Kading on the future, great challenges and transformation
The global reinsurance industry is changing. What will the reinsurer of 2020 look like?
Our view would be that the additional capital into the insurance and reinsurance business is here for the long-term, and that this additional capital will likely continue to grow in the foreseeable future. That means that both commercial insurers and reinsurers will be underwriting on their own account and they will be managing risk as third-party administrators for other capital providers. That is the emerging model. Nearly all the members of ABIR [the Association of Bermuda Insurers and Reinsurers] now operate capital markets subsidiaries. Some of those entities deal with underwriting and issuing catastrophe bonds, or investing in catastrophe bonds, others are working in collateralised reinsurance arrangements. When you manage risk for others you’re keeping some skin in the game to deal with moral hazard and you’re helping to educate new assumers of risk about how to be good risk managers and how to think about opportunities in the future. This is often looked at just as a reinsurance market issue. Our view would be that the alternative capital that’s come into the business is also there now to look at liability insurance and it’s also there to look at commercial insurance opportunities.
What do you see as the greatest challenge facing the global reinsurance industry in 2015? And, what do you see as the greatest opportunity?
Post-financial crisis we have seen the rise of regulatory protectionism, which threatens to undo the enormous opportunity to grow additional insurance markets. The rise of protectionism can manifest itself in many ways, including increased collateral requirements, for example the new Chinese solvency regulations, long-term seasoning requirements, such as China’s 30 year requirement, limits on affiliate transactions, such as the US’s proposed affiliate reinsurance tax and Brazil’s regulatory constraints and the UK regulatory actions to force a company to convert a branch into a subsidiary. The overall effect of these measures is to restrict the free flow of capital and to isolate capital into individual pockets. If that happens broadly we don’t get the benefit of diversifying risk and it will take more capital to write the risk that we currently have.
If we’re able to manage risk by reinsuring risk onto a central balance sheet we can diversify risk globally. By getting the benefits of diversification we can write more business at a better price, helping markets to be more competitive around the world. The impact of regulatory protectionism is to undercut that opportunity and that’s a disservice to consumers who need these products.
How can reinsurers better use technology and analytics to navigate the transforming industry?
The number one issue on big data is building out the tactical tools available to underwriters. That includes developing new catastrophe modelling expertise for risk around the world so that we can move from fairly developed catastrophe models in the US and the EU to the existence of new models around the world and for multiple perils around the world.
The second most important issue would be new perils like cyber risk. We need to use technological skill to better understand the risk and then to mitigate the risk. This means having employees who understand the technology and understand how you might identify the difference between a government-sponsored attack on a cyber system and a criminal attack on a cyber system, and the motivations of the different actors in the system so that we can put in the right risk management mechanisms. We need to compete with the technology firms themselves to hire that talent and move it into the insurance business.
Kading was interviewed in advance of the IIS conference in June.