The annual Rendez-Vous de Septembre in Monte Carlo, Monaco traditionally focuses on one or two signatory concerns within the industry. This year, things were different. The 2,700 registered attendees were faced with addressing the pace of change within and without the reinsurance industry, which has mandated a significant reexamination and overhaul of how it does business.
Reinsurers had to adapt to an abundant supply of capital as a result of several benign catastrophe years and the entrance of alternative capital; i.e. insurance linked securities or ILS that now supply around 16 percent of reinsurance capital. While capacity has gone up, its utilization has gone down. According to A.M. Best it declined from 81 percent in 2012 to 73 percent in 2014. This over capacity has caused P&C reinsurance rates to decline, and to remain low.
Advances in technology, particularly in the field of catastrophe modeling, opened new possibilities for companies, cedents and reinsurers to manage their capital with a hitherto undreamed of sophistication. The industry has therefore realized that if companies aren’t on the cutting edge of that technology, they will go the way of the dinosaurs.
Continuing low interest rates have also spurred insurers and reinsurers not only to tighten up their underwriting procedures, but also to look for new sources of business, both in the products they offer, and geographically.
Heightened oversight from increased regulation—notably the European Union’s long-delayed Solvency II—has made risk management an even greater priority than it already was, and has been one of the factors that has set in motion a string of merger and acquisition (M&A) activity, industry participants say.
The Danger of Irrelevance
Finally, there is the overriding concern that the entire P/C industry—insurers and reinsurers— are in danger of becoming irrelevant. When XL Catlin’s CEO Mike McGavick first broached the subject more than three years ago, he was more or less considered the P/C industry’s Casandra, an unheeded prophet of doom. That’s changed. He now appears more like the industry’s canary in the coal mine.
At the panel discussion on Tuesday, Sept. 15, hosted by the Rendezvous organizer, it was quite plain that the other members had heard McGavick’s warning and were considering what actions to take to address his concern.
The relevance question is existential. It stems from the fact that many global and national companies—the potential buyers of insurance and reinsurance—have far larger capital bases than even the biggest insurers and reinsurers. As a result, they are able to retain more risk, and often form captives to do so. While reinsurers are frequently the ones who reinsure those captives, they lose the reinsurance that would be forthcoming from primary insurers, who no longer have that business. In addition, the larger primary carriers are also retaining more risk, and therefore buying less reinsurance.
The panel discussion featured two presentations on the exponential expansion of technology: one from Siemens Chief Engineer, Siegfried Rasmussen, and one from IBM’s Sandip Patel. They came up with numbers that seem incredible. Machines at Siemens production lines record “50 million measurements per day; the average oil rig has 25,000 sensors that are constantly feeding data into computers. In addition, they referenced the universe of digital information, now measured in something called a “zettabyte,” -a 1, followed by 21 zeroes.
Rasmussen also noted there’s “no 100 percent security” for any of this data, a fact confirmed by Daniel Gerber, a senior partner with Goldberg Segalla, who heads the law firm’s cyber practice team, in an interview that will soon be published in video format on Insurance Journal TV. “You can no longer ‘ring-fence’ your data,” he said. “Someone’s going to get through. So, you have to find ways to spot intruders and deal with them.”
Patel’s presentation was somewhat more comforting, as he explained that the insurance industry is well-placed to effect the solutions that are needed. The industry “can produce holistic analysis. It’s an opportunity for the industry, as it understands risk management and risk transfer, and therefore loss prevention. You need to prevent losses, not just pay claims,” he added.
McGavick was first up on the panel after the two men finished their presentations, and he agreed with Patel’s statement that the industry “knows risk, and how to handle it.” He also called for greater speed in making decisions on coverage, the recruitment of talented people and, in the face of more regulation, an increase “in capacity to match balance sheet needs.”
Zurich’s head of group reinsurance Paul Horgan was one of the panel members who supported McGavick’s call for relevance. He said the industry “needs the skillsets to work with the market.” He said that insurers and reinsurers need to work with brokers to “take on more risk, or they will get passed by.”
Aon Benfield’s CEO Eric Andersen urged a pragmatic approach. “The [reinsurance] broker’s role should be to help mitigate risk,” he said; adding, however, that the brokers “can’t solve all the risks,” but can work with the companies to mitigate those risks.
“A company has to decide what it needs to protect,” he said, “and how much risk it wants to transfer.” He also spoke about the necessity of replacing old insurance and reinsurance products with new ones. “You need to create relevant products” that establish on “what basis you transfer risk.”
The Need For Innovation
Munich Re’s Thomas Blunck stressed the need for innovation in the industry both to “increase the speed” at which it operates and to create “preventative risk management services.” Both, he indicated, require “working with engineers in the companies” to change the way the industry “develops new products.”
McGavick turned to the necessity for growth as the means to increase relevance. This can be achieved, as most people at the Rendezvous realized, by creating new products, addressing new and emerging risks like cyber coverage, and by expanding geographically into new and/or emerging markets. “You have to think it through, however,” he said. “You will probably lose two bets out of five, but you have to be involved. You can’t stand by and do nothing; you have to take risks.”
Andersen pointed out that “customers want long-term partners” as they need the services those partners can provide. “You can’t know everything,” he continued, but “you can get the experience to create the products that are necessary for companies from Siemens down to SMEs,” he said, referring to small and medium-sized businesses.”
What came through loud and clear was the integration the reinsurance industry is experiencing, or as Paul Schultz, the CEO of Aon Securities, put it, the “convergence” of what used to be independent elements.
In a recorded interview, he explained that the convergence of insurers, reinsurance brokers and their clients is “all about growth. We are in an industry that is struggling to grow, and it’s a tough industry to grow.” We need to find ways for clients to “become more efficient so they have the ability to earn a higher return for their shareholders, and can reinvest [those returns] back in the business and create growth.”
It also means that reinsurance brokers continue to play an essential part in advising their clients what the options are for reinsurance, including the terms and conditions of a specific treaty, or the possibility of going into the ILS market. Capital and growth are tightly linked, and that requires all the parties to any insurance transaction involving more complex risks to have the competence to do their jobs.
The 59th Reinsurance Rendez-Vous stands apart from past Monte Carlo events, as there wasn’t a recent major catastrophe, other than the explosion and fire in Tianjin, or the arrival of alternative capital to dominate discussions. The presentations revolved around strategy—to achieve growth; to protect capital; to improve and speed up the reinsurance business model. Terms like relevance, convergence and integration were commonplace and were usually part of these conversations. Oddly enough “modernization” wasn’t heard often, but that in essence is what the insurance industry has embarked on—to bring itself into the 21st century, and to ensure its survival and growth.