CMS Partners Stephen Netherway and Simon Kilgour share their top five issues facing the reinsurance sector.
As the (re)insurance industry heads en masse to the Riviera’s most famous principality, practitioners face a dizzying array of challenges.
For reinsurers, brokers, MGAs and anyone in the supply chain it is a question of priorities. Whether you are investing for the future, trimming your expenses or managing an underwriting portfolio, business law needs to be at front of mind. Here is our top five pre-Monte Carlo Rendezvous head-scratchers…
The market is struggling to assess the damage of Hurricane Harvey and Hurricane Irma is brewing in the Caribbean. Once the Rendezvous begins, we will know if Irma, too has made landfall on the US coastline. Will the losses help move the rating dial? Whilst Harvey has caused substantial damage along the Texas Gulf Coast and in Louisiana, the market has had difficulty in attempting to estimate loss reserves with any accuracy. RMS has forecast $90 billion of economic losses (of which an uncertain percentage may be insured) whereas AIR Worldwide has put losses exclusively arising from wind damage and storm surge between $1.2 billion and $2.3 billion. Refineries have been hit but will their expected large retentions help ameliorate losses? There are reports we hear of possible meaningful losses in non-standard auto, cargo, and areas like fine art and specie, which may be bad, relative to the size of the market.
There may also be significant issues for claims adjusters in determining the scope of coverage e.g. Flood losses are not usually covered under standard homeowners’ insurance and more than half of the properties at risk in the Houston area are lying outside the zones where homes financed by Federal bank mortgages must carry flood insurance. We can see arguments arising, depending on aggregation language, that all losses arising from Harvey may not be aggregated as a single catastrophe occurrence for reinsurance purposes, and because damage will most likely be widespread and prolonged, insurers may seek to define the scope of the occurrence by electing when the “hours clause” is to be triggered. Will Irma substantially add to the ultimate market hit?
The probable loss of passporting rights in the UK after Brexit, as matters stand, has sent companies looking at alternative homes and many businesses have identified their relocations of choice. In stark contrast, there has been little, if any, progress in clarifying what will happen to the EU legal structure post Brexit and in respect of the UK in which (re)insurance currently operates.
UK regulators have required firms to be ready for Brexit but cannot offer any guidance on what Brexit means or its timetable, so the worst case scenario (the crash landing in late March 2019) has been the only basis for firms to model. Everybody is now more familiar with WTO rules, but these are predominantly focused in relation to trading goods and market access (in WTO/FTA terminology) is not the real or immediate priority for financial services- rather this is to ensure that there is dual regulation coordination , to avoid firms doing business around Europe having multiple regulators setting rules and supervising the same areas - potentially in different ways- and facilitating a regulatory acceptance by the EU of the UK post Brexit regulatory regime. But can this be achieved, is there time to achieve it, and must businesses effectively decide now to de risk the possibilities of this not happening by planning to relocate now, irrevocably, relevant business operations?
It is happening. It is transformational. Certainly it is being driven by customer demand for technological and digital platforms to aid client friendly access and interaction in the insurance distribution chain, but the cost savings and efficiencies generated by embracing AI can transform the economics of a business: in what seems an interminable soft cycle it may offer businesses perhaps the only way to stay relevant and profitable in the future. AI does not just mean automated cars- it offers the ability to provide automated personal services, better and more consistent data processing for underwriting risk assessment, faster claims processing, and the ever better mining of ever-increasing volumes of claims data to refine and identify trends to allow adjustors to make quicker decisions. The big issue for the market is when to move and accept that AI is more than supportive but is to be accepted as also fully “disruptive” i.e. totally transforming how businesses are set up, how they operate, how they are staffed and the levels of future human interaction and job dealing. First mover advantage will generate the greatest rewards and may be key to many businesses survival and profitability.
By the time of the 2018 Rendezvous this will be of application in all EU member states. It is almost certain the equivalent or mirroring of the provisions will remain relevant for UK businesses post Brexit. The key message given to the industry at the start of the journey to its application is that it needs a greater command over the data it holds, why it is held and how long it is held for.
How far are businesses along the road of that journey? There is no scope for further delay; the market must urgently look towards its pathway to 25 May 2018 at the way it treats personal data, to assess and understand organisational exposures and take steps to develop, build and implement GDPR compliant documentation, processes and systems.
Anyone familiar with the (re)insurance market will recognise its fluid relationships and complex supply chain networks. Distribution chains can also be convoluted and these, alongside business process and IT outsourcing relationships are likely to require urgent review to ensure all key players demonstrate their compliance. Appropriate security and safeguards must implemented where personal data is to be transferred outside the EEA and privacy notices should be received by data subjects at appropriate times. Current and tendering contracts may also require revisions to ensure they are GDPR-ready.
Soft cycle profit management for most observers has always been about shaving expenses and reserve releases to offset low investment returns and low technical pricing of all direct classes of insurance.
Many have said that making a small profit in a perceived catastrophe-free year was seen as a success.
However, post Hurricane Harvey and with Irma possibly to come, 2017-year looks like it will be a year with cat losses added to the mix. It will be difficult for some entities to make a profit with trade-offs needing to be made between increased retentions and decreasing reinsurance costs unlikely to be effective. Moving forwards, is managing claims and claims leakage rather than expenses likely to make a greater difference to results?