Reinsurance innovations at Hiscox Re don’t necessarily come in the form of entirely new products, according to Mike Krefta, the chief underwriting officer.
Rounding out offerings like RAP and SECAT—Hiscox’s forms of risk aggregate protection and second event covers—the reinsurer designs bespoke single-peril takeouts to help insurers grow in new areas. Krefta explained these to Carrier Management at the 2014 PCI Annual Conference.
Hiscox Re underwriters spend much of their time and effort with clients, first trying to understand what coverages the “clients need on an evolving basis, and then how to package those in innovative ways,” he said.
“It doesn’t have to be the killer product. It can be a twist of lime in a glass of water that just sells more water …If you can add that twist on the product to make it more bespoke to clients’ needs, that’s exactly what we are trying to achieve at Hiscox Re.”
In particular, Krefta says there is a product team at Hiscox Re that aims to help clients by in ways that drive growth and innovation on the insurance side. One simple way to do this is with a product called the single-peril takeout.
Krefta explains that the takeout gives clients “the ability to cede some or all of their business or their insurance risk in areas that they’re not necessarily comfortable writing, partly because they might not have the expertise in that region or the risk appetite in that moment in time to take that risk on themselves.”
An example might be an admitted carrier that is entering a new state in the Midwest or on the Gulf Coast or in California—in an area where they previously hadn’t had the experience of that type of business or product line. “We would use the expertise we have in‑house to try to help them set and define rates” and to identify some of the issues that could arise in that business and that state.
And ultimately, they can transfer that risk to Hiscox Re should they not want to take that risk themselves.
Providing another example of how Hiscox Re is helping clients to innovate, Krefta highlights the specialty expertise across Hiscox Re, and the wider group, Hiscox. “We have the terrorism portfolio, the kidnap and ransom book, space and aviation, fine arts—these are all product lines that Hiscox has a very long heritage in underwriting. So if we can help our clients to get those types of expertise into their products, and what they sell to their agents or insureds, then that helps them to build their business forward, and it helps us to spread our product and our innovation in that way as well,” Krefta says.
Giving a broader picture of innovation at Hiscox Re, Krefta reflects back to January of 2014. “The very formation of Hiscox Re was bringing together our business units from London, Paris and Bermuda. It really gives us the expertise of over 100 reinsurance professionals who are specifically looking at that business class in order to try and innovate, in terms of product, in terms of the capital that we use, and in terms of the distribution.”
Honing in on product, he said that the product group, which meet twice a month to create a pipeline of brand‑new products, such as Hiscox Re’s RAP or risk aggregate protection
“For us, the risk aggregate products have been sold for a very long time. It’s not something that is innovative in and of itself. But the way that we are making it innovative is by making it more bespoke to our clients.
As an example, if a large global corporate, for example, has varying risk appetites within different divisions of its varying business, this product allows them to have different levels of attachment, and limits for each of those business units.”
Krefta adds that “the chance of a recovery for that type of product is higher than if it was a standard X-over-Y- type coverage being sold to them.
Innovation was a hot topic at the PCI meeting, where the conference theme was “Leading in an Age of Disruptive Transformation.”
“It’s less probably disruption. It’s more just a period of change,” said Krefta. “If one thinks about the new forms of capital in the marketplace, the new emerging types of risks that we have to cover whether it’s nanotechnology, whether it’s cyber—and in terms of the capital, whether it’s ILS [insurance-linked securities], whether it’s the increased traditional appetite for writing risk on a rated basis, those are all just changes in the marketplace that I think everyone has to be aware of. For us, we see opportunity in that,” he said, noting that with an ILS platform known as Kiskadee, Hiscox is “trying to put a foot in that camp as well.”
While most reinsurance industry representatives likewise said they saw opportunities for innovation rather than disruption in the current market, both Krefta and Martin Neuhaus, head of underwriting for national clients and specialty lines at Munich Re America, voiced some concerns about reinsurers who are broadening contract language in a way that is risky rather than innovative.
“We have to distinguish between innovation and smart innovation, especially when it comes to contract wordings,” said Neuhaus, explaining that what is often referred to as “innovation” is just a broadening, or sometimes, a blurring of the contact language.
“We think that cannot really be in the interest of both parties, either reinsurers or insurers.”
“On the other hand, when it comes to new exposures or exposures that are not well understood or covered in the insurance industry like cyber, flood, or non‑material damage business interruption, we think that this is really a place where the reinsurance industry, the insurance industry, and Munich Re in particular, should be innovative and can be more innovative,” he continued.
“We think that Munich Re in particular, given our global network of experts and that we are present in all lines of business in basically all major markets, [is] very well suited to drive that innovation.”
Neuhaus also noted that Munich Re does agree to change contract language at the request of a client in some instances, such as expanding hours on catastrophe treaties, or expanding the terrorism coverage on the traditional cat-only treaties. “We can price for that, we understand the exposure, and there’s a need on our client’s side. So that is perfectly fine.
“In other cases, where it’s just some additional exposure is added to a treaty, with unclear language and the expectation is that this coverage would be given for free, then it’s something we wouldn’t be willing to do because that wouldn’t be prudent,” he said.
Like Neuhaus, Krefta is concerned about unpriced exposures being added to treaties and recommends proactive early dialogue between reinsurer and cedent to protect both parties.
“Loose contract wordings could be a time bomb for the reinsurance industry,” Hiscox Re executives warned in a media statement released a few weeks before the PCI Annual conference. But not all changes in coverage are a cause for concern, Krefta explained during a videotaped interview on site at the conference.
“One thing we’re very keen on at Hiscox Re is making sure that the coverage we can afford on the reinsurance is exactly what our clients need. So, there is a distinction there from slips in coverage that perhaps the client doesn’t need, which is where our largest concern lies,” he said, noting that he has seen the latter type of pressure on contract wordings for more than a year, starting in the summer of 2013.
“Our largest concern is that if a client needs the coverage, then we should have that discussion proactively and early, in advance, rather than wait until the very last minute before renewal. And quite often then, the coverage is thrown in at little cost or at no cost at all. In which case, I think doesn’t help the reinsurance buyer or the seller.
“It doesn’t help the seller because they don’t have time to proactively price for the risk, define that risk, aggregate it and fundamentally be able to report on that risk for whatever reason they may need.”
For newer emerging perils, such as cyber, “we struggle to even be able to define the risks, let alone actually work out how that translates into contract wordings,” Krefta added.
That being the case, Hiscox Re aims to “proactively engage” with clients “to work out how we can broaden coverage, if it’s appropriate to the client’s requirements and needs.”
“But we need to have the granularity of information to be able to actually price and define that risk appropriately, to make sure we have longevity and a sustainable business model where we can actually support our clients over the next couple of decades,” he said.