Dinos Iordanou, the chief executive officer of Arch Capital, may not be working in the insurance industry when it happens, but disruption is coming for excess directors and officers liability and other excess covers, he believes.

Dinos Iordanou
(Photo by Don Pollard)

Speaking at the Standard & Poor’s Global Ratings 2017 Insurance Conference in New York yesterday, Iordanou, who is set to retire early in 2018, said he envisions entities ranging from Google to the Chicago Board of Trade creating exchanges that allow pension fund and private equity firms to participate on layers of excess property and liability coverage.

“I think we’re going to see that in our lifetime. As a matter of fact, I think we’re going to see those in the next few years because that’s where the technology is taking us,” he said.

Iordanou made the bold prediction about excess insurance exchange platforms while describing the increasing role of predictive analytics in the insurance industry in areas where coverage is standardized.

“Once you standardize a product, it has a commodity-like characteristic to it, and then predictive analytics have to enter your underwriting judgment, [allowing] you to out-select risk from the competition,” he told other executives in attendance at the conference.

Referring first to personal lines, where the GEICOs and Progressives of the world can use predictive analytics to build a competitive advantage, Iordanou said the next step in the evolution is small business insurance, where products can also be standardized.

“Now, taking it to the high end of the business, anything that is ‘excess of’—excess D&O, excess property, excess liability, excess professional liability—is almost standardized…You place the first $25 million of risk and then the terms have to be determined. And now everybody is following form.

“I envision over time, either the industry—meaning underwriters and brokers working together or separately—or external participants” will create an exchange to trade layers of excess risk. “I don’t know if it’s going to be Google or Microsoft or IBM or BlackRock or the Chicago Board of Trade,” he said, explaining that one of these entities could devise an exchange where risk is taken by standardizing the layers. “You have a clearing price, and now that eliminates a lot of frictional cost…”

Iordanou described the potential negative consequences for insurers. “As an underwriter with committed capital, I like the cocoon that we’re in because who is going to say that pension funds won’t participate or private equity funds won’t participate, and now you’re taking the available capital in the industry to infinity,” he said.

He concluded that this will probably happen within a few years. “It will create an efficiency as to how you price and transfer risk through these exchanges.”