In Pursuit of New Directions
An improving economy has made the past year a good one for insurers. So at this year’s annual meeting of the Property Casualty Insurers Association of America (PCIAA) in Scottsdale, Ariz., instead of ruminating on challenges faced, presenters and attendees instead looked to the future, focusing on a theme of disruptive innovation and progress. A presentation by Luke Williams, professor of innovation and executive director, Berkley Entrepreneurship Center, New York University’s Stern School of Business, best encapsulated this theme. He urged business leaders to not just tweak existing products and ideas, but defy the norm and go in entirely new directions.
Ideas, he stressed, are the recipes for change and lasting growth. The focus on innovation and disruptive transformation may arise out of the fact that none of the challenges facing insurers and reinsurers are very new. The reinsurance market has been softening for the past four renewal periods; alternative capital has been spilling in for some time, contributing to falling prices; the evolution of technology, while ever difficult to keep up with, has been developing over the past several years. To address these persistent challenges and thrive in spite of them, Williams and other speakers asserted, insurers need to break out of their comfort zones and explore new ways of doing business that take advantage of the excess capital, technological advances, and generational differences that at times plague the industry. Here are some key takeaways from the meeting, summarizing the state of the market today and what should change going forward:
New Capital and Staying Relevant
The reinsurance market remains soft due to a lack of natural catastrophes and the influx of alternative capital from insurance-linked securities, sidecars and hedge funds – to the tune of roughly $20 million. Rather than voice concern, however, PCI speakers and attendees see the new capital as an impetus to push in new directions and find new ways to stay relevant to their clients. This includes diversifying their book of business to include specialty and excess and surplus lines, as most of the extra capital is focused on the property catastrophe market. Kevin Ahern, a managing director of financial services rating with Standard & Poor’s, said some reinsurers are even forging into mortgage insurance and crop insurance. Reinsurers can also create more customized coverage to suit their customers’ specific needs and risk tolerances. Mike Krefta, Chief Underwriting Officer of Hiscox Re, said his company is doing just that, and reinforced the need to stay innovative to stay in the game. The reinsurer has worked to roll out new products over the past year and a half, “tweaking them to make them custom to the client’s needs.” Increasingly, insurers will also have to provide not only coverage, but skills and expertise to their clients to help them gain a holistic understanding of their risks.
Cyber Presents Challenges and Opportunities
One area where companies are seeking the most guidance is in cyber liability, but more questions remain than answers. For one thing, there is no definition of what constitutes cyber coverage, and there’s a lack of understanding of how to underwrite it. Definition of coverage could vary from company to company, and everyone is just “trying to get their feet wet,” said Sridhar Manyem, director, ERM, with Standard & Poor’s. Gaining understanding and skill with cyber will need to follow a four-step process, according to Krefta. That includes defining what “cyber” encompasses, pricing the coverage, reporting on the results, and using those results to build up skills sets and expertise around the coverage. Others suggested that the industry could speed this process by taking a more proactive role in pushing for regulation of cyber risks, which would provide some parameters to build coverage.
Legislative and Regulatory Environment
TRIA renewal likewise occupies a spot on insurers’ list of concerns, but most believe Congress will pass the Act that many see as essential to the stability of both the insurance industry and the American economy. Both the Senate and House of Representatives have passed versions of the bill, which expires on December 31, 2014. Robert Gates, former secretary of defense and the meeting’s opening speaker, said renewal of TRIA is necessary for the security of American businesses.
Several speakers also urged insurers to stay ahead of rapidly-occurring regulatory changes, especially those relating to technological innovations. Panelists speaking on “Driving Innovation in the Marketplace” pointed to growing prevalence of smart and driverless cars. Questions of liability surround this emerging technology, and insurers can stay ahead of the game by keeping abreast of regulations governing its use. Evolving data analytics tools, which will grow increasingly important for underwriters and actuaries, may also be subject to regulations. According to Ahern of Standard & Poor’s, data analytics help insurers identify which customers to retain, but the collection and storage of so much data can also pose an operational risk. Overall, the property/casualty marketplace fared well over the past year, with benign loss cost trends, strong underwriting profits, and largely stable ratings. Despite the challenges ahead — and the incredible speed at which they evolve — attendees expressed optimism and willingness to use those obstacles as opportunities for innovation.