CEO roundtable: Industry must work together to address underinsured and emerging risk opportunity

Faced with emerging risks and challenges around escalating “traditional” risks such as severe convective storms (SCS), insurers, reinsurers and intermediaries need to work together to better understand the risk and educate buyers, governments and regulators on the value of the product, according to participants on the Deloitte CEO Roundtable.

At the Monte Carlo Rendez-Vous this week, one topic of discussion has been the impact of higher cat excess of loss retentions, which have forced insurers to retain a higher proportion of frequency losses, most notably from SCS in the US.

Brokers have suggested that to remain relevant, reinsurers need to lean in and provide lower-attaching layers again, while carriers have largely said they will hold their ground on retentions.

Speaking on the Deloitte CEO Roundtable moderated by The Insurer in Monte Carlo, Liberty Mutual Global Risk Solutions president Neeti Bhalla Johnson said that risks such as SCS are “solvable problems”.

“You are trying to solve a problem, but everybody has to win in that. These are all solvable problems, and we are not going to solve them tomorrow. We're also not going to fix them alone.

“It will require the expertise and insights of the insurance companies, the government investment in loss mitigation programmes and the development of new alternative risk funding mechanisms to absorb the volatility of secondary perils. We need to work together, public and private sector,” she said.

She added that clients will also need to collect information in a way that enables carriers to price and select risk and structure the right solution.

“So if you’re looking at SCS, you need them to understand their property values and location accumulation. You need to collect that information in a way that you can overlay that with climate hazard maps and stochastic models and have a dialogue with clients about the insights,” she suggested.

While the industry is far from having “excellent” models for SCS, it could get visualisation tools to help assessment around aggregation issues and what it will take to write the risk at an appropriate risk-adjusted return, Bhalla Johnson added.

New risk funding mechanisms could include parametric deals, state pools for SCS and potentially a federal scheme like the National Flood Insurance Program but for the SCS peril.

The executive added that to lean into these kinds of opportunities, a strong balance sheet will be key.

“For the first time in a long time, there's value in having a large and strong balance sheet that enables you to absorb volatility. This will be an important differentiator in making us risk aware, not risk averse,” she concluded.

The CEOs on the roundtable also discussed growth opportunities and challenges associated with the changing risk environment, including around climate.

Aspen’s executive chairman and group CEO Mark Cloutier said that the growth opportunity represents a balancing act between new product development, including for new industries and sectors, but also not losing touch with pressures in “traditional business”.

He said that some of those pressures in traditional business, such as retained losses and the lack of availability of low-attaching cat covers or aggregates, could be addressed by new structured solutions, which would then need to pass the test of risk transfer with accountants and regulators.

“I’ve used the phrase finite reinsurance, [but that was] a different time, a different application and different motives. I’m saying, if we’re purely going to finance risk for a period of time, let’s call it that, let’s declare it that, let’s account for it, and let’s agree how we’re going to account for it in the open, as a solution to a problem,” Cloutier said.

Meanwhile, Aon president Eric Andersen suggested that after several years in which the balance has generally been in favour of clients, it has now probably tilted back the other way – as he cautioned that if the industry doesn’t come up with solutions, clients will find their own.

Using the example of school districts in the US that are finding insurance buying conditions challenging, he said: “What they will end up doing is aggregating among themselves. It will either end up with state support or they’ll group together and create their own captives, which will then buy reinsurance and the exposure comes right back into the market in a different way.

“Ultimately, the value of the product over time has to solve the client’s problem … I agree it has to be priced right, no one is asking anybody to lose money. But I think, ultimately, if we don’t solve their problem, they will find a way to solve it, another way that likely will not include us, or will include us in a diminished way,” he continued.

The value of (re)insurance

Vicky Carter, chairman of global capital solutions, international at Guy Carpenter, said data will be key and a huge enabler to grow into opportunities.

But she added that the industry needs to do better at promoting itself.

“One of the big things this industry really has to do is to sell the value of insurance and reinsurance, and I think there’s a lack of understanding outside the industry of the societal good it can deliver,” said Carter.

She used cyber as an example of how better data and modelling can drive growth in a market.

“A few years ago, cyber was an emerging risk, but what's interesting is how models are starting to develop and get more complex. From there you can start to build products, and we're starting to see alternative capital enter the space.

“The key thing is understanding the client's needs, and based on that heightened understanding, developing new and innovative solutions that meet those unique requirements,” the Guy Carpenter executive commented.

Also during the roundtable discussion, Axa XL Reinsurance CEO Renaud Guidée said that insurers and reinsurers can come up with solutions if it is clear that they can both benefit.

“It brings us back to the fundamental principles of our industry, which is that insurance and reinsurance are about alignment of interest. I think it's very important in the chain of risk sharing that we understand the responsibilities and the duties of each stakeholder,” he commented.

The executive said insurance and reinsurance can function well where there is uncertainty around loss and both sides want to pool it.

But he added: “If you have certainty of loss, which is being brought by elevated frequency and by reckless behaviour, because you don't have any prevention, then it becomes un-underwritable.”

Maintaining relevance

Also during the wide-ranging conversation, Deloitte vice chairman and global specialty and reinsurance lead partner Guru Johal highlighted the importance of the industry remaining relevant.

“It is important that we continue to be relevant to address our clients’ largest challenges and how you bring capital together with the total risk that needs to be mitigated. Sometimes due to limits/country limits, there is a large of amount of risk that still needs protection.

“How this gets addressed and how our industry helps assess, mitigate and place this will continue to increase relevance,” he said.

He added that the increasing sophistication among corporates around the risks that they are facing and how they mitigate these more holistically – including use of captives, reinsurance and leveraging the capital markets – will become more prevalent.

His colleague Neal Baumann, global financial services leader at Deloitte, highlighted the growing complexity around risk which requires a different approach from the industry.

“We usually say, I'm looking at a risk through a certain lens. I think what might be the difference these days is that it’s not a lens, it’s a prism. Irrespective of which angle you come in the prism, you get a different level of a complex distortion.

“The question is, what's the coalition that needs to come around the table to start to get a better understanding of what is that prism, and how do you need to think about it?” he commented.