Moczarski says firms need new approaches to tackle the new risk landscape
When we interviewed you last year, you said new capital sources, technological advancements, emerging risks and regulatory changes were among the biggest challenges facing the industry. How has that list changed now?
We believe the same challenges exist and present opportunities for those taking a strategic approach.
Changing regulatory and rating agency requirements are leading (re)insurers to implement sophisticated capital models and enterprise risk management practices. The emergence of increasingly complex global risks are challenging the way we evaluate and mitigate their potential impacts at the same time that digitization and big data analytics offer new insights for underwriting. There are more participants as financial markets continue to embrace the sector and capital continues to flow into the (re)insurance market.
Within the scope of change, we must develop innovative approaches to address a new risk landscape and take advantage of opportunities to shape the future of (re)insurance.
At the last Monte Carlo there was a lot of talk around public/private partnerships being part of the future of reinsurance. One year on, how do you see the future of PPPs and reinsurance?
We believe there is a significant opportunity to transfer risk from the private to public sector. The creation of private sector pre-financing options will not only relieve the burden on public finances and in turn taxpayers, but will migrate the management of these catastrophes to companies with expertise in claims handling and risk management – extending the availability of insurance and reinsurance around the world.
We have made significant progress in this area over the past year. In April we launched the Guy Carpenter Public Sector Specialty Practice to deliver private sector solutions that could relieve the cost of catastrophes now borne by governments. Also in April, in support of our public sector clients we launched GC ReBID®, a real-time electronic auction platform designed for entities subject to strict procurement rules.
GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC, has assisted in these efforts with the development of innovative catastrophe bond structures. These include the introduction of the first catastrophe issued by the World Bank in 2014 on behalf of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which provides three years of protection from hurricanes and earthquakes affecting the countries participating in the CCRIF bond. Another first was the Texas Windstorm Insurance Association (TWIA) taking advantage of the catastrophe bond market in two consecutive years (2014 and 2015) achieving a total of USD 1.1 billion in cat bond capacity, becoming the sixth largest cat bond sponsor globally (as of July 30, 2015).
These catastrophe bonds continue a history of innovation in public/private partnerships at GC Securities that can be traced back to 2009 with the first residual market insurer’s, North Carolina Joint Underwriting Association and North Carolina Insurance Underwriting Association, use of catastrophe bonds and the 2013 groundbreaking MetroCat Re catastrophe bond, the sponsor of which was the captive insurer of the Metropolitan Transportation Authority (MTA), following Superstorm Sandy.
Other ways in which Guy Carpenter is assisting public entities is with special reinsurance facilities or arrangements with government agencies or departments. These arrangements have been established to enable the availability of affordable cover for flood, such as Flood Re in the United Kingdom. Similar public/private arrangements have been utilized around insuring man-made disasters such as terrorism – Pool Re, the industry mutual backed by government guarantee in the United Kingdom being an excellent example.
If we are successful in increasing penetration and shifting management of risk from the public balance sheet, we could significantly extend the reach of insurance.
With increasing industry consolidation what is your outlook for the (re)insurance landscape?
Traditionally we have seen a general trend of diminished appetite for M&A transactions during hard markets, principally as a result of market participants’ ability to realize strong organic growth. Conversely, in soft markets there has been heightened deal activity. While this has largely been the case historically, an analysis conducted by GC Securities on the correlation between pricing and M&A cycles has identified that while the (re)insurance pricing cycle continues to be a strong driver of M&A activity, the insurance industry has also increasingly been influenced by wider financial conditions, new investors, globalization and the benefits of healthy profits despite a prolonged period of rate softening.
Today market conditions are complex and challenging. Macro-economic developments, multiple sources of capital, benign loss activity and the pricing cycle are converging to create a healthy M&A environment. Absent a large scale market or catastrophic event we can reasonably expect M&A activity in the global (re)insurance market to continue at a rate meaningfully above the historic mean.
How is industry consolidation affecting the relationship with clients and reinsurers?
As the rate of change to the structure of the (re)insurance industry accelerates, we believe the role of the reinsurance broker has become more important.
In this increasingly complex and dynamic world, the need for unbiased and agnostic customized advice and services is growing. More options create the need for more market insights to make the best decisions. As insurers are challenged to find growth in a rapidly changing market, our clients are increasingly looking to us for unique ways to expand into new geographies, develop diversified capital allocation models and to innovate on their behalf.
What do you think will dominate discussion at this year’s Monte Carlo?
Every year I look forward to spending time with our clients and markets. The Monte Carlo Rendez-vous is an excellent forum for idea exchange and to discuss opportunities for our clients.
I believe conversations this year will be focused on market dynamics and our evolving landscape. Although we are undergoing significant change, it is important not to forget that ours is a resilient and innovative industry. Throughout history we have developed new approaches to managing risk and have weathered significant catastrophes and volatile economic conditions. With today’s market conditions and our history of innovation, the creation of new solutions for new risks will no doubt be part of the discussion.
Which part of the world do you think will be the next hotspot for your company in particular?
We believe both China and the African Continent have significant potential.
The African Continent is attractive for many reasons. Nine of the world’s top 20 fastest growing economies are in Africa. The African Continent’s annual GDP growth has averaged 5% over the last decade, and the Sub Saharan economy is set to grow by 6% this year. Furthermore, investment from the US, China, and India, coupled with favorable demographics and economic and political reforms, make for a flourishing (re)insurance sector in which we are committed to playing a leading role.
Marsh & McLennan’s presence in the African Continent was strengthened in 2011 with Marsh’s acquisition of the brokerage business of Alexander Forbes (AF), and in 2014 when Mercer acquired a 34 percent stake in the remaining Alexander Forbes business, creating a footprint that is unrivaled across the region. Guy Carpenter has an established presence in Southern Africa and we are enthusiastic about continuing to expand across the region.
China continues to be a hotspot in our view. Although the growth rate of the economy has slowed to around 7 percent, the insurance industry has been expanding at a higher rate than GDP and we expect it will continue to outgrow the GDP growth pace. It is estimated that the insurance penetration rate in 2020 will be 56 percent higher than what it is today, and the per capita insurance spend will more than double by then. The continued high growth of primary insurance will drive the growth of reinsurance in the country.
With the implementation of the new risk-based solvency regulation system C-ROSS in 2016, we expect that there will be a rebalancing between the types of reinsurance needed by ceding companies. For the lines of business that have higher capital requirement, we expect there will be increased demand to utilize reinsurance as a more efficient way of capital. In the meantime, the government policy-supported business such as agricultural, credit, surety and catastrophe insurance will be the growth areas.
For the next five years, we anticipate changed needs in risk management, products and solutions. Guy Carpenter, which enjoys a leading position in this market, is well positioned to help our clients navigate through the changes.