respond. on a number of roads and areas cited as the reason. Insurance policies in general around the sites of the attacks, and The terrorist incident impacted exclude acts of terrorism, which blocked access to various businesses businesses not only within the has been the case for many years in the CBD. Police also advised the cordoned-off areas of Christchurch, globally because insurers cannot public in central Christchurch to but throughout New Zealand. obtain reinsurance cover for such stay indoors after the attack and only Businesses within the cordon were events. This particular clause allows allowed them to return to the CBD unable to trade until the cordon insurers to decline any claim for the following morning. The road was lifted. Surrounding businesses, damage to property caused in acts cordons, however, were not fully while they were able to resume of terrorism.
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The following is a standard In the claims that were the coverage of the policy. This exclusion clause in a business investigated, it was found that is not dissimilar to the situation interruption policy: “Terrorism – insurance cover was generally encountered from wide-area damage we will not pay for any death, injury, provided under these sections as the following natural disasters, e.g. illness, loss, damage, liability, cost cover was triggered by bodily injury, earthquakes, fire and floods. or expense of any nature directly or or threat of bodily injury, under these A loss which will fall outside of the indirectly caused by, resulting from, dependencies. With that said, cover policy is a general downturn in the or in connection with, any action responded differently, depending on economy following an event. Should of terrorism regardless of any other the location of the impacted business. any future attacks occur, it could have contributing cause or event.” For those located within the cordon, a dramatic impact on the country’s tourism and reputation. Hospitality would be the other major industry “ Most insurers were quick to waive the terrorism exclusion which could be heavily affected unless in light of the events in Christchurch and said they would a specific industry was targeted. accept claims for damage caused by the shootings” Future of NZ terrorism cover Insurers have generally waived terrorism exclusions within business Notwithstanding the above clause, “access” was only impacted while the interruption policies where the most insurers were quick to waive cordons were in place. economic impacts have been modest. the terrorism exclusion in light For businesses outside of the Whether or not this trend will of the events in Christchurch and central Christchurch cordon, continue, particularly if a terrorist said they would accept claims for warnings to stay indoors were event occurred over a wider area or damage caused by the shootings. only enforced until early Saturday caused greater economic loss, is still Such responses corresponded to the morning. Once the warnings were something which needs to be debated stance taken by many Australian lifted, access to the businesses was by the authorities and insurers. insurers following the Lindt Café no longer restricted. Trading of those The clause is also not something siege in Sydney in 2014. At least three businesses, however, was negatively to be ruled out as the New Zealand insurance companies stated that they impacted for a longer period. government may consider any future would not rely on terrorism exclusion event to not be likely enough to create clauses but rather pay out claims. Contingency policies a Pool Re-style scheme. While such exclusion clauses may A large number of contingency have been overridden, it still needed policies included cover for losses Prior to the attack, to meet the remaining provisions of arising from “terrorism” and “threat “ the insurance policy for a loss to be of terrorism”. For terrorism cover there was almost a covered. to respond, the event must be “necessarily” cancelled as a sole and feeling in the country BI coverage issues direct result of terrorism at the venue that New Zealand was Indemnification under business or in New Zealand, which must have interruption cover generally requires been confirmed by local or national immune to any such the property of the insured (or government authorities. property used by the insured) at the The challenge arises from the attack. This feeling has premises to be damaged, with the keyword “necessarily” stipulated in all but disappeared basis of settlement referring to cover the above clause. Some of the events ” only for losses resulting from that were not “necessarily” cancelled as a damage. direct result of terrorism or threat of In terms of policy wordings, In the case of the Christchurch terrorism. They were cancelled out of we don’t foresee any changes to terrorist incident, with the exception respect and public mourning, which terrorism wordings in light of the of the mosques involved, any insured are not typically covered under most terrorist incident – for now. making a claim would not have policies. Prior to the attack, there was suffered physical damage. When Notwithstanding the coverage almost a feeling in the country that assessing these claims, Sedgwick’s issues highlighted above, most New Zealand was immune to any Forensic Advisory Services team insurers in New Zealand reportedly such attack. This feeling has all but turned to the contingent business JAKE have chosen to indemnify their disappeared and the industry will interruption extensions and CARTER is insureds for losses arising out of start to see terrorism premiums endorsements, such as “Prevention head of forensic the Christchurch terrorist incident. being increased on contingency/ advisory of Access” or “Acts of Civil Authority” services at However, even when the terrorism event cancellation claims as terrorism provisions, to see whether they would Sedgwick New exclusion is waived, there may becomes a more frequent event respond to the loss. Zealand be losses which fall outside of globally.
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37-68_IQ Autumn 2019.indb 41 27/08/2019 17:28 INSURTECH COMING OF AGE? With only a few InsurTech initiatives having reached maturity, and many more yet to deliver value for money, slow and steady has proved the best strategy for success, says Andrew Johnston
nsurTech is beginning to come InsurTech bandwagon but gaining no first-mover advantage. of age. Many companies remain That’s not to say that all the They are no longer giving insurance Itoddlers, but some have come InsurTech hype has been hot air, technology the attention it deserves, through the earliest, most difficult but what may be its greatest because “technology” remains years to reach adolescence. A scant achievement has been secondary. synonymous with “InsurTech” in few have even reached maturity. The volume of InsurTech activity insurance circles, even though Investment patterns reveal the and fanfare has acted like a in practice insurance technology growing-up process. InsurTech defibrillator on the heart of the is nothing new. The very first investments were down about a insurance industry. commercially used IBM mainframe one fifth (21 percent) by individual The much-heralded InsurTech was deployed by an insurer. transaction number in the second “revolution” has made people across DR ANDREW quarter of 2019, but the deals that the sector talk more positively about JOHNSTON Strategic investment happened were larger on average, the use of technology. Some see it is global head In contrast, many companies and skewed towards later-stage as the potential saviour of a broken of Willis Re avoided this pitfall by adopting a InsurTech investments. system. slow and steady approach. Some are Risk carriers are playing less in This positive impetus, spurred by now reaping the benefits, perhaps the venture capital stages of the outsiders, is now growing organically by buying in proven insurance InsurTech lifecycle, taking fewer from the inside, because the industry technology firms as a strategic vertical risks on unknown businesses. They knows its own challenges better than investment. They risked missing far prefer to put their cash behind anyone else. InsurTech has forced out on a revolution, but ultimately companies that have at least begun insurance technology issues onto the avoided wasted millions and a dose of to walk, and preferably to feed industry’s dinner plate. InsurTech fatigue. Some will come out themselves. It has gone the other way, too. winners, in the sense that they have That said, it remains difficult to Technology will be fundamental to or will acquire technologies that truly rationalise the value invested in our sector in the medium term – if improve their business processes. InsurTechs overall, given the stunted not revolutionary. However, as has We now possess, in our industry growth and limited success of many happened so often in the technology and the world, a record number of of these ambitious potential players in investment sphere, many hoped technologists. Meanwhile, technology this space. InsurTech would deliver impossible has become infinitely duplicable. Approximately $15bn has been gains. They piled onto the InsurTech Fickle, price-sensitive personal ventured so far (depending on your bandwagon when it emerged, as the lines customers may be here today, definition of InsurTech), but the latest industry-disrupting high-tech attracted to a flash technology, but sector has not delivered anything near investment opportunity. are just as likely to be gone tomorrow. $15bn worth of value. Just a few years ago some major That makes early-stage InsurTech That might be achieved five years industry players threw all but the investment a real risk. from now, but so far, the money kitchen sink at the promise InsurTech Launching something that lavished on the InsurTech universe appeared to hold. Some of them have doesn’t work is a costly error, since has been radically inefficient. become jaded after spending millions opportunities now abound to partner
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with, buy, adopt, or embrace one or more of the thousands of InsurTechs QuarterlyQuarterly InsurTech InsurTech funding funding volume volume – all stages – all stages after they have been proven. 2,500 Slow and steady has proved the Property and casualty winning strategy – and the industry 2,000 Life and health has learned this lesson. Defining InsurTech 1,500 The industry should redraw the $mn 1,000 dividing line between InsurTech and insurance technology. At its 500 broadest, InsurTech includes any technology which can be levered 0 into the insurance sector. However,
a more nuanced definition provides Q1’12Q2’12Q3’12Q4’12Q1’13Q2’13Q3’13Q4’13Q1’14Q2’14Q3’14Q4’14Q1’15Q2’15Q3’15Q4’15Q1’16Q2’16Q3’16Q4’16Q1’17Q2’17Q3’17Q4’17Q1’18Q2’18Q3’18Q4’18Q1’19Q2’19 greater delineation of the sector: an InsurTech company is one that has Source: Willis Towers Watson been intended and designed from its inception to yield efficiencies Launching something that otherwise deployed, in addition to and savings within existing business “ a diluted view of the true value of models. doesn’t work is a costly error, appropriately used technology. The definition does not rule out Meanwhile, the goal of creating a the revolutionaries created to disrupt since opportunities now abound panacea platform that delivers risk the industry. Under it, the first-ever to partner with, buy, adopt, or transfer end-to-end has failed to InsurTech dates back to 1985, with materialise in any meaningful way. the launch of Direct Line in the UK. embrace one or more of the Instead, success has typically been Its impact certainly reshaped the achieved by companies that have UK personal lines market by cutting thousands of InsurTechs after chosen to play a part somewhere in out the retailer and encouraging they have been proven the existing insurance value chain by consumers to go direct via a web- ” improving incumbent processes. based platform, a model now widely InsurTech investment. Those that do Insurers have not lost their utilised. not know the problem they hope to customers to InsurTechs, although Nor are peer-to-peer platforms solve will soon find that no one else a few entrants such as Lemonade excluded. They are simply mutual has the answer, either. have attracted modest numbers of or affinity groups repackaged as primarily first-time buyers. technology-enabled cooperatives. Negative disruption Unlike B2C platforms, however, their InsurTech’s real disruption has been InsurTech success impact so far has, at best, been muted. achieved through the use of new When is an InsurTech successful? In line with this damp squib, technologies in ways that are more That must be measured by benefits industry talk has shifted from a fear of effective than competitors’ efforts, delivered, which boil down to top-line out-and-out disruption to the creation thereby altering the sector’s dynamics growth or margin improvement. Both of partnerships intended to enhance in the way Direct Line did. are possible, given the insurance and enable existing players. Looking Those InsurTech systems which sector’s many expensive, cumbersome ahead, that will be the most likely way add a layer of process or solve no real processes. to win in the InsurTech arms race. A problems will not be winners. They Technology has a huge future role company can raise $600mn relatively must be designed from inception not to play in the industry, but the players easily, spend it on Google ads and just to digitise existing models and within it must recognise their own industry events, but provide nothing the processes behind them, but to value, and grasp InsurTech as a tool to more than a solution to a non-existent reinvent the model. enhance it. problem. Success begins with the same They should not be diverted from Instead, InsurTechs must create ingredients, and ultimately delivers technology’s potential despite hype- solutions to problems that insurance the same product, but adopts a driven fear. Nor do they need to jump and reinsurance companies face different, much more efficient, on bandwagons. Smart risk carriers today. The business proposition has to methodology between them to create will wait for the technology they come first and must comprise a clearly competitive advantage. actually need to be proven through defined business technology that On the downside, the InsurTech use and acquire it more cheaply supports an existing process. Carriers craze has also brought negative as a result. Those that genuinely should re-evaluate and reflect on all disruption, through its consumption understand their customers’ needs of their processes before making any of $15bn which could have been will only gain.
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37-68_IQ Autumn 2019.indb 43 27/08/2019 17:29 DISTRIBUTION SHORTENING THE CHAIN Removing players who don’t add value from the distribution chain will dramatically reduce the cost of transferring risk from insureds to the ultimate bearers of the risk, says Jason Howard
ewer, stronger participants will However, their space is changing, brokers, using technology to leapfrog carry the future of commercial largely through a wave of the entire centre of the value chain, Fspecialty and wholesale consolidation, which allows smaller and levering their lower costs of insurance. organisations to deliver value – capital. The market is currently awash with ranging from risk management Meanwhile, many commercial brokers, MGAs and risk carriers, each consulting to data delivery – to insurers are adopting the business- taking a slice of the original insureds’ clients and markets. to-consumer model long ago premiums. To be strong and hold their devised by consumer insurers to We commonly leave investors in place, MGAs must offer a niche sell low-complexity cover direct to the ultimate risk-carrying entities distribution advantage, whether insureds without the involvement of with as little as 60 percent of the by product, geography or other intermediaries. initial spend – and sometimes a speciality, which makes them Ultimately, we will see simple paltry 50 percent. invaluable. business from retail brokers delivered Every category of market Risk carriers are beginning direct to end carriers. A (re)insurance participant has an important role to question the role and cost broker may intervene to build these to play, but the common practice of these agents if they deliver no risks into portfolio bundles, to be of passing a diminishing premium such value. Wholesale brokers that served by efficient facilities and through the hands of as many as JASON trade with other wholesale brokers consortia. HOWARD eight participants sited between retail is chief executive – including binder brokers – add Specialisation will be key to this clients and risk carriers must come to of Beach & a glaring additional cost to the distribution-chain shortening, since an end. Associates distribution chain. larger players with interests at every Insurers and other risk carriers point in the chain are unlikely to wish Evolving market obviously have a key role to play, but to eliminate one or more of their own Fuelled by technology, we have they too are evolving. Insurers with participation nodes. begun to see various players leap over significant financial wherewithal are Such an overhaul, one that breaks nodes in the distribution network. increasing their retentions, choosing up the chain and removes redundant In all cases, the goal is to reduce to cede only the most volatile risk to links, could eliminate double-digit the whittling down of premium by reinsurers. points or more of distribution and engaging only with those middle The latter, in turn, are forced to underwriting cost. That will reserve a players that add value. operate with smaller, more volatile far greater share of original premiums Retail brokers possess the all- risk portfolios. They may wish to gain for carriers, who will be able to offer important customer relationship. more direct access to retail producing more competitive rates as a result.
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37-68_IQ Autumn 2019.indb 44 27/08/2019 17:29 DISTRIBUTION
The increasingly widespread use of effective technology will Simple, low-volatility risk will “ leap through the chain to reach the disintermediate those chain members that do not add value ultimate carrier much more directly. As has occurred with personal lines, in today’s world of electronic trading” much commercial business will move to the internet, where a growing Shortening the chain almost certain to remain abundant. range of products is offered directly For an industry under desperate That’s good for insurance buyers, of by an expanding array of carriers. cost pressure, one which has already course – it delivers stability of pricing Retail brokers will use similar, more reduced its prices to at – or in some and claims completion – but only if sophisticated on-line offerings. cases below – the minimum feasible prices settle at levels where ultimate to achieve profitability in normal risk carriers receive sufficient Wholesale brokers loss years, such steps are essential to premium to yield profits over the “ avoid disruption from third parties. flattened cycle. To ensure that comes that trade with other The prospect of dramatic rate to pass, we must take players out of increases in the manner of an old- the distribution chain. wholesale brokers style hard market seems extremely The increasingly widespread – including binder limited. Capital remains abundant, use of effective technology will irrespective of losses, and drives disintermediate those chain brokers – add a glaring global markets. members that do not add value in The ‘Decile 10’ reform at Lloyd’s today’s world of electronic trading. additional cost to the illustrates this. It removed some Some will be marginalised, their distribution chain underwriters from certain classes, share of the cake reduced. ” allowing the remaining players to For example, Lloyd’s has the raise prices, but few believe ‘healthy’ beginnings of a plan to bring simple The need for specialists ratings have been achieved. Changes business directly into the market At the other end of the risk spectrum, in the affected lines have not spilled from retail, non-Lloyd’s brokers, and complex risks – those that reach the over to a general rise. delivering it straight to syndicates. inflexion point where algorithms In reinsurance, seriously loss-hit That route would cut out one or more cannot drive the solution – will portfolios like Florida wind have wholesalers, and possibly binder- continue to require the value and sometimes endured dramatic rate brokers and MGAs. expertise in market selection and increases, but 2017-18 hurricane Such firms – fewer in number, structuring that can be provided losses did not drive a market-wide better resourced and utterly focussed only by niche specialists in product increase during any of the 2019 – would no longer profit from development, geography, and renewals, and will not do so. business where they add little or no markets. In the absence of a truly value beyond the transmission of risk Insurance buyers wishing to monumental loss event, a global and premium from A to B. transfer such risks will continue financial crisis or possibly an abrupt These moves will lead to a to seek expert advice, but perhaps end to quantitative easing and a bifurcated model like the one Lloyd’s choose to bypass the wholesale link rapid rise in interest rates, capacity is has proposed. and go directly to specialist facilities or highly focussed MGAs. Pressures drivingShortening inter-industry the valuevalue chainchain hopping At the extremely complex end, wholesale and London market brokers – among others – will continue to battle over each piece of business, leaving those that provide the best products and services to thrive. These developments are under way, but we’re not there yet. Retail Capital client Retail brokerWholesale USWholesale broker LondonMGA brokerWholesale binderCeding broker insurerReinsurance brokerReinsurer markets A great many players are looking at ways to shorten the chain and doing so will dramatically reduce the cost of risk transmission from end-insureds to ultimate bearers of the risk. This will restore our global market to health by delivering tangibly better Source: Beach & Associates value to our ultimate customers.
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37-68_IQ Autumn 2019.indb 45 27/08/2019 17:29 TECHNOLOGY MANAGING AGENTS ARE FROM MARS…
The biggest barrier to a transformational claims model is an operational and technological disconnect between the London market and its customers, brokers and delegated agents, writes Aidan O’Neill
hen Write-Back, the ground-breaking, message- Wbased technology that allows the IT systems of London market insurers to interact fully with the market’s central claims systems, ECF2, went live on Saturday 17 October 2015, it was seen as a seminal moment in London market claims transformation. The high level of co-operation during the development phase, sponsored and overseen by the Associations’ Administration Committee, followed by fifteen weeks The first was about whether of intensive testing, led to a successful respondents were supportive of the delivery. claims modernisation programme Nearly four years on, the and the vision to transform the technology powering Write-Back claims model. Around 98 percent continues to play a leading role, of respondents gave it their backing in partnership with the market, in and 72 percent believed the market the London market modernisation should manage the delivery of agenda. claims solutions under a new model Write-Back was the result of of market governance, but 66 intensive and successful market percent were unsure that the Target collaboration over a period of 18 Future claims model Operating Model would deliver for months between multiple software First of all, let’s start with what we claims. providers, including DOCOsoft and know about potential London market The Claims Modernisation Update, eight Lloyd’s and London market claims transformation in the future. October 2018, states that the future carriers. We know that delivering the future “middle office” vision for claims There is no doubt that the project claims model is overwhelmingly focusses on enhancing the claims has been a huge success. DOCOsoft supported by London market service, the customer experience and alone accounts for more than 50 carriers, brokers and 50 market delivering a transformational claims per cent of Lloyd’s claims messages representatives. model. that flow through its own claims In a 2018 survey, 42 out of 55 It will achieve this by delivering management system version of Write managing agents were asked a shared technology and services that Back, across 15 managing agents. number of questions polling their are more accessible to customers, The question now is ‘what next?’ views on market modernisation. broker, suppliers and third parties.
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37-68_IQ Autumn 2019.indb 46 27/08/2019 17:29 TECHNOLOGY
To paraphrase a bestselling pop psychology book London to talk like the rest of the “ world, not for London to think that from the early 1990s, if managing agents are from the rest of the world should talk more Mars then policyholders are from Venus when it like London. But London doesn’t just need to comes to talking to each other!” think outside of its claims messaging bubble – it needs to do more than The market consensus is that we A policyholder doing its due expand beyond the boundaries of its need to introduce new technology diligence on market processes could own terminology and explore new and services with capabilities that are be forgiven for wondering what an routes to market and that can be not part of the current claims model. alien, impenetrable language this done using existing technologies. No This will allow customers, brokers is. Language is important because blockchain required! and delegated agents to transact with it cements relationships and trust, For example, claims departments London easily and get a high-quality, which are key to the insurance value harvest a rich crop of data fast, transparent claims service. proposition. that can be used to provide Lastly, there must be a renewed To paraphrase a bestselling pop intelligence and analysis to assist focus on removing the reliance on psychology book from the early 1990s actuaries, underwriters and senior legacy systems, technology and on common relationship problems management. infrastructure. between men and women, it would So much attention is being paid to There are a number of metrics in seem that if managing agents are bringing down claims’ lifecycle times this report that quantify the benefits from Mars then policyholders are but we are in danger of losing sight and service improvements that can be from Venus when it comes to talking of the even greater potential prize of delivered to the agreement, settlement to each other! more informed risk selection, models and lifecycle of claims, from the The premise for the book ‘Men and pricing. delivery of a claims modernisation are from Mars, Women are from If data can play more of a programme. Venus’ (so I am told!) is that role when informing exposure I don’t propose to go into those each gender is, metaphorically management and spotting in detail here; suffice to say that speaking, from a different claims trends, it can also help the market agrees it needs to see planet and acclimated to the to mitigate future payouts and improvements in claims lifecycles and society and customs of their own even open up new insurance settlements right now. ‘planet’, but not to those of the distribution channels. other. AIDAN Managing agents from Mars Could there be a better metaphor O’NEILL Leveraging data insights The key risks of not delivering a for the language disconnect that is CEO of Do you need to be a member of the transformational claims model prohibits transparent dialogue DOCOsoft latest Lloyd’s lab cohort to help is a potential operational and between all the parties involved in London’s carriers leverage their technological disconnect between the insurance value and language data? Not really. the London market, its customers, chain? The reality is that existing Write brokers and delegated agents. Back technology is already doing We have to tackle potential Global language just that for 15 market carriers worth developments that negatively impact I highlight this issue because London, a combined £9bn in gross written the competitiveness of our market and while undoubtedly being a major premium on the DOCOsoft claims claims service when measured against specialty lines market that provides management system. international peers and domestic an invaluable service to its customers, Meanwhile, to take advantage of markets/carriers. needs to talk in a language that global the data insights in an organisation It is sometimes easy to get lost in policyholders understand. requires new ways of automatically the minutiae of London’s claims and The same holds true for London’s organising, classifying and labelling underwriting jargon and the plethora relationships with its global peers and documents. of acronyms that infest the market. counterparts, brokers and TPAs and Using advanced machine- Indeed, it is striking when referencing other inputs into the insurance and learning techniques – for example, the report mentioned above that the reinsurance value chain. DOCOsoft’s new claims reserving London market’s acronyms are rarely, There is frustration within the tool – does just this, leading to if ever, spelt out in full. global carriers and brokers that actionable insights such as improving One sentence which particularly London seems to think it rules the compliance, cost structures and stood out for me states that we need roost. competitiveness. This machine- to: “deliver an integrated model (in London specialty class big-ticket learning technology crunches support of STP) with; policy data via business only accounts for a tiny petabytes of data more efficiently and PPL/SDC, and delegated data via DA fraction of global insurers’ portfolios. makes sense of a complicated claims SATs”. The reality is that global carriers want world.
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37-68_IQ Autumn 2019.indb 47 27/08/2019 17:29 TECHNOLOGY
HARNESSING THE POWER OF REAL-TIME DATA HUBS Tim Rayner considers how a real-time data exchange can improve the speed, cost and quality of business for carriers, brokers and coverholders
trides are being made to of systems and logins in order to improve operational efficiency transact business. Sin the London market, yet Insurers have created their portals, Carriers, brokers and significant inefficiencies still exist in brokers have created a multitude of “ the delegated authority distribution platforms, and coverholders might coverholders must still chain. Digitalisation marks a key have multiple logins to manage for negotiate a confusing step forward in improving the speed any one class of business. and efficiency of business in the This is not only time consuming, web of systems and London market, but it is no silver but also presents serious challenges bullet. around visibility and capital flow logins in order to Despite the introduction of efficiency for all participants in transact business initiatives like DA SATS and PPL, the chain. DA SATS itself relies on ” carriers, brokers and coverholders monthly bordereaux and not real- must still negotiate a confusing web time declarations.
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37-68_IQ Autumn 2019.indb 48 27/08/2019 17:29 TECHNOLOGY
Data hubs API-based approach may also Beyond bordereaux That looks set to change, however, as improve ease of business across This cumbersome approach will soon the market is now moving towards borders. no longer be necessary, however, cloud-based technology which as declaration data can be shared consolidates these disparate portals Information is power automatically in real time and into centralised hub exchanges. One challenge wholesale brokers integrated into carriers’ back-office Harnessing application must contend with is dealing with systems, giving the underwriters programming interface (API) various layers of delegated business, improved visibility and control. technology, it is now possible for from coverholder binders up to Moreover, this data is validated participants in the chain to connect lineslip and facultative placements, at source – another huge step up to one central platform and share each with their own rules and levels from bordereaux, which are still data with each other in real time, of authority. transported in spreadsheets and are therefore vulnerable to inconsistency, Declaration data can be shared automatically in real time incompatibility and manipulation. “ This kind of exponential and integrated into carriers’ back-office systems, giving improvement in data quality aligns neatly with Lloyd’s vision of the underwriters improved visibility and control” standardised risk exchange. Traditionally, brokers and removing the need for multiple The hub approach consolidates all underwriters have also been blind to logins, speeding up straight-through of these layers into an omni-channel how many quotes are being issued processing and generating significant workflow, encouraging the more against binders and what the take-up cost savings. efficient use of aggregate capacity. rate is. Sequel Rulebook Hub, for Not only does a central hub give a By capturing granular data at example, whilst protecting a carrier’s more holistic view of the portfolio, it the question level, participants intellectual property, allows them to also allows carriers and brokers to be can now get real-time insights share their rating logic, underwriting more fluid when deploying capacity. into hit rates and referrals, helping rules and documentation with Traditionally, if a wholesale broker them understand what is being the brokers and coverholders that today had a fixed aggregate of £2bn referred, what is being declined distribute their products, giving of Gulf Coast property catastrophe and why particular rules are being brokers immediate access to markets capacity to deploy among 20 triggered. on behalf of customers. coverholder facilities, for example, This may uncover, for example, The brokers and coverholders then any adjustments within the portfolio that tranches of business are being input quote data into the hub, which would require capacity to be manually declined because properties in an automatically generates approvals, removed from one facility and added area are falling foul of a particular terms, pricing and documentation into another. This aggregate capacity underwriting restriction. Tools within the agreed terms of authority, can now be managed in one bucket, will soon be able to simulate how with underwriters able to view it all in greatly improving flexibility and adjusting certain restrictions, from real time. efficiency. building age to occupancy types, for Real-time sharing significantly Underwriters have historically example, would affect quote and speeds up the quote and bind process, struggled to access quality data and approval rates in a portfolio, helping facilitates more efficient use of maintain an accurate, up-to-date view underwriters and brokers tweak capital and reduces the cost of doing of aggregation in their portfolios. product design and again manage business. Using traditional methods, As the market is still reliant on portfolios more efficiently. coverholder bordereaux can take up bordereaux, which usually lag by Demand for this vastly improved to 10 weeks to be processed – even several weeks, this makes it virtually technology is already strong among with London’s digitalisation efforts. impossible for underwriters to get brokers, who recognise both the The market has made it clear that an accurate view of their position value real-time data sharing can quote and bind speeds must improve, in any given line of business. bring to the distribution chain along with overall operational Today, if a carrier wants to and also the importance to efficiency at all stages of the chain. assess its aggregate position or their value proposition of taking The in-built rules engine of its gross premium income, for ownership of the process. a centralised hub should also example, it needs to do so through Perhaps most importantly, contribute to the quest for better separate aggregate, risk or premium the efficiencies gained should also pricing and rating discipline – though bordereaux, which can be up to 75 TIM RAYNER help all stakeholders get the most Lloyd’s delegated authorities can days out of date. is business out of their workforces, freeing development of course still assert discretion on In peak storm season, this could director of up expertise to write and place pricing within the underwriting mean the underwriter is unaware of Sequel Business profitable business rather than guidelines set by the carrier. This large swathes of bound business. Solutions chasing paper trails.
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37-68_IQ Autumn 2019.indb 49 27/08/2019 17:30 CAPITAL CONVERTING FALLEN ANGELS TO SAINTS
The pending BBB crisis which will allegedly inundate the high-yield market should be viewed less as a threat than an attractive opportunity for canny investors, says David Newman
here has been much discussion To put this into context, assuming When a bond exits in recent months about the all downgrades happen on a pro forma “ Texplosion in BBB-rated debt, basis, 22.5 percent of the high-yield investment grade, high- and the amount that could be market coming from fallen angels as a downgraded to high yield in the percentage is not unusual although the yield investors have a next downturn. Our credit team quantum is higher. Thus, one can be minimum of a month to proactively analysed $3.5tn hopeful that this dynamic should of non-financial BBB debt be a positive addition to the high- decide to buy it. Only (~35 percent of the global yield market. corporate index) to test the But what was more interesting those tied to indices conventional wisdom. Our is that, unlike previous would be obliged to finding was that around $450bn downgrade cycles which were of outstanding debt was at risk. more sector-specific, in this case buy and, even then, This equates to a migration rate there is a diverse split of industries of ~20 percent from BBB– and DAVID at risk of downgrade: consumer many might take active ~10 percent from investment grade NEWMAN non-cyclicals 35 percent, capital is head of global positions and decide not overall to high yield, which is in line high yield at goods 27 percent, consumer cyclicals with historical averages as the chart Allianz Global 21 percent and technology 16 percent. to get involved” on the right shows. Investors With a broad range of issuers Performance of fallen angels vs global high yield and investment grade Overall Pre-crisis (1998-2006) Crisis (2007-Mar 2009) Post-crisis (Apr 2009 onwards) Global Global Global Global Global Global Global Global Global Global Global Global fallen high inv grade fallen high yield inv grade fallen high yield inv grade fallen high yield inv angels yield angels angels angels grade returns 623.5% 299.9% 206.5% 136.2% 67.2% 71.6% -22.2% -21.9% -3% 293.8% 206.1% 84.10% Annualised 9.8% 6.7% 5.4% 10% 5.9% 6.2% -10.6% -10.4% -1.3% 14.7% 11.8% 6.30% Volatility 9.8% 8.9% 3.8% 8.2% 7.5% 3.2% 17.3% 15.8% 5.8% 11.2% 10.2% 4.40% Return/Vol 1 0.8 1.4 1.2 0.8 1.9 -0.6 -0.7 -0.2 1.3 1.2 1.4 Worst Month -11.5% -16.1% -5.5% -10.9% -7.6% -2.6% -11.5% -16.1% -5.5% -4.8% -4.4% -2.40% Best Month 12.2% 11.2% 3.4% 8.5% 6.4% 2.5% 12.2% 6.6% 3.1% 11.4% 11.2% 3.4% Source: Bloomberg, ICE BofAML
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37-68_IQ Autumn 2019.indb 50 27/08/2019 17:30 CAPITAL
entry point (or at least a low-risk comfort that “smart money” has entry point). Performance of Fallen Angels vsalready invested and start to move This is based onGlobal a “fire sale”High Yield and Investmenttowards Grade their desired index positions. valuation700% of the business and an Therefore, to really take advantage of assessment600% of where theGlobal bond Fallen you areAngels a fallen-angel strategy, one needs to looking at sits in the capitalGlobal structure. High Yield invest at the point of greatest fear. The500% fire-sale valuation would Indeed, in the FTSE Time- Global Investment Grade typically400% involve a “haircut” of around Weighted US Fallen Angel Bond 40 percent of the enterprise value of Index, the index’s constituent weights 300% the business. Unless the valuation of are determined based on the time the200% business is close to zero – a real from inclusion in the index. Higher fallen100% knife – typically involving fraud, weights are assigned to bonds that this is the lowest price a bond should have more recently become “fallen reach 0%during the transition period to angels”. This time-based weighting high-100% yield. approach aims to capture the price As bids return to the market, the rebound effect that fallen angels tend
bond price 1997 will1998 often1999 recover2000 2001 as2002 more2003 2004 2005 2006 2007 2008 to2009 experience2010 2011 2012 soon2013 after2014 2015 their2016 initial2017 2018 traditional high-yield investors take downgrade to high yield.
Last 12 months fallen angels in US high yield vs US highLast twelveyield monthsoption-adjusted Fallen Angels spread: in US High six-month Yield vs US High-Yield Option-Adjusted Spread: movingSix-month average moving average
2,000 50 LTM Fallen Angels (%)
40 potentially entering the high-yield 1,500 universe, investors would more likely 30 be able to absorb the new entrants. 1,000 When a bond exits investment 20 OAS (bp) grade, many index-focused funds and 500 10 ETFs will need to sell within a month. Let’s say, for example, an issuer is 0 0 1 percent of the global corporates index; as of April 2019 this would 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 be $103bn. That would equate to HY OAS (LHS) LTM Fallen Angels (RHS) 5.1 percent of the global high-yield Source: Allianz Global Investors index. Most index-following high- yield investors follow a constrained index which limits each issuer Performance of fallen angels vs global high yield and to 2 percent. So in this example, Performance of Fallen Angels vs 3 percent of the bonds would need to investmentGlobal grade High Yield and Investment Grade be absorbed elsewhere. 700% When a bond exits investment 600% Global Fallen Angels grade, high-yield investors have a minimum of a month to decide to buy 500% Global High Yield Global Investment Grade it. Only those tied to indices would be 400% obliged to buy and, even then, many might take active positions and decide 300% not to get involved. 200% In this period, bonds that look 100% stressed would be treated as “falling knives”. In this eventuality, the 0% distressed community is likely to be -100% the first buyer. Distressed buyers do not have to buy these bonds at all and 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 would typically begin to purchase bonds where they believe downside Source: Bloomberg, ICE BofAML Note: Total returns in USD hedged terms risk is minimised – the “zero-risk”
Last twelve months Fallen Angels in US High Yield vs US High-Yield Option-Adjusted Spread: 51 Six-month moving average 51
2,000 50 LTM Fallen Angels (%)
40 37-68_IQ Autumn 2019.indb 51 1,500 27/08/2019 17:30 30 1,000 20 OAS (bp) 500 10
0 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 HY OAS (LHS) LTM Fallen Angels (RHS)
CAPITAL
WORKING YOUR FIXED
INCOME ASSETS HARDER Russell Baird explains why GrossGross yieldyield vs.vs. SCR for fixed income income assets** assets working with an insurance-literate 4.0% asset manager can help improve Global multi-asset Dutch mortgages the yield and solvency-efficiency 3.5% Infrastructure loans credit Emerging market debt of your fixed income assets US short-duration high yield 3.0% Sterling corporate credit onds are the core holdings for 2.5% most UK insurers, with an average fixed income allocation B 2.0% of around 65 percent*. In a long-term, Dutch government guaranteed loans low interest rate environment, there is relentless pressure on insurers 1.5% to achieve a better yield without 1.0% 10-year gilts
damaging their capital position. Gross strategy yield (GBP-hedged) Sterling money market The chart on this page plots the gross yield against the Solvency 0.5% Capital Requirement (SCR) spread for a range of fixed income assets, 0.0% 0% 5% 10% 15% 20% 25% as represented by relevant indices. This illustrates the variation in yield SCR spread (SCR counterparty default for Dutch mortgages) and solvency efficiency that can be Source: Source: Aegon Asset Management and Kames Capital achieved within this diverse asset class. For institutional investors, reserves or how they might blend with The chart also shows why residential mortgages offer exposure existing holdings. investing in Dutch mortgages has to consumers rather than Achieving the right blend of fixed become attractive for insurers, corporates and governments, and income assets is just the start. Within not just in the Netherlands but so can help diversify risk. each fixed income sub-asset class there across Europe. Market risk Finally, most Dutch residential is great disparity at sector- and stock- typically contributes heavily to mortgages have long fixed-rate level. There is significant potential for insurers’ overall required capital; terms, so they reflect the liabilities active sector and stock selection to add however, residential mortgages of insurance companies. further value through the manager are covered under the ‘Counterparty Another interesting sub-asset-class being able to identify strong relative Default Risk’ module, a treatment RUSSELL is short-duration high-yield bonds. value, the possibility of upgrades and, BAIRD is a which results in a relatively low member of The chart shows the relative yield importantly, to avoid defaults. Solvency II capital charge. Aegon Asset enhancement that can be achieved Each insurer’s mandate and The attractiveness of Dutch Management’s from going down the credit curve risk appetite differs. Working with mortgages isn’t just about solvency Investment at the short end without a material a manager that can navigate the efficiency; there is also a strong Solutions Team increase in SCR. breadth of the fixed income market investment case. They have been Of course, each insurer is different, and has a deep understanding of the a relatively safe asset and offer an and we have not considered factors nuance of the insurance market and attractive yield relative to government such as whether assets are being regulation will help in extracting bonds and corporate debt. used to back liabilities, optimise free maximum value.
*Source: Eiopa investment split at FY18. Fixed income allocation proxy = government bonds + corporate bonds + mortgages and loans Disclaimer: In line with Solvency II standard formula spread risk SCR calculation on a standalone holding as at 31 May 2019. You are responsible for your own SCR calculations and any reliance you place on this report is entirely at your own risk. Yields reflect selected indices for each asset class and Kames-managed money market fund. For professional clients only and not to be distributed to or relied upon by retail clients. Opinions represent our understanding of markets both current and historical, and are used to promote Kames Capital’s investment management capabilities: they are not investment recommendations, research or advice. Opinions and/or example trades/securities are only present for the purposes of promoting Kames Capital’s investment management capabilities. Sources used are deemed reliable by Kames Capital at the time of writing. Past performance is not a guide to future performance. Outcomes, including the payment of income, are not guaranteed. While the investment objective of absolute return funds is to achieve a positive return in all market conditions, this is not guaranteed in any way. All data is sourced to Kames Capital unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice. Kames Capital plc is authorised and regulated by the Financial Conduct Authority.
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37-68_IQ Autumn 2019.indb 52 27/08/2019 17:30 MAXIMUM SERVICE MINIMUM FUSS
Our Insurance Brokers’ Products are specifically designed to provide practical, real protection to brokers. It’s more than just insurance. It’s a business support service too. A little bit different Call us on 01494 770700 for a chat with one of our experts or visit our website: www.manchesterunderwriting.com
37-68_IQ Autumn 2019.indb 53 27/08/2019 17:30 INNOVATION SCORING WITH TECHNOLOGY Innovation and technology are set to transform the insurance industry, but insurers need to clearly define their objectives to avoid unnecessary failures and expense, say Damian Cleary and Andrew Dunkley
he insurance industry has finally applications has increased rapidly insurance is a relationship business, moved from talking about in recent years, from driverless cars where intuition, judgement and Tinnovation to actively embracing to medical scans. For insurers, AI relationships play an important role. new technologies like artificial is likely to be a powerful tool in the Human decision-making is less intelligence (AI) and advanced data future, helping to drive advanced data constrained by strict parameters analytics. Over $10bn has been analytics and automation. However, and allows for concepts such as trust invested in insurance technology the technology is easily misunderstood or good faith. Consumers are also companies globally since 2015, of and has its limitations. typically more forgiving of people than which $4.1bn was invested in 2018 Intelligence in the context of AI is machines when a product does not alone, according to a presentation at not the same as human intelligence. perform as expected. CB Insights’ Future of Insurance event AI today uses historical data and As automation and AI become in June this year. experience to make predictions or more ingrained in insurers’ business Much of this investment has been spots trends, working within rules and models, it is important that the spent on data-related initiatives and parameters set by people. However, industry retains the human strengths AI, used for risk assessment and the technology lacks valuable of adaptability and flexibility, using underwriting, product development or human skills like judgement and technology to partner with human to automate insurance processes. adaptability, and may not perform judgement, in particular for Of the 11 firms taking part in the well in adverse situations or complex and speciality risk. recent Lloyd’s Lab cohort, almost all where there is a shift in context, were based on either data analytics or such as a significant legal or Smart contracts AI. societal change. Smart contracts are another Earlier this year, we launched BLM As the industry comes to rely promising innovation that could Innovations, a suite of online analytics more and more on AI, there will be help bring about faster and more and case management tools that use a temptation to reduce the numbers of efficient insurance processes. For AI and data analytics to create better underwriters and claims handlers. De- DAMIAN example, the technology could be used CLEARY is outcomes for insurers. skilling on the assumption that AI can head of London to execute insurance contracts, going There is little doubt that innovation be left to automate certain business Market & as far as the automatic verification and and technology will bring huge processes, however, presents a risk Reinsurance at payment of claims. benefits for the insurance industry, for insurers that will need careful BLM Smart contracts have an obvious but they will also bring new challenges consideration. potential role in catastrophe bonds and uncertainties. If a context shift causes an and parametric insurance products, If insurers want to avoid the AI process to perform poorly, where claims could be paid potential pitfalls of technology insurers may need to call upon instantly when triggered by a investment they will need to start the skills of underwriters and relevant index, such as volume of thinking about how these innovations claims handlers. This will be rainfall or wind speed. will translate to their businesses and hard if an insurer has totally They could also speed up the cultural and operating challenges moved those skills out of the insurance processes in other ways, that lie ahead. business as a result of its AI such as automatically authorising implementation. third parties to carry out repairs or ANDREW AI Insurers will have to find the DUNKLEY is triggering the transfer of funds. AI has been around since the 1950s, right balance between humans and head of Analytics Self-executing contracts are also but the number of real-world automation. Commercial and specialty at BLM likely to feature alongside other
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37-68_IQ Autumn 2019.indb 54 27/08/2019 17:30 INNOVATION
technologies, including AI, blockchain The industry is also sitting on out of the market. and the Internet of Things, which a potentially rich vein of its own Another challenge is that more could combine to create a secure data, based on decades of claims accurate reserving based on predictive ecosystem for the real-time exchange history. However, legacy data is often analytics would not be without of data linked to automated processes. inaccessible or unusable, residing uncertainty and would mean fewer A number of platforms are on legacy systems or beyond the reserve releases. currently being developed that use organisation’s resources or expertise some or all of these technologies, to use. Limitless data including blockchain initiatives for As a core competency, it is no Few question the need for innovation marine and trade credit insurance and surprise that much of the industry’s in the insurance industry. To their reinsurance. investment in data analytics to credit, many insurers are embracing Smart contract technology, while date has been for pricing and technology-led disruption. The Future promising, is still very much in its underwriting. Data, both internal at Lloyd’s projects and Lloyd’s Lab infancy. At present there is no legal and external, is being weaponised by are good examples of this, and we framework specifically designed for insurers looking to gain a competitive continue to encourage and assist smart contracts (whether based on edge or insights on risks or clients. insurers to use a thoroughly thought- blockchain or not) and technical But data can be used across the through and strategic approach to challenges remain. lifecycle of insurance, from product innovation. Much like AI, smart contracts development through to claims and Don’t be afraid to fail – and know are not intelligent, and can only reserving. when to move on when an idea isn’t make decisions based on rules and parameters set by human developers. As automation and AI become more ingrained in insurers’ Such automated technologies “ will require a lot of thought and business models, it is important that the industry retains judgement in design and testing before they can operate successfully in the human strengths of adaptability and flexibility, using the real world. technology to partner with human judgement” Data and analytics Big data and the Internet of BLM Innovation’s suite of tools, working. Our experience has shown Things will offer insurers almost for example, includes Foresight, a the biggest obstacle to successful unimaginable volumes of data and pioneering explainable AI system innovation is often culture. Putting a information, but what will they do that predicts fault in a liability claim, good idea into practice is challenging with seemingly limitless amounts of enabling earlier settlements. Our in a market that is as conservative as data? Pathfinder tool forecasts possible insurance. Technology will only make A steady stream of InsurTech firms outcomes at trial, while Realtime a difference when it is embraced by are coming to market providing data gives insurers access to live data the business and when it gets people on a wide range of risks – including relating to claims spend, reserves, thinking and working in new ways. weather, supply chains, political risks, accident cause, location and injury We would encourage insurers health, product liability and cyber – analyses. to consider what they would do while insurers will increasingly have We have also worked with clients differently in a world of limitless access to data from connected sensors, on bespoke analytics, such as building data. Part of the answer will depend such as those used to monitor cargo a predictive model to analyse latent on the extent of other technology containers or the black boxes in cars. defect claims for medical devices, developments, such as AI and smart Over time this could radically forecasting likely future claims trends contracts. But insurers will need to change the “claims information and helping set reserves. think carefully about what they want lifecycle”, whereby an event happens Tools like these will help sharpen to achieve from their investments in and then the insured and the insurers’ underwriting, claims technology, and define the problem insurer must gather information to management and risk management. that they want to solve. understand what happened and why. However, a business model that Our advice for the insurance Connected data means that third increasingly relies on data and market is to identify the goal you parties such as car manufacturers analytics will bring new challenges want to achieve, and focus on that might have a full picture of the for the industry. More accurate when applying innovative data-driven incident before either the insured pricing of risk and more informed technology. or the insurer. If these third parties risk selection could challenge age- If you don’t have a specific goal, turn out to have a legal interest in the old principles of insurance – such it opens up the risk of unnecessary dispute, it could create new risks and as the sharing and pooling of risk – expense, broken promises, and opportunities around claim handling reducing the potential customer solutions looking for a problem that and dispute resolution. base as some customers are priced isn’t there.
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37-68_IQ Autumn 2019.indb 55 27/08/2019 17:30 THE LONDON MARKET “Staying 332 years ahead”
HISTORY >> MADE FASTER
Harbinger, oil on canvas, 2014, Samantha Keely Smith
LAUNCH OF OUR RESEARCH INTO HOW History>>Made Faster is a research and events THE LONDON MARKET IS PREPARING FOR programme, sponsored by NTT DATA, uniting leading figures to debate and share insights THE WAVE OF CHANGE. into how London can maintain its place at the top of the global insurance market. The research FOR MORE INFORMATION AND TO REGISTER explores the role of emerging technologies such YOUR INTEREST, CONTACT: as RPA, how organisations are approaching [email protected] investment in innovation, and how London compares to other leading specialist insurance markets globally.
37-68_IQ Autumn 2019.indb 56 27/08/2019 17:30 PROFESSIONAL INDEMNITY
CAPACITY DRAIN
With market conditions for professional indemnity set to get tougher as more subscription market is returning. capacity withdraws, the issue many underwriters and brokers of the class face For many brokers, it’s a long time since they’ve had to think too hard is a lack of hard market experience, writes Charles Manchester about the quality of a risk or the quality of the presentation; about s each month of the year ticks higher-risk insureds become almost structuring a programme for a by, the professional indemnity uninsurable because an underwriter client that makes sense and allows A(PI) market hardens a little is wary of writing something that underwriters to take a share of a risk bit more. It was only a couple of they shouldn’t and, besides, there is at the right price. months ago that rumours started to plenty of premium income. Brokers are also faced with surface of certain PI markets running The reality is that the risks finding markets that have capacity low on capacity. Now, in July, a themselves are still insurable, left and still have an appetite to number of markets have started to although underwriters are write a class such as PI. tell brokers that they have stopped uncertain of what they can At Manchester Underwriting writing new business. write or charge for a risk. Management, we are now seeing Market conditions are going to get Underwriting in a hard market risks where the market has dried tougher as the rest of the year rolls is a skill. up. Some are at the heavier end by, especially for those risks insured There is also the challenge of that we’d not have written in softer with markets where premium managing premium income capacity CHARLES conditions or are new layers caused capacity has already been used. and not using it all up in the first MANCHESTER by reducing line sizes, but the risks is CEO of Manchester It has been a long soft market part of the year. This is easier said Underwriting are hardly uninsurable. and, after 15 years or so, the trading than done as renewal books have big Management It helps to have lived through environment has finally changed. A increases. a hard market. In fact, it’s quite lot of habits have formed during this Equally, there is a skill to broking invigorating being able to look at time that don’t fit well into a harder in this market. It has been easy to risks and prices again after so many market. place the more challenging risks with years of taking or leaving what’s The PI market is having to a single insurer and a high limit of offered. adjust more than most classes – not indemnity for so many years. But It is a time to write business and just to the harder market trading now line sizes are reducing and the build on relationships with brokers. conditions, but also the steep learning curve for those underwriters The PI market is having to adjust more than most classes, and brokers who have never “ experienced such an environment. not just to the harder market trading conditions, but also There are people with 15 years’ experience that have rarely seen an the steep learning curve for those underwriters and brokers underwriter say no! In a hard market, suddenly, who have never experienced such an environment”
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37-68_IQ Autumn 2019.indb 57 27/08/2019 17:30 risktheory-advert.pdf 1 31/05/2019 07:51
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37-68_IQ Autumn 2019.indb 58 27/08/2019 17:30 CONTINGENCY DON’T RAIN ON MY PARADE
Caspar Prestidge explains why With the safety and security But spare a thought for the events of the spectators, volunteers and which weathered the storms to stay event organisers need to consider participants in mind, many directors open and suffered major downturns the impact of bad weather felt that they could no longer safely in revenue as walk-up sales deliver their events – resulting in plummeted or for concession scar Wilde once remarked the cancellation of Boardmasters stands reliant on the expected that “conversation about the in Cornwall, Houghton Festival footfall, for whom adverse Oweather is the last refuge of in Norfolk and the Castle to weather conditions rendered the unimaginative” yet, according to Coast sportive triathlon. business forecasts a damp squib. a recent study in The Independent, Stages were curtailed in the In such circumstances, the average British person spends Women’s Tour of Scotland cycling traditional contingency insurance the equivalent of four and a half event, and both the Blackpool Air CASPAR policies are of no consolation, months of their life talking about the Show and Bristol’s International PRESTIDGE and where no physical damage is elements. Balloon Fiesta fell foul of the is an sustained to property, then business underwriter in In recent weeks, UK event conditions. Tokio Marine interruption coverage is unfortunately organisers and contingency Cowes Week suffered a blow when HCC’s specialty equally as redundant. insurance professionals alike it started a day late due to strong group So, how does one plug the gap? could have been forgiven for their winds, while at Ascot the show most Using weather data, predictive immersion in an all-consuming certainly did not go on for Jessie J and analytics can be used to create meteorological obsession. Tinie Tempah after gales damaged the bespoke weather insurance policies For the discerning event racecourse stage in early August. that are tailored to each client. Buyers professional, turbulent and wildly A gloomy outlook indeed, but can construct their own coverage, fluctuating forecasts presented the prudent event organiser can at focussed on a specific location at logistical problems which were as least take solace in their contingency a particular time of year, based on unexpected as they were challenging. insurance policy which protects their budgets and their tolerance to On 8 July in Sutherland, revenue or expenses should their abnormal weather conditions. temperatures hit an all-time low of event be “cancelled, abandoned, Tokio Marine HCC, in partnership -0.4°C. postponed, interrupted, curtailed with Athenium Analytics – a leading Four days later, 80.4mm of rain or relocated” following “adverse provider of global weather data (20 percent more than the monthly weather” which “prevents the for brokers and clients – can tailor average) fell in a single day in organiser of the insured event from insurance policies to the individual Fettercairn, and by the 25 July, undertaking the necessary set up to needs of their clients. Cambridge was sweltering at a record enable the insured event to proceed While it must be said that temperature of 38.7°C. In a climatic due to concern for the safety of insurance will never compensate finale, 29 July whipped up winds of those responsible for the necessary event organisers nor festival nearly 60mph to batter the coasts set up and/or reason of physical goers for the disappointment of a of Devon and the 31 July saw North impossibility”. wash-out, it may go some way to Yorkshire pelted with abnormally For the loss adjustors at least, every financially mitigating against Britain’s large hailstones! cloud has a silver lining! increasingly unpredictable weather.
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37-68_IQ Autumn 2019.indb 59 27/08/2019 17:30 LEGACY POSITIVE REINFORCEMENT IRLA’s Head of Academy Leslie- Ann Giovnilli details the work done by the association and the steps the wider legacy sector is taking towards greater diversity and inclusion
e often talk about the cyclical nature of Wour (London market reinsurance) work and eight years ago The Association of Run-off Companies was wondering why, with Current IRLA board (2019) L-R: Darren Truman, the plethora of discontinued books Enstar (EU) Emma Lawton BAI Claims, James of business, the specialist and yet Bolton Quest Consulting, Mark Everiss Cooley (UK) Mark Hallam Swiss Re, Paul Corver R&Q, diverse market was no longer working Jenny Fair Fidelis Consultants, Stephen Roberts as a cohesive legacy profession, RSML, Simon Barnes, Zurich but seemingly forming ‘specialist’ boutique operations. So, some bright spark came up with a name change for the trade IRLA Services to Legacy Award 2019 body, which became the Insurance & Reinsurance Legacy Association Geraldine Quirk, Partner, Bryan problems and explaining potential solutions (IRLA), and it gave everyone a focus Cave Leighton Paisner LLP (London in a comprehensible non-jargon rational once again. office) fashion. She is praised as refreshing to work Every (re)insurance company has Geraldine was elected by a group of her with, lacking the need to over-complicate discontinued books of business and peers with her reputation as one of the or over-intellectualise, instead just getting to whatever they choose to do with them go-to lawyers in the legacy regulatory area. the nub of the matter. – retain in house or outsource/sell – a This annual award is not about In a major transfer case, Geraldine was concentrated review of potential exit contribution to the profits or prestige considered to be a really safe pair of hands strategies has developed into the most of a particular employer, but rather and there was confidence that an excellent sensible and cost-effective option. about a contribution to the sector as a lawyer had been appointed. This client On every board’s agenda are capital whole, for example through innovation, expected their lawyers to be experts, but management and the best use of improving professionalism or acting as they also have to be great to work with (as funds and investment strategies, but an ambassador to the wider business these deals/transfers do go on for extended in this cycle of renewal/non-renewal, community. periods of time). discontinued exit strategies are not Quirk was the thirteenth recipient of the Geraldine certainly passed this test and being considered from the get go. award and the first female winner – in a was well respected by the commercial Imagine if you had a large motor year of two female winners. teams from both sides. portfolio that was tying up human Her impressive knowledge of portfolio She is often referred to as the Royalty of and financial resources – resources transfers, regulation and cross border issues Part VIIs. She is pragmatic in approach, you wanted to use right now as a including EU Directives and passporting forthright in her dealings real money-making opportunity flagged her as one of the leading experts with the regulators and had arisen. If an exit strategy had on portfolio transfer schemes, particularly in commercial in her opinions already been agreed for discontinued the legacy area. as to what is reasonable portfolios then it would be a seamless Geraldine is also a regulatory expert, for achieving the client’s transaction for you to get on and advising on Solvency II, perimeter goal. make money. guidance, governance and conduct. She has been a long- In the old marketplace, companies She is known to provide strong clarity standing supporter of would retain this business for years, of thought and sensibly expressed advice, IRLA and has often slowly paying claims, reserving for along with a knack for considering complex spoken at briefings. IBNR and losing investment funds,
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because the reputation issues were holding the sales/transfers back. Young Professional of the Year 2019 But with new on-line companies Jennifer Connolly, Solicitor, Jennifer is very active in IRLA, having been being set up regularly, the competition Weightmans LLP (Liverpool office) appointed to the IRLA Young Professionals is getting faster and leaner, and with a Jennifer was nominated as someone who Group (YPG) Committee and she also acts skilled and professional legacy market often goes above and beyond what is as an IRLA ambassador. As part of her own is retention really a choice? expected of her to produce good outcomes, engagement with IRLA, she has become The legacy marketplace is reliant both for her clients and for her firm. actively involved with the IRLA mentoring on experts, fairness, transparency and, One client mentioned that they have been programme, in order to build and develop overall, a professional approach to hugely impressed by Jennifer’s customer her understanding and knowledge of the every deal. focus, and her ability to quickly grasp the insurance market. The UK association encourages massive behemoth that is their historical Jennifer says: “I am delighted to have open discussions and takes education operating entities. been chosen as IRLA’s Young Professional from all parties and excludes no-one. Jennifer has consistently demonstrated of the Year. Being a YPG member has It is a diverse area and many skilled her diligence, pragmatism and attention to provided me with many opportunities and providers are needed if we are to offer detail, and this has led to numerous positive guidance as I progress in my career and I the right services to all those who wish outcomes for the client. have greatly enjoyed being involved in all of to free up their capital and take on She carries out important supervision of the opportunities they make available new profit-making books. her junior colleagues on a daily basis, to members, including the mentoring In 2019 the IRLA board are which in turn provides for good career scheme and being on the YPG discouraging guesses about what a progression for the future leaders in Committee. company will or should do with its the firm. “I am grateful to my employer portfolios at renewal, but encouraging One team member said she is Weightmans for encouraging my early discussion about potential always happy to offer support and participation and look forward exit strategies to widen the range of advice on cases whether it’s to to the next year of personal possibilities. cover work or providing technical development, networking and With the huge range of options that or tactical suggestions. learning opportunities.” IRLA members can provide, why not invite a discussion with the experts rather than a new capital provider with no experience or knowledge in the legacy market? We support our own and, with global leaders leading the way on buy/ sell transactions within IRLA, we believe this is where you will come if you want the best. Future predictions It has been more than 42 years since I first walked through the door of Stewart Smith on Camomile Street in IRLA ‘next decade’ board to 2029 the City of London. L-R: Johanna Ramirez, Hannover Not once during these 42 years did Re, Yana Efimova, Compre, Thomas Spring Langleys, Louise Squire Rio I seriously consider another career; Tinto, Annabel Gray, Swiss Re, James I love the London market and even Strudwick NatWest, Hershil Amin, more so the legacy sector, where I PwC, Giorgi Kachkachishvili,Hannover have worked for the majority of my Re, Amy Berry, PwC (AIMS) Minhaz Pradhan, Enstar (EU) career. There have been times when dinosaurs lumbered out of the was a year in which its first female Professional of the Year (see above). undergrowth, causing mayhem member was given the Services to In our young professionals case she
and misery, but leaving was never Legacy Award by her peers – not an was the fourth woman in six years. Photos: ianmacaulay.com an option. I felt I was part of the achievement to be taken lightly in So perhaps an underlying change is growing, new, forward-facing market view of the ratio of female to male being made and the legacy market is and they were a dying breed to be left workers, even in IRLA membership. where the freedom can be found to be behind and pitied. This was also the year in which a yourself, and where the glass ceiling is Sadly, in 2019 we are still watching hat trick was achieved and a second just something that you admire at The the bodies twitch, but for IRLA 2019 woman (a lawyer) won the Young Garden at 120 in EC3.
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37-68_IQ Autumn 2019.indb 61 27/08/2019 17:30 EXECUTIVE BRIEFING THE RSG VALUE CHAIN
Kieran Dempsey tells IQ that, than to the risk,” he says. new coverholders and traditional with 23 MGUs in its stable plus a new RSG’s major alignment step has capacity providers, he underlines the been the creation of Bermuda-based importance of that commitment. reinsurance vehicle, RSG Underwriting Geneva Re. Announced in May 2019 “In the last few years, we’ve been Managers is breaking new ground as a joint venture with US insurer thinking about how to align ourselves Nationwide (S&P A+, AM Best A+ with the capital but without replacing ecent years have seen the XV), RSG and its investing capital it. That has been Pat Ryan’s goal all evolution of managing general providers provide 50 percent of the along, to show alignment but not to Ragents/underwriters (MGAs/ company’s capital, functioning as a displace anyone,” he says. MGUs) as both vehicles and partners reinsurance vehicle for its MGUs. “It’s important to emphasise that for InsurTech, as a major link in the The credit ratings strength afforded this is only with the express approval chain between brokers and capital by this “strategic partnership” of our capital-providing partners. providers and as serious rivals to the traditional insurer model. MGUs typically provide some of the services of an insurer Kieran Dempsey, Ryan Specialty “ Group (RSG)’s chief underwriting but without the capital, and they are generally viewed as officer, is responsible for supporting the underwriting for RSG’s 23 MGUs, being closer to distribution than to the risk” binders and delegated authorities, and is administering a development phase that is blurring the lines between the provides a reinsurance foundation It’s also important to stress that it’s “traditional” role of binders and the that underpins RSG Underwriting within certain limits, because we evolving role of the MGU. Managers’ (RSGUM) many simply don’t have the capital to take RSG is betting a stake of its own businesses. the leading role, even if we wanted to in its MGUs, demonstrating its “It’s a vital mechanism for us to – which we don’t,” Dempsey adds. commitment to delivering profitable be able to participate in the risks the “RSG is now an investor, putting growth, alongside its capital businesses are underwriting,” says our own skin in the game, and so far providers. Dempsey acknowledges Dempsey. it’s working well. that the rise of the MGU has The RSG CUO underlines the “Most capital providers have contributed to that blurring of the long-term strategy of the company’s already welcomed the new alignment lines in the insurance industry. founder, Pat Ryan, to ensure the it brings. Alongside our other “MGUs typically provide some of group remains closely aligned investors, we’ve deployed capital in the services of an insurer but without with the goals and interests of the 5 to 20 percent range, depending the capital, and they are generally capital providers. In an era of on the desires of the current capital viewed as being closer to distribution greater crossover between the support.”
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RSGUM plans to increase the example,” he says. our products are designed to enhance volume of capital invested, not Dempsey adds that the group’s the capabilities of the retail broker.” through raising percentages but by approach to acquisitions has not taking a stake across an increasing been opportunistic, but rather about Firm response number of its programmes, provided finding businesses that deliver profit MGUs’ attractiveness to capital the other investors approve. and fit the right culture. providers depends on their ability “So far it’s going well. Naturally it’s However, through some 12 to provide relatively quick entry and easiest on syndicated programmes, acquisitions and 11 de novo exit from specialty classes of business. for which leaders will request a formations, RSGUM’s spread of Dempsey says that MGUs can bring specific percentage, because we’re classes is significant, ranging from a programmes and innovation to not trying to lead, but to be just one slew of US commercial lines-focused market faster and more cheaply. of several other investors towards businesses to a Latin American Those with syndicated support the bottom of the slip,” Dempsey unit based in Miami and European can provide greater stability in explains. business via London, Barcelona, hardening markets, because a portion Copenhagen and Stockholm. of the subscribing capital can enter Niches For 2019, one major technology or exit without disrupting the core RSGUM’s businesses are focused on investment across the business has programme, he suggests. niches designed to appeal to capital been to innovate a digital platform “RSGUM is at the forefront of providers. and marketplace for small businesses. MGU innovation and distribution “Our list of capital providers is “The vision is for retail agents and and well positioned to adapt to all an extremely broad one. There are brokers to go online and not only market conditions,” he says. some big carriers providing capital, receive multiple quotes for multiple “With the variable cost model, and Lloyd’s has a large chunk of our products but then bind and issue on capital providers can access business quickly without the significant fixed With the variable cost model, capital providers can costs associated with investing “ in people and technology. This is access business quickly without the significant fixed costs especially beneficial in a hardening market.” associated with investing in people and technology. This The market is not hardening across the board, Dempsey explains, is especially beneficial in a hardening market” but firming up in response to investor pressure for better returns and business. We do business with all one single platform. We’re developing because of claims within some lines those that support an MGU strategy that in-house, on our own platform,” more than others. and are interested in our unique Dempsey says. “Firming pricing is due to claims value proposition,” says Dempsey. Saving costs for small insureds pressure and demand for better “Capital providers aren’t going to and retail brokers is at the heart of returns rather than a shortage of pay us to do something that they can this vision, he explains. Instead of market capital. We’re in a hardening do themselves. They’re looking for multiple portals and platforms to market, in that we’re seeing rate profitable niches. Generally speaking, compare quotes, technology can increases on the lines that need it they value our differentiated make the quoting and placing process most,” he says. underwriting access to a geography easier, he suggests. Professional and general liability, they can’t get into themselves, and “Pat Ryan said years ago that directors’ and officers’ (D&O) liability deployment of technology they don’t he was going to find a way of and medical malpractice have been want to have to develop themselves.” removing costs in the chain hard-hit, he notes, while initial public He emphasises that it does not for small businesses buying offerings by US firms have also been attempt to be all things to all people. insurance, and the first battered by D&O claims activity. “We’re not everywhere, and we step is to make the buying “New markets will eventually come don’t provide all excess and surplus process more efficient. in to take advantage of the rising specialties. We don’t have an aviation We’re committed to the rates. MGUs provide the quickest or an environmental risk practice, for retail producer and all of access to this business,” he concludes.
Continued on page 63 Kieran Dempsey is CUO of Ryan Specialty Group
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Insider Quarterly: Tell me about We have used a binary decision- the tools and technology that making process a lot in our business underwriters now have at their and, in my opinion, it does not have MINING disposal. to be some sophisticated macro technical tool to help an underwriting Gary Marshall: It feels like people unit develop guidance. Part of the are branding technology as artificial problem is that management has to intelligence (AI), and it really is not. give its support to a mechanism that FOR GOLD It is just mathematical decision- makes the underwriters, frankly, less making rather than truly learning error-prone. That is what the system Risk Theory’s Gary Marshall tells intelligence. And that is something does. Insider Quarterly about the MGA’s that I watch for when somebody But if you are going to do that rejuvenated approach to underwriting, claims they have AI, because in someone really has to know their reality, that is very difficult to do. customer well. It is not uncommon mining big data and using advanced If you claim to have AI, what you for underwriters to have a lot of analytics to differentiate its offering probably have is some sort of binary breadth in the risk classes that they decision-making – yes/no questions are evaluating and so to get that kind that toggle down to a final decision of detail, to be able to drill down and that says a risk should be this price, make binary decisions, you have to be or have this deductible or something a technical or customer expert to get like that. that done.
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For instance, we have a very large We have used a binary decision-making process a lot auto dealer book and each customer “ has slightly different characteristics. in our business and, in my opinion, it does not have to So the auto dealer may have 500 cars, some of those cars are held in be some sophisticated macro technical tool to help an inventory, some are demonstrators and some are customer loaners. Some underwriting unit develop guidance” are new, some are used, some are trade-ins. So there are various levels database. We are analysing not only the insurance industry credit. and types of vehicles, with exposures the business that we underwrite I would caution anyone from compounded by geography. and its performance, but we are also spending on a huge legacy system The system takes all of these comparing it to the business that that is hard to get into and therefore underwriting parameters, which we did not write, to learn how the hard to get out of if you outgrow it are business characteristics – they market evaluates risk differently. or become unhappy with it. After are not really rating elements – and you have spent months or years and then we put a mathematical formula Insider Quarterly: Tell me about millions of dollars installing it, it is around that to guide the underwriter. your weather avoidance app very difficult to make a change and and how that came about? so you wind up being inefficient and Insider Quarterly: How else do ruled by the system. you look to extract value from Gary Marshall: Back in the early As a small company, we focus on data? 2000s when all the hurricanes hit simple solutions to problems. We Florida, we required dealers to move prefer to build our own systems, their inventory outside of a flood or access boutique vendors, to get I would caution anyone from zone before the hurricane arrived. I better service. “ always wanted to do something like spending on a huge legacy that for hail. How can you avoid cars Insider Quarterly: How system that is hard to get into being damaged when you know a important is it to attract young, hailstorm is predicted for that day or millennial, talent into the and therefore hard to get out evening? industry as it undergoes its of if you outgrow it or become I found a service which cost a few digital transformation? hundred dollars per address per year, unhappy with it” which seemed very expensive. Our Gary Marshall: I have been in the CEO, Bryan Wilburn, asked: “Can we business for over 30 years and I am just build a weather app for it?” And amazed at young people’s ability to Gary Marshall: We are an MGA we looked at each other and said: grasp new systems and technology, with our eye on how we can improve “That is brilliant, let’s do it”. So we better and faster than more efficiency, both from an operational built it to give our customers three experienced people. and knowledge perspective. In levels of warning. It asks them if they It seems that the people who order to achieve this we do a lot of are moving their cars to a protected started in the business before there data mining. Even things that are area, and requires a response. were electronic printers on every seemingly unrelated can make a That is the kind of thing, as a desk, when everybody was still using difference. specialist and proactive MGA, that typewriters, are today using big For example, if you learn that can really differentiate and add corporate systems that they have a a business with green doors has more value for our partners and our hard time mentally navigating. a better loss experience than a customers. That likely will create an efficiency business with red doors then gain for the industry, as the younger we identify those unique Insider Quarterly: Looking people coming in are more mentally characteristics. more broadly at the in tune with the technology. And yes, You have to really specialise insurance industry, do you there are challenges with that age these days because if not, you see much innovation taking segment, but they are certainly more will have a specialist competitor place? capable technologically. that is doing this better than you. The thing that I foresee for the You need to have a system that Gary Marshall: Oftentimes, industry is that there is so much can keep up with your specialist GARY when I tell somebody I am doing technology, that people do not have underwriters and make them MARSHALL is something unique, I find out that to understand the basics anymore. efficient. chief operating someone else is doing it also. I can see the industry having a officer and chief Continued on page 65 We do a lot of data mining on underwriting Certainly, at the small business level knowledge shortage in that respect, business we quote but do not sell, officer of Risk there is plenty of creativity out there because the machine can do so much which is incorporated into our Theory for which most people do not give for them.
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37-68_IQ Autumn 2019.indb 65 27/08/2019 17:31 EXECUTIVE MOVES
E V I M T O The ins and outs U
V of the executive C
E job market E
S
X E
Tony Ursano Juan Andrade Alison Martin Tony Ursano has returned to the Everest Re has appointed Chubb Zurich has appointed insider Alison (re)insurance industry as the CFO executive vice president Juan Andrade as Martin as CEO for the Europe, Middle for Hamilton Insurance Group, four CEO to replace Dominic Addesso from East and Africa region following the months after leaving TigerRisk Partners. January. Andrade joins the business on 1 sudden departure of Amanda Blanc in Ursano replaces Jonathan Reiss, who has September as COO, and takes the CEO July. Martin joined Zurich in October been appointed president of Hamilton’s role in January. At Chubb, Andrade was 2017 as group chief risk officer and will newly formed Strategic Partnerships responsible for the carrier’s general retain the risk management function for unit. Before becoming president at insurance business in more than 50 a limited period while a replacement is TigerRisk, Ursano was chief executive of countries outside North America. found. Willis Capital Markets & Advisory. Andrew Hughes Richard Watson Todd Jones Hiscox ILS promoted Andrew Hughes to Hiscox chief underwriting officer QBE has appointed Willis Towers Watson the role of managing principal in July, Richard Watson will step down from executive Todd Jones to lead its North following the resignation of Richard his role and the carrier’s board at American operation, succeeding Russ Lowther earlier in the month. Hughes year-end. The (re)insurer said it will Johnston, who is stepping down to “seek joined Hiscox ILS Bermuda in 2015, announce a successor in due course opportunities outside of QBE”. working as its general counsel and after assessing internal and external Jones was most recently head of global chief compliance officer. Before joining candidates. Watson, meanwhile, will corporate risk and broking at Willis, Hiscox, Hughes worked at Queensland continue to serve as an adviser and and was previously CEO of Willis North Investment Corporation on alternative on subsidiary boards. He joined America. asset class structuring and investments. Hiscox in 1986. Jennifer Allen Lou Iglesias Peter Kiernan Fairfax Financial Holdings has Fairfax Financial Holdings has made Lou Axis Re Bermuda president and chief named Jennifer Allen as its new CFO Iglesias CEO of subsidiary Allied World underwriting officer Peter Kiernan is to following the sudden death of David as Scott Carmilani takes a new role within leave the business. His next destination Bonham in May. Allen has worked at Fairfax Insurance. Iglesias was previously is unknown. Kiernan has worked at Axis Fairfax for 13 years, most recently as vice president of Allied World, having joined since May 2006 and remained in post president of Fairfax and CFO of both the company in 2012 as president of US through a restructure in May 2018, in Fairfax India Holdings and Fairfax Africa P&C, later becoming president of North which he was also made head of property Holdings. American insurance. for Axis Re North America.
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37-68_IQ Autumn 2019.indb 66 27/08/2019 17:31 BUILDING PARTNERSHIPS
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37-68_IQ Autumn 2019.indb 67 27/08/2019 17:31 DOCOsoft IQ_ad_280x216_AW.indd 1 29/08/2017 13:28 Coverage from THE SEA TO THE CLOUD HARD-TO-PLACE RISK DOESN’T HAVE TO BE Solutions for marine, cyber and 90 additional lines of business, RSG Underwriting Managers (RSGUM) is a specialty risk marketplace—offering innovative, bespoke solutions for even the most complex risks. 23 Managing Underwriting brands. 250 underwriters. All working diligently for your clients.
312.637.8300 [email protected] rsgum.com
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37-68_IQ Autumn 2019.indb 68 27/08/2019 17:31