A Dragons' Den approach to the reinsurance challenge
Soft market pressures, a prolonged low interest rate environment, low barriers to ILS capital entering the sector, the digital economy, tepid GDP growth… Hiscox Re’s Bill Lazzaro argues that how we respond to the current challenges in the reinsurance sector – how we manage the threats and continue to innovate – will define our future.
While attractive returns are still available, fundamental change in the reinsurance sector means the days of sitting back and delivering a 20% return on equity by optimising a finite amount of traditional capacity with vanilla products is long gone. Life as a reinsurer today is very different.
As an industry, we need to learn more from those outside our sector, do more to embrace change and focus on new innovative approaches to our business. It is exciting and humbling to have the role of chairing the Hiscox Re Product Group, a think tank of sorts at the forefront of our efforts to respond to the challenges and develop client solutions. We are constantly trying to enhance our value proposition, make the next incremental innovation or crack the next market disruption. Through varied meeting formats we are trying to stimulate creative thought, build a culture to help develop those ideas, reward proactivity and make the tools available to execute an idea.
Enter the dragons (or the sharks)
Drop your title, all your fancy designations and your family crest at the door, this is no elite members only club. We don’t care if you are the CEO or in the mailroom – we want diversity, energy, ideas and a willingness to be challenged. We’ve brought in outside speakers to help us generate new ideas and taken the format used on the TV show Dragons' Den (or Shark Tank in the USA) to decide on which ideas to invest. The cross unit collaboration and competition have made our jobs more exciting, delivered unique solutions to clients and rewarded us with profitable business and new efficiencies. The momentum has spread across the team with pitches ranging from InsurTech partnerships to flood loss mitigation, or simply coming up with ideas on how to make the workplace more fun.
By removing the old rules about how we do business and the bureaucratic decision making often present in corporate structures, proactive team members are empowered to pitch and invest their time in the ideas they believe will work. By no means am I suggesting we forget the lessons learned of the past, but as an industry we need to balance valuable experience with openness to develop new ways in which to run our business. The key to true change is in creating an environment that allows us to continually adapt from the ground up. To sit on the sidelines in your comfort zone and wait for the next hard market or direct innovative change from the top down is not a viable strategy in my view. We can learn a lot from other sectors in terms of organisational structures to promote ground up innovation and attract more talent and diversity as a result.
So, where are the dragons investing and where do we see future disruption?
I can’t count the number of times that people used to ask me why I earned the right to use the Chartered Financial Analyst designation while working in the reinsurance business. “You’re not in private equity.” I wish I could claim I had the foresight to see the convergence of reinsurance underwriting and investor portfolio management. Today, the question doesn’t come up much anymore. People accept the underwriter’s dual capacity as risk evaluators and portfolio managers. The capital is moving closer to the risk and reinsurers/ILS fund managers are uniquely positioned to evaluate the risk and match it to the most suitable investor portfolio.
Even Hiscox, known most for our traditional underwriting track record in Lloyd’s of London, now manages over $1bn of ILS assets for institutional investors. ILS capital is here to stay so let’s accept there is no separation of alternative and traditional anymore, and figure out the best way to put that capital to work. While existing structures are such that capital can freely enter and exit the industry without barriers, do we really need to have so many links in the chain and fees from source to the ultimate risk taker? New capital structures and technology innovations are disrupting the entire chain and more efficiently bringing investor capital closer to the original risk. It is a race to avoid disintermediation. The result could be a more competitive product, covering more of society’s retained risk.
Having a toolkit to differentiate as a reinsurance partner in the products you offer is critical in today’s market. For Hiscox Re, it’s been about finding ways to help customise coverage to the specific needs of each client and solve a unique problem. Our focus on product innovation is paying off, adding over US$75m in premium since the start of 2015 and substantially more to the overall reinsurance market. A tip of the hat to our specialty team for their cyber offering, to our risk team for our new Risk Aggregate Protection (RAP) product and the countless other ways we’ve worked to solve problems like net retained volatility and rating agency capital.
As the lines between insurance and reinsurance get increasingly blurry, and GDP growth sticks in the 1-2% range, the biggest areas of product innovation for the future will be in creating a market for uninsured risks or privatising risks currently covered by governmental schemes. With an abundance of capital, we need to do more to better understand and educate capital providers on emerging perils such as future technologies and reputational risks, as well as finding efficient ways to privatise perils like flood, terrorism and earthquake. There is no reward without the risk, and especially with new products, vigorous underwriting discipline is needed to avoid the innovative disaster.
The digital age is changing how insurance carriers manage the customer experience, transforming back office systems, creating more efficient ways to share risk and making more data available than we know what to do with like telematics. It’s hard not to notice the recent venture capital flowing into the InsurTech world. Is it just a fad or should we be worried about the 'Uberisation' of our industry? In discussions with VC investors and advising startup firms entering the space, I know that there is a major opportunity to change how we sell policies and use data to tailor coverage to new generations and make underwriting decisions. There is also plenty of opportunity to standardise and make the risk transfer model more efficient from the source to eventual risk taker. Still, while there are plenty of brilliant ideas, many ventures underestimate the regulatory complexity and litigious environment that comes with insurance. The insurance industry is full of smart people and our underwriting, claims and regulatory experience and relationships will be critical to the success for many of these new businesses. True disruption will come with reinsurers and insurers working together with new technology ventures to drive innovation.
Back to the dragon
At Hiscox, we live by the motto 'there's always a better way'; constantly challenging the status quo and approaching every client visit, internal strategy session or third party capital meeting as if we are in the Dragons' Den pitching for an investment. My challenge for Hiscox is to truly live the motto and for the industry to either hurry up or take a shot at catching up. We all benefit from setting the bar higher but, using the golf match analogy, don’t expect any strokes to be given on the first tee. So, if you're from a technology start-up and have something new and exciting to offer, a carrier looking for a unique product or an investor looking to learn more about ILS, get in touch as we'd love to explore how together we can take on the challenges and help define the future of reinsurance.