Supercede’s Rose and Leigh: Poor data adding $40bn a year to reinsurance costs

Poor data means reinsurance companies are unable to distinguish between good and bad insurance portfolios, according to Ben Rose, co-founder and president at Supercede.

Speaking to The Insurer TV, Rose borrowed from Nobel Prize-winning economist George Akerlof, who posited that asymmetric access to information in the second-hand car market leads to a situation where buyers cannot discern between broken cars (lemons) and working cars, resulting in price impacts across the board.

Applying this theory to the (re)insurance industry and the data challenge it faces, Rose said: “You could probably sum it up by calling the reinsurance market a market for lemons at the moment.

“What I mean by that is … we're in a situation where data quality is really poor and reinsurers, as a result, can't really confidently tell which risks are the good ones and which ones are the bad ones, because they don't get the data from their cedants” he said.

“As a result, [reinsurers] put up their prices for everyone, regardless of how good the underlying risk actually is,” said Rose.

Rose was speaking alongside Jerad Leigh, co-founder and CEO at Supercede, who estimated reinsurers add a 10 percent pricing load as a result of these data deficiencies.

“On average, the feedback from the reinsurers was about 10 percent of the cost that's added to each of these risks through a combination of direct loading and adjusting the pricing of hedging for worst-case scenarios,” he explained.

When extrapolated industry-wide, he said it represents an additional cost of around $40bn per year, based on Howden’s estimate of a market size of $400bn.

Talent challenges

A knock-on effect of this poor data quality in the reinsurance industry is the substantial amount of drudgery required to make the data digestible. As Rose explained, this essentially involves checking thousands of columns for discrepancies.

“When it comes to sense-checking reinsurance data you,have to look at this year versus last year, which means opening this year's set of spreadsheets on one side of the screen and last year's spreadsheets on the other side of the screen and scrolling through side-by-side and trying to figure out what's changed, and does it make sense,” he said.

According to Leigh, the mundanity of the work has led to an industry that struggles to attract and retain top-level talent.

“You're going to have a hard time attracting really top-tier talent if you then hand them really tedious work to do,” he said.

“They want to lean in. They want to do interesting analytics on the data. They want to build out insights into a portfolio and do really compelling and hard things.” said Leigh

Watch the full 10-minute video with Ben Rose and Jerad Leigh to find out about: