📺 Masterclass | The History of Reinsurance - 6/6

Patrick's Masterclass - Video n°6 

(French & English subtitles avalaible directly on YouTube)

Hi everybody 👋

I am Patrick. 

Today for the last tutorial, let’s make a kind of summary of past present and future, a mixed salad and hopefully a tasty one!

Let’s start! ⏬

4 OUTLOOKS

1975

• (Re)Insurance industry was a well-established traditional, specific one with its own technics, expertise, distribution channels, individual risk assessment, claims processing.
• There was a clear distinction between risks covered that is” the financial consequences of a damage to a property due to a sudden unpredictable accident” and what was not insured such like Non damage BI.
• More than 80% of covered assets were tangible ones.
• Top management members of (re)insurance companies were seniors having developed solid insurance competencies whatever their studies.

Today

• (Re)Insurance industry has turned to be part of the financial world, with intricate relationships between the respective actors, competitors and partners.
• Power at the top has shifted from insurance specialists to financial ones.
• The risk adverse mindset of our societies has grown both at the individual and corporate levels, an opportunity and a challenge for our industry.
• This attitude has reached the insurance companies who want to secure stable results and lately.
• Reinsurance companies and their investors due to negative return net of capital cost over the last 5 years, volatility not paid for the risk assumed
• Increased handling (Modelling, ERM, ESG, IFRS…) and retrocession costs. Retrocession market is small (about 16 Bns $) to face big Cat events) , drying out and more expansive for the rest available.
• Fear that the worsening Cat loss trend Nat Cat with the climate change but also man-made uncontrolled accumulations: (pandemic, cyber, political violence, SRCC…will continue.
• The favorable environment to invest money at a time interest rates were low or even negative has gone   

Our insurance industry is at the crossroads

« Insurance is now a value-destroying industry. Half of insurers are not earning their cost of capital and half are trading below their book value » Mac Kinsey REPORT 2022

at the same time

“There is a massive opportunity out there and if we capture it, we can double our Industry” Greg Case CEO Aon 

Demand is increasing :

• Risk awareness gains ground due to increased claims frequency & severity and medias.
• Cat losses grow year by year, average, frequency, and severity along with the urbanization and concentration of values, the climate change, the disruption of social behaving/values.
• Emerging risks appear and/or develop dramatically: non-Damage BI, “assailant cover”, Cyber…

As an industry we should not complain about the demand for an increased role!

Offer :

• was increasing, with the development, on top of the regular growth of the traditional market, of Alternative risk solutions offered by non-traditional investors.
• but not enough to cope with the increased exposures and now starts to decline

Protection gap has been widening:

• 220 Bns $ on the Cat Property, source Swiss Re,
• 588 Bns in Health (2019), 41 Bns for Pension (2016), source Moody’s
  Graphique

Challenge: “Insurers’ inability to provide adequate cover at an affordable price“

More demand, less offer, the usual simple answer is price increase :

• Insurance cies have raised their prices for some years, especially for commercial lines.
• Reinsurance companies have started slowly but the trend up is on the go.
• These price increases are bound to Players have to face: inflation and social inflation, 2 threats, increased frequency and huge severity potential with scenarios going beyond our worst movies scenarios.

Increase in prices and reduction of cover (cyber…) is not the answer expected from clients:

"(Re)insurance industry must face the challenges presented by systemic risks and increase its footprint or run the risk of losing its relevance in the next decade" Tom Clementines CEO from Pool Re

• Insurance industry weight is down:

- Penetration ratio expressed as a % of worldwide GDP down from 1.3% to 1% for P&C commercial lines over the recent years.

- Over the last decade insurance premium has grown by 3.2% while global GDP annual growth was 4.7%.” Julian Enoizi Guy Carpenter.  

Surplus funds dedicated to Reinsurance +/- 600 Bns$ depending on metrics are not growing anymore, were even down over the first 6 months 2022.

While

• Andrew a 15 Bns $ event in 1992 would reach 70 Bns $ today, if striking Miami 200 Bios $ (source KCC).
• Covid 19 near 50 Bns insurance cost, 3^rd (re)insurance loss with hardly any premium for it but no image reward for our industry
• Pandemic risk is by nature worldwide but who had forecasted it could affect so many lines of business Life and non-Life together?
• Unexpected accumulated losses have impaired balance-sheets distressing investors.
• A substantial part of this amount has been claimed/paid although the purpose of the contracts was not to cover this risk.
• Court decisions, considering lack of clarity of policy wordings, have often been made in favor of insureds.
• Insurance industry has most of the time enjoyed decisions in its favor but despite the size of losses paid got a bad image in the public!

We have to change that! Solutions?

• Reduce acquisition and management costs to allow affordable risk premium

- Invest massively in new tools, use AI, ML, share big data.

- Streamline processes to allow for a fast-track risk handling from pricing/underwriting /delivering the contract/ assessing and paying the claim.

- Hire high skilled profiles to innovate while preparing redundancies on the other hand.

- Costs reductions and a more efficient treatment.

- A proper risk premium to be accepted by the clients

• Design clear wordings:
  
  - What is covered, what is not (“named perils” would be nice to have), what could be covered provided additional premium
  - Clarity reduces litigation costs, thus price needed and
  - Improve the image of our industry.
  
  
• Work on risk prevention:
  
  - Rather than pay after the loss, pay to prevent it!
  - Our industry has to contribute to change the mindset of citizens and corporates who have turned too much individualistic and short-term minded.
  Incentives may help this change with « discounts on homes equipped with devices that can detect fire, flood, or unwanted visitors » Mac Kinsey report 2022.
  - Follow an ESG responsible approach rather than short-term money earning.
  - Increase the cooperation between the respective actors of our industry;
  - Join resources for think tanks able to exchange with governments.
  - Solutions for systemic risks can only be found if we work together.
  - Attract capital as an innovative, risk taking and controlling, yield providing industry.
  
  
• A challenge but there has never been so many opportunities and talents to work on this : 
  
  - (Re)insurance industry with limited capital cannot answer to unlimited requests!
  - Attract capital to take more risks rather than give the money back to shareholders because of insufficient return.
  - To do that there must be an adequate price for the service offered with bespoke products and return for the risks assumed.
  - Our industry has to let understand and appreciate, in other words, to sell better to the public, the value of the services offered and the price needed for these.
  
• In case of systemic risks Private/Public Partnerships may appear needed beyond and/or : 
  
  - Some do exist for long like for the Earthquake cover for Homeowners in Japan, Nuclear and Terror pools and Nat Cat covers in some markets (France, Japan, Spain, UK, US…)
  - World Bank has produced innovative parametric solutions, sometimes involving several countries with different triggers.
  - Other solutions may be offered by the market depending on variety and size of the risks.
  - We know how difficult it is to find a country-by-country solution, not to speak of 27 European countries! We experience it with the pandemic issue these days
  - Our (re)insurance industry’s mission towards citizens, and corporates, is to offer solutions according to its financial capacities and be rewarded for it with the proper return deserved.

It may sound like “I have a dream” but that’s a pretty challenge to work on.

I have done my duty with passion over the last 47 years servicing our (re)insurance Industry.

Now it’s time for me to say: goodbye and thanks for your attention 👋

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