O’Kane discusses his five year plan, Aspen’s Q2 results, cyber risk, and staying ahead of the competition
GR: Where is Aspen now and how do you want the company to grow over the next five years?
Chris O’Kane: We have invested significantly in both our insurance and reinsurance businesses in recent years and have now reached an inflection point where we are beginning to see meaningful returns from these investments. As we look forward, we believe that we will meaningfully increase our operating leverage, growing our premiums at a faster rate than both our expenses and the allocated capital needed for that growth.
This increased operating leverage is possible because our growth is coming from exposures with only limited correlation to our existing key exposures. As a result, the more efficient use of our capital base will in turn lead to increased return on equity.
Which markets do you see as holding the best opportunities for the group?
We have made a significant investment in our US insurance platform and this is now close to reaching a premium level which will result in a competitive operating expense ratio. The second quarter of 2014 was the sixth profitable quarter in a row for our US insurance teams. What we view as even more impressive is the very good loss ratios they are achieving. The market is now familiar with our underwriting capabilities and is bringing us opportunities which previously we would have had to go and seek.
So we have been in the investment phase over the last five years, working to amass the premiums needed to cover the investment we made in people, systems and infrastructure in order to build a first class business. We have now turned the corner. As we mentioned on our last quarterly earnings call, about a year ago we articulated a level for US insurance of $550m of net earned premiums in 2015 which will equate to a 16% G&A ratio. We are on track to reach this. That does not mean that the growth or focus will abate when we reach this level of premiums - it is merely a milestone that we want to highlight as we believe that the G&A ratio will be, at that point, competitive with our peers.
What are the biggest risks facing the (re)insurance industry?
Achieving an adequate cost of capital, the low interest rate environment and dealing with a changing regulatory landscape are clearly key considerations for the industry.
Aside from these, I see more severe headwinds for reinsurance than insurance. As catastrophe modelling has improved and with the investment in capital modelling thanks to Solvency II, understanding risk has improved and the approach to risk retention has changed.
As companies better manage risk, I predict a potential decreased demand for reinsurance. Previously, insurers would simply reinsure a part of their risk just to make it someone else’s problem. However, today the same companies have invested in better modelling meaning they can safely retain risk and, as a result, are buying less reinsurance.
The rise of alternative capital: Flash in the pan or long-term existential threat to traditional risk carriers?
This is neither a flash in the pan nor a long-term threat. For me it is actually a long-term consideration. It should be embraced and the agile and the proactive companies will be the winners. There are lots of people in the reinsurance world who want things to stay the same and for business to continue the way it has for decades past, but those are going to be the ones that lose.
If we look at our laptops today, for example, we don’t view them as a threat. However, go back 25 years and if we were makers of large, cumbersome mainframe computers, then we would see them as a challenge. But the successful companies were the ones that reinvented themselves to embrace change. Who will remember the companies that don’t adapt?
In today’s market, it is important to have access to all forms of capital as there are certain products where new capital is most effective and others where traditional equity capital is more appropriate. At Aspen, we formed our asset management company, Aspen Capital Markets, in 2013 to enable us to bring all available solutions to our customers.
But would a high cat loss year change their perceptions?
We need to be careful about making sweeping generalisations about third party capital. The majority of it is pension fund, some is hedge fund, and on the whole they are extremely sophisticated and thoughtful investors. They often have hired the right people to manage their investment risk and share many of the risk management characteristics as reinsurers.
So if something bad does happen, presuming it is within their modelled limits, I think they will just take it in their stride. However, I think there are also some investors in the ‘me too’ category who are saying “all the smart kids are doing it, so we should too”. Those individuals may not have worked out the risks in a sophisticated way and may decide to pull out in the event of a major catastrophe.
Despite this, if something bad happens, more capital will still flow in. I cannot foresee a day coming when pension funds simultaneously decide that they don’t want exposure to catastrophe. It is like saying “we don’t need laptops any more, we should go back to mainframes.”
What are some of the emerging risks and opportunities for the (re)insurance sector?
For me, the new opportunities will be driven by an ability to adapt to new and emerging risks. Take a look at the risk register for any major corporation and you will see around 100 risks but P&C insurers probably can only provide cover for 25-30 of them. The problem is that the industry often has a tendency to look at new risk and choose not to cover it because it looks complicated or because it is something they have not covered before. This is not the way to grow the industry.
But for me obvious among the emerging opportunities is what many call cyber risk. I was lucky enough to be invited to a briefing by some senior US military staff from West Point on their approach to counter terrorism. One of the things they showed was how they have the potential to take a normal commercial building in another part of the country and, solely by electronic means, cause a fire in the building. The point wasn’t to cause damage but to show that damage could be caused. The question I asked myself after seeing this was “does the industry react by adding this to existing products or do we need to offer a new product altogether?”
How can brokers stay relevant for their clients in today’s rapidly changing market?
Put simply, it is a question of price and selling the correct product. Should something unforeseen happen, the customer wants to know if they were sold something cheap that didn’t provide the cover they really needed. The successful brokers are the ones that go to their clients and explain that cheapest isn’t necessarily the best. From an insurance company perspective, clients will only remember the company that, following an event, gets you back on your feet and won’t remember the ones that were not there to help.