The insurance industry must be more creative in the development of products to meet increasingly complex risks, speakers at the recent Cayman Captive Forum said.
The insurance industry has been successful in attracting capital, but it has not kept up with the requirements of buyers in terms of coverage, according to Brendan Barry, chief underwriting officer at Cayman reinsurer Greenlight Re. “We are excellent at providing more capacity for risks that you already have lots of coverage for.”
Mr. Barry gave the example of financial institutions in the United States, which are facing much greater threats from cyber risks – such as computer crime, the loss or theft of data or the physical loss of computer systems – than from windstorm damage. “Yet, as an industry, we will line up to give them insurance coverage for that building and nobody will give them any coverage for the cyber exposure.”
Mr. Barry said the industry had struggled with innovation but noted that some of that had been caused by increased regulation. It took the state of Florida three years to approve that an insurance policy can be sent out electronically rather than on paper, he said. “If that is the environment we are dealing with, innovation becomes virtually impossible.”
Meanwhile, the difference between insured losses and economic losses continues to grow, following each major catastrophic event. In Mr. Barry’s view, this gap highlights the failure of the insurance industry to develop new products that meet the needs of customers.
Peter Mullen, chief executive of Aon Captive and Insurance Management, was not quite as pessimistic. He said the industry is not as bad as its image on the subject of innovation. He cited a recent report by reinsurer Swiss Re, which named about 400 innovations in the insurance business.
“The majority of those are incremental. They take place through changes in policy language, in different ways of distributing products, but even so, there is still a lot of innovation going on out there,” he said.
Aon’s biannual Global Risk Management Survey 2013 saw failure to innovate as the sixth most mentioned risk, out of a total of 49, by large companies worldwide.
While the industry may be lacking in “blue sky innovation,” insurance linked securities – the transfer of insurance risks to investors through debt instruments – have been the biggest innovation in the insurance world in the past 20 years, Mr. Mullen said. “So innovation is happening, we just maybe need some better systems to move it forward.”
However, a forthcoming survey by Aon found that 69 percent of polled captive managers believe the insurance industry needs to be more creative.
Mr. Mullen said the majority of the top 50 risks mentioned by large corporations are either not insurable or not fully insurable, which should give the insurance industry a starting point for innovation. At the same time, the gap between economic losses of $85 billion and insured losses of $20 billion during the first six months of 2013 should give the insurance industry enough incentives and opportunities to innovate.
The need for creativity extends also to captive insurance.
Captive insurance used to be new, interesting and cutting edge, Mr. Mullen said, but it is becoming conventional. “We have got to be careful. We have always been good at innovating in this space, but we are becoming mainstream, run-of-the-mill. We have got start focusing on innovation a little bit more.”
However, he believes that by focusing on clients’ needs there are many opportunities to innovate, for example around new regulations such as Solvency 2 or the use of data and analytics.