Musings

Value creation & charging for it, an elephant in the reinsurance room

Value creation is a huge topic across the insurance and reinsurance industry right now.

Everyone insists they’re creating it for their clients.

But, in a world where the charging structure for insurance and reinsurance protection services and contracts are generally bundled, it’s really hard to identify and measure the value being created.

In a market where not much has changed over decades, the delayed adoption of the technology available to it has in recent years resulted in an urgency surrounding the first part of the value creation conundrum.

Demonstrating value

Demonstrating value was all about sealing the deal, building the tower, closing the book and signing those contracts.

It’s still a massive part of the process of course.

Often completed over lunch, drinks or/and dinner, brokers and underwriters met, agreed on terms and pricing (often with little changing year-to-year) and at the same time unanimously agreed there was value in what they’d achieved.

But now, with the ability to drill down into data and an increasing determination to try and own the customer, parties are wheeling out a raft of tools and services to demonstrate more clearly to clients the value they are adding.

This is a very good thing.

It’s about time reinsurance programs in particular were looked at with more than a cursory glance prior to renewal (I’m generalising, of course, plenty do get the attention they deserve).

Now the data and technology is available to completely remodel the risk tower, should you want to.

There are almost always better ways to slice, dice and transfer towers of risk now than has been achieved historically.

At last, the market has no excuse not to look seriously at the risk tower, to identify the most efficient and effective way to transfer it.

At least you’d think that was the case.

Touch points (there are more of them)

There’s a saying about too many cooks.

That’s not the real problem in risk and reinsurance, it can take a lot of expertise to get a deal done.

Numbers aren’t all-important, but making sure those involved (and getting paid) are adding commensurate value really is.

As expertise levels rise and technology use in reinsurance becomes ubiquitous, the need for more parties to be involved can rise.

It’s resulting in a tower of risk being touched (analysed, assessed, tweaked, tested) many more times and by many more actors than they were in the past, during their life cycle (from renewal to renewal).

These touch points can be actioned by one actor (company/role) or many, from many different companies.

Meaning there are now significantly more opportunities to demonstrate value creation than there used to be.

As well as more competing actors, coming from a growing range of backgrounds and disciplines as well.

Which also means there are a lot of actors adding minimal value and someone’s got to work out how to charge/pay for all of this more effectively.

Which brings challenges and threats to everyone.

Deconstructing the chain (of risk to capital)

The insurance and reinsurance market chain, along which risks travel to find their ultimate home with capital, is breaking apart.

Technology and more efficient business models / capital, as well as an increasingly technical and specialised range of service providers, are driving this break-up of what has often been called a value-chain (despite the questionable value some have brought to it over the years).

As the chain breaks down it creates even more touch points and opportunities to interact with the risk and its owners/holders at specific points in its life cycle.

Which brings us back to demonstrating value creation, as there are now many more opportunities to do so.

But if we’re breaking the chain into many pieces, with many more actors and touch points, the industry has a lot of work to do in defining pricing structures that will work going forwards.

Towards an unbundling

The cost structure of the reinsurance market chain remains one that is largely bundled.

With huge amounts of value creation charged for in one sum, as commission or supposedly near-free services designed to help in client and customer ownership.

Break this apart and nobody really understands how to charge for it, it seems. Or at least no-one is trying to change the game in an obvious way, yet.

An industry used to paying commissions for a bundle of services has so far not worked out how to break it down and apply new cost structures to the market chain and multiple touch points within it.

But it’s going to have to.

As expertise comes in and adds value in the process it needs paying for it.

At the same time, the industry is becoming more efficient and costs and expense need to come down.

More people to pay across the life-cycle of a risk, as it makes its way to capital, doing smaller and increasingly specialised chunks of the work.

Which means more competition for these roles as well, as even the very largest of brokers or underwriters cannot possibly hope to own the entire chain a risk moves along.

Which means unbundling is inevitable and as has been seen in other sectors of finance (or even other industries entirely) getting to grips with a new and unbundled normal is a challenge and requires a different approach to pricing as well.

For simplicities sake, consider the travel sector, an industry where I went through the significant changes in implementing new pricing and product structures to cope with the rapid unbundling caused by the advent of online travel agents, low-cost carriers and price comparison websites.

The end-product, a holiday, tour, or simple city break abroad, didn’t change.

But the players involved in fulfilling it did, the mechanisms used to fulfil it, the way it was purchased, how customer engagement occurred and relationships were formed and sustained. So too did the way it was priced…

The advent of the internet broke down the monopolies, levelled the playing fields of competition, delivered greater choice, enabled the product itself to be more tailored to the customer’s needs, and ultimately all of this needed an entirely new approach to cost, pricing and the related business rules defining all of that.

Sure, re/insurance is a very different industry. But this unbundling is happening and only going to accelerate.

Right now, we seem to be in a phase whereby the major players are undergoing their own internal unbundling, as the emerging service layer of the risk and re/insurance industry forms within the walls of brokers and global underwriting houses.

But eventually this will cause the walls to tumble.

At first we’ll see this as new, focused specialists look to increasingly bite off little chunks of the market chain and offer new products to the industry.

Some of these will find it hard to break through the decade’s old relationships, but eventually they will become viable competitors for chunks of the bundled service brokers and underwriters are used to providing.

Another way we’ll see the walls coming down is through platforms.

As technology focused methods of transferring risk, or managing portfolios, or analysing market-specific data, get so much better at these chunks of the chain than a large, generalist like a global broker or underwriter ever could be.

The result here could be that entire chunks of the process chain move out of the control of the incumbents, forcing them to either try even harder to win it back (often a pointless and costly effort, as other industries like travel saw) or to dive in and use these as part of their own service offering to clients.

However you look at it, risk and re/insurance is ripe for unbundling and the industry has to learn how to charge appropriately and sustainably for the bits it is really good at, while also turning the holistic, bundled service of the past into a more menu-like, fit for the future and unbundled selection of offerings.

Which brings me back to value creation.

As those who can, will, and will get paid commensurately with the value they bring to the market chain.

But no-one’s really talking about this need for a new approach to the cost-structure of the risk and insurance product lifecycle, hence me calling it an elephant in the room.

It needs discussing and it’s almost certain the major players are moving in this direction naturally, via a walled-garden, protect as much of the revenue as you can, transition phase.

It’s another of the really interesting features of the industry right now and I can’t wait to see how the incumbents work it out and the new entrants bring disruption and new offerings to market.

Change is good. But it can be a little challenging and painful…

To redefine Lloyd’s, you’ve got to start by asking does it even need to exist

Lloyd’s of London, an insurance and reinsurance market steeped in history with a perpetual ambition to reinvent itself for the future.

The Lloyd’s market and its very existence is a constant source of discussion, raising questions such as (some of these from personal experience):

  • Is the Lloyd’s model fit for the now?
  • How can it embrace technology?
  • How many times can you show someone/thing the future without them embracing it?
  • Is the building & expensive real estate Lloyd’s is housed in appropriate at a time when margins and returns are so under pressure?
  • Just how many cooks does one simple broth (process) take?
  • Is it fit for the near future?
  • How does it ever get ready for the far-future, when a significant amount of what it does can be digitised?
  • Does the global insurance and reinsurance market actually even need it?

That last question is important to ponder on, I believe.

When people start talking about revolutionising the Lloyd’s market, or redefining it as CEO John Neal said recently, it’s best to go back to basics and establish if there’s a need for it in the first place.

Lloyd’s is currently a major player in global insurance and reinsurance of course. While its home London is still the most dominant global location for the risk business as a whole.

But at only 5% of global underwritten premiums, albeit with an ambition to double that to 10% (as CEO Neal said recently as well), it’s perhaps not as significant as you might think.

Much of the capacity backing Lloyd’s comes from sources that could easily be routed via the company market (most of it emanates from there anyway), global players and of course insurance-linked securities (ILS).

In fact there’s a case to say that some just participate as an arbitrage of sorts, capitalising on what remains unique about Lloyd’s today (licensing, leverage, market access).

If you’re realistic about it, there’s little that’s truly unique about Lloyd’s and its capital anymore, aside from the specifics of the structure itself thanks to central fund, attractive rating, licenses and the support (and arbitrage opportunity) that provides.

The largest global insurance and reinsurance players have already proven they don’t need it and can often emulate all that’s good about Lloyd’s entirely on their own.

So the uniqueness of the capital, central fund and structure aren’t really enough on their own to definitively say Lloyd’s is needed anymore (I believe).

But, syndication of risk. It’s a marketplace damn it!

I hear you cry…

Yes, the premise of Lloyd’s was that risks enter the market and are underwritten by experts, while distributed or syndicated to the various mini-underwriting operations in the marketplace.

Marketplaces are supposed to be efficient by design, as was Lloyd’s at its founding prior to the advent of technology.

Does that still stack up today though?

A lawsuit suggests otherwise, as the subscription market of Lloyd’s syndicates has been likened in a recent one to an operation that is akin to divisions of a single corporate entity, rather than as true individuals and competitors, as you’d expect to see in a truly efficient marketplace.

At the same time, there’s not a week goes by that someone doesn’t suggest that Lloyd’s has become a market run for the corporation and its largest backers. A complaint about Lloyd’s that I’ve been hearing for over two decades now.

There will always be detractors of course, but this complaint that Lloyd’s is no longer designed to support its members and ultimately capital providers is quite damning.

As too is the accusation (such as in the lawsuit) that it’s not really a marketplace at all and certainly not an efficient one.

Is a risk underwritten and priced by one lead and then signed onto by everyone else, at or above the baseline terms set, really generating efficiency for the customer (or for the capital)?

A lot of business in Lloyd’s goes down that path and it seems to be a disservice to a customer who’s seeking efficient placement of their risks into a pool of diversified capital.

There must be a better way…

So what’s Lloyd’s still got going for it?

It’s a significant hub of expertise in risk, insurance and reinsurance. That cannot be denied and should not be understated. It’s quite unique and is precisely what Lloyd’s needs to learn to leverage and capitalise on.

Nowhere else in the world can you take the most extreme or exotic of risks and almost guarantee that someone in the building will be able to understand and underwrite them.

For the biggest risks, the direct & facultative or most extreme, this is especially important for now, as the expertise + syndication = risk dispersal (which is key), albeit not always at the most efficient terms or in the most efficient manner.

But what else is there?

Capacity, a central and expensive location in London, leverage and a structure that can support small underwriting teams to achieve much more than they could on their own.

But again, is that enough?

So much of this is replicable by existing re/insurers (especially the big ones), while the syndicated nature of the marketplace can be achieved (and significantly improved on) with much greater efficiency through the use of technology (I believe).

Just look at other “markets” in insurance and reinsurance.

Bermuda is considered a “market” and does very well at it, without any of the history or legacy of Lloyd’s.

It’s got the expertise and the capital, with enough players located there to syndicate risk if you want to. And they’re truly independent (of each other) players as well.

That’s all well and good.

But, in the modern world, location and physical marketplaces defined by geography are not going to be as important as efficiency, connections and networks.

The expertise is everywhere and by looking within a single building in EC3 you’re actually just limiting yourself, some might suggest.

Capital is abundant and fungible, with an appetite to attach itself to insurance related risks that is growing globally.

Leverage and mechanisms to make capital go further are equally available nowadays (expect more of this as well).

Yes, the security of Lloyd’s central fund, the incubator it can provide to niche underwriting teams and the oversight set-up remains unique.

But, in a functioning, modern risk transfer marketplace of the future, you’d expect to find security anyway. Via the layers of protection, the broad syndication only achievable through globally accessible open and transparent risk marketplaces, next generation hedging strategies and much greater dispersal routes into diverse capital sources, I think.

Can Lloyd’s ever achieve that?

Can it revolutionise and redefine itself enough right now to put it in a state fit for the next decade, twenty years, half century, more?

The problem is, that while Lloyd’s is unique, re/insurance is still a niche. So it’s been able to sustain itself without much change over the last few decades. But as time passes, the world modernises and markets evolve, it becomes increasingly less relevant at the same time.

Can it ever keep pace with technological change? Or simply with the change that the risk market’s it focuses on are undergoing?

The consultants currently ensconced at Lloyd’s are going to do their best to deliver “one change program to rule them all,” as one Lloyd’s underwriter said to me.

That’s a significant challenge, but one we’ll hear a lot more about in the next fortnight when the awaited blueprint emerges.

But back to the title of this missive.

Does Lloyd’s even need to exist?

I’ve actually struggled to find anyone who can fully convince me that if Lloyd’s as a concept disappeared tomorrow the capacity it provides wouldn’t be swiftly replaced through corporate re/insurers, or the same underwriting teams & capital providers from new, independent locations.

But still others swear Lloyd’s will never die, although in the main they all struggle to explain why that should be the case.

It’s almost as if the concept of Lloyd’s itself has become more important than its functionality, especially to London of course. As a result it’s future is a contentious topic, but one that needs to be considered.

Over and over again Lloyd’s tries to reinvent itself.

But it’s always without actually changing the overarching concept of Lloyd’s.

It often seems more about saving rather than revolutionising itself.

Which is a shame, as there are clear signals that embracing openness, transparency, capital markets and technology, to create new valuable market chains that allow risks within Lloyd’s to flow out, or risks/capital outside to flow in, would be a clear winner for the market.

This has been the case for two decades or more and enough times the subject has been broached, with little to no real uptake.

It is clear though, that expensive EC3 real estate is not really required to support a truly modernised vision of Lloyd’s.

So… Virtualise Lloyd’s?

Allow the underwriting experts to participate from wherever they like. WeWork is all the rage I hear…

Sustain the central fund, oversight and a set of rules in one fully regulated form or another, as the buffer(s) within and around the system.

But allow risk transfer interfaces (technology) to connect to participants and the risk pool, bringing risk/capital into and out of the market more efficiently.

Allowing the capital to attach to those flows however the heck it likes.

Lloyd’s would become some sort of fee generating business then, a virtual regulated marketplace, connecting risk and capital, while renting out its central security.

But is that even Lloyd’s any more? Well it’s kind of what it does today, minus the legacy, building, lunches and all those people.

But without all that legacy has the concept of Lloyd’s just been thrown away entirely?

Which leads me to ask again. Does Lloyd’s even need to exist?

The bloated middleware of the risk transfer (insurance) market

While everyone’s so focused on front-end customer experience and distribution in insurtech circles, while the insurance-linked securities (ILS) market is so focused on providing the lowest-cost and most efficient capital, I thought it was time to talk about the rest of the chain, the bit in the middle.

I’m going to call this middleware.

Before I start. Yes this is simplistic. No I’m not offering any definitive answers. But it might get some people thinking…

Coming from a software focused background originally, developing / managing insurance and reinsurance technology solutions since 1995, also managing large, data intensive e-commerce operations, having front, middle and back-ends of the market makes a lot of sense to me, as a paradigm that’s understandable, simplified and so allows room for bigger thinking.

Middleware is clearly, the bit in the middle.

No prizes for guessing that in the insurance and reinsurance market this middle piece is severely bloated and full of redundancy.

In fact there is so much duplication of effort or roles, that you could highlight as surplus (to requirements), that I’m not even going to bother trying to distinguish between them here.

I’m just going to lump it all together as middleware and talk a bit about what it’s function should (could) be.

If the front-end of risk transfer and risk financing (an easier and more all-encompassing name to include hedging than just calling it insurance and reinsurance) is all about customer interaction, originating, understanding and pricing risks.

While the back-end is all about capital allocation (to the risks) and (in the future) trading it.

What does the middleware bit do?

It’s where the many actors of the risk to capital chain come in.

Broker, agent, underwriter, wholesaler, MGA, insurer, reinsurer, retrocessionaire, etc.

All the different people that touch, interact with, or hold a risk, likely expressing a view on its ultimate cost or value, during its journey down (or around) the market chain to capital.

Also in the middle are a range of different activities, such as risk bundling, pooling, aggregating, sharing. As well as activities that are essentially secondary and tertiary replications of the front-end, or secondary and tertiary transfers, to satisfy different players confidence in the risk and their various appetites for it.

Now don’t get me wrong, there’s an awful lot of value in an awful lot of this activity. This really is an industry steeped in expertise.

But there’s also a lot of cost, friction and waste as well.

Much of it sounds like it could be a bit redundant in a world where efficient risk technology converges with efficient risk capital (a future I for one subscribe to).

That’s because it largely is and find itself increasingly so.

There’s a whole chunk of the market that aggregates and then passes risk on down the line, in different ways/means/structures. While different actors of agents/brokers/wholesalers/consultants/underwriters/modellers etc, all get paid.

That’s not even considering hedging (reinsurance and retrocession, secondary markets, plus layers beyond in the lifecycle of a risk).

These add additional layers of complexity and sometimes duplication as well. They certainly add to the cost of taking a risk from source to its ideal home attached to the right capital.

How did it all develop like this?

Everything has a purpose and is valid, depending on your role in (and view on) this marketplace.

Justification for the existence of certain roles, procedures, processes, actors and actions has always been found by highlighting complexity, expertise, ability, connections and of course relationships.

But none of those factors actually mean it’s needed, especially not when you’re the third, fourth or fifth actor to touch, analyse, express a view on, or transfer a risk.

As a result this middleware is bloated, overly complex and adds significant cost to the process of taking a risk and matching it with capital.

It also adds risk to market participants, given the middleware’s habit of obfuscating the clarity surrounding risk.

We all know data magically disappears as risks travel further down the market chain, especially in secondary and tertiary trades (reinsurance, retro etc).

But there’s a natural obfuscation of risk clarity as more and more people touch it, analyse it, apply their view, their data formats, their underwriting standards etc, meaning risk information can be significantly less clear and embedded risks themselves harder to recognise, in a contract or portfolio the further down the chain you sit.

That’s a problem, requiring more expenditure and effort, ultimately making the market less effective than it could be and risk transfer less efficient.

In my view that’s a key issue here.

The market has naturally developed to a point in which layer upon layer of complexity and duplication has taken it to a stage where it’s now becoming harder and harder to unpick as well.

Which suits some incumbents, as this complexity equals greater security and longevity, for some roles in the chain right now.

That means roles and responsibilities won’t be given up readily. Protectionism is alive and well in risk markets (and always has been).

Depending on where you sit (in the market landscape), I bet you can draw a diagram and pick out pieces of the traditional market chain and highlight some that are redundant, in your view.

But of course your own seat is vital, valid and you deserve to get paid?

As I’ve said before, only if you’re bringing value to the risk to capital chain.

If you’re not? Perhaps you’re a piece of the middleware problem.

The discussion that needs to be had has to begin with taking a simple view of risk and capital, asking how best to connect the two in the most efficient manner.

Stripping back the market to its most basic of functions and roles means this middleware can be reimagined entirely.

Which could result in something new, more efficient, more effective and ultimately fit for the future.

My gut feel is this is going to happen in niches, where risks are more readily streamlined (commoditised) along an efficient chain to capital at first.

Or where the risk is so new there’s a chance to do things differently from the off.

But that will have ramifications for the wider market, as signals of efficiency emerging from niches that have a chance to redesign the chain, show incumbents how to redesign their own niche while maintaining market share and most importantly margin/profits.

As that spreads, so too will market efficiency.

There is an issue coming in some ‘innovation’ and ‘insurtech’ initiatives though and its worth highlighting a risk that may emerge.

Some tech and innovation initiatives are not really making anything more efficient.

Rather they are adding control, designed for the few, perpetuating the status-quo, all under a shiny layer of unicorn dust.

That doesn’t actually help anyone (except some investors & incumbents).

However, the industry does need to go through these phases of innovation and iteration, which will range (often wildly) between control and openness, before a better paradigm (and balance) for efficiency is found.

Some will find it sooner than others and these may be the ultimate winners, at either end of the chain or those seeking to provide an efficient and new form of middleware to connect them.

Bifurcation of the middleware is entirely possible as a result of this iterative approach (I expect we’ll find).

But this change will be positive for everyone adding value and able to demonstrate it.

Those unable to (demonstrate the value they bring to the chain) might have to think again.

As a side note, consider the travel industry, a space I worked in for a number of years.

Incumbents ended up disrupting their own business models as they tried to fight back against start-ups offering a better and more efficient way to connect product and user together.

Playing a zero-sum game while trying to exert ownership and control has resulted in some very large companies disappearing altogether (not just in travel).

As risk industries look to bring risk to capital (or capacity) ever more efficiently, to provide a better product at the front-end, there’s a good chance some may undermine their very reason for existence in this market, by trying to do so while still exerting their control.

Just as you can compete yourself into irrelevance, so too can you disintermediate and disrupt yourself to the same end, commoditising the original value proposition you once had.

Why responsive risk transfer (or insurance)? An example…

Insurance and reinsurance, as a product set, are not particularly responsive today.

Yes, it (the product set) can meet the broader expectations of billions of consumers and hundreds of millions of businesses around the globe, as financial tool to transfer risk.

Or at least they think it does, based on what little they often know about it.

But is the insurance or risk transfer product actually serving their needs, when they really need it most?

Following on from my thoughts on rethinking and redesigning re/insurance for the modern age, where I questioned whether insurance, reinsurance and risk transfer really responds to its users needs (at the right time and in the right way).

I thought it might be interesting to dive a bit deeper into the responsive angle.

In that post I wrote:

Given the way our lives and businesses work, in this fast-paced and rapidly changing environment, we need something new and more responsive than this.

Something more responsive to our needs, that dovetails into the cycle of our lives, businesses and communities.

What we need are shock-absorbers: financial and risk protection products that smooth out the bumps in the road that might otherwise have knocked our life or business off course.

Products that respond right when we need it, providing just enough in terms of recovery to push us back on track, helping us to help ourselves right at the point it’s most needed.

Insurance can become this shock-absorber for our lives.

Insurance and reinsurance is often more like a time-delayed source of risk capital, with benefits only coming at the point the pain has already become so significant that it can often prove too late anyway.

But we’re used to this now, particularly in the business world, where insurance can payout after it’s too late and too little to help a firm avoid significant financial impacts and sometimes even bankruptcy.

In the majority of use-cases, insurance and risk transfer should be about responding at precisely the right point in time (when it’s first needed and can be most helpful) and in precisely the right way/amount required (no more, just enough to steer you back on-course).

The right time and right amount/way are both key.

Get that wrong and you’re over-paying (expensive), or over-complicating the product itself (confusing & disappointing for the customer), and likely also over-burdening the insured during its time of recovery (cognitive load is high).

Better to deliver only what is required, but most importantly at precisely the point it can be of most use to the insured.

But how to be this responsive?

To have an almost sixth-sense for when a claim is set to be needed/made and then delivering just what is required to smooth out the volatility (to life or business) that is being experienced?

Of course it largely comes down to data, access to it and the ability to understand/use it.

The more of it (data) the better. The more granular the better. The more real-time it’s delivered, on an ongoing basis throughout the policy term, the better. The more localised and personalised it is to the particular use-case in question, the better.

This is where I get excited (nerd alert) about anything that can provide real-time data insights to inform insurance, reinsurance and risk transfer responsiveness.

Enter the sensor.

Sensors and the data they provide are going to become key tools and inputs that allow for better risk transfer product design and development in the first place.

Insurance and risk transfer products are often created in what seems like the dark, with little visibility of what could or may happen. So decisions on pricing, triggers, responsiveness, are all taken using historical data and information derived from analogues and synthetic models of reality.

But, with sensors and the data they provide, you could be updating underwriting information, risk metrics, pricing, triggers, tweaking the responsiveness of the risk transfer product all in real-time, creating something that really does offer the kind of responsive experience users demand (or should demand) from finance today.

Enter Cloudleaf (https://www.cloudleaf.com/about), an interesting start-up that I first heard of a while back, but it caught my eye again the other day.

Cloudleaf just raised a $26m round of funding (congrats!) and provides sophisticated digital and analytical solutions for better supply-chain improvement.

Internet of things (IoT), artificial intelligence, machine learning, Cloudleaf uses them all.

Buzzword heavy but for the right reasons, as these advanced technologies enable its services to map and understand, even predict or forecast, where the pain points are and how to optimise supply-chains for large organisations.

That’s interesting alone.

But given the IoT angle, which involves sensors and the resulting data that flows from them (don’t you know), Cloudleaf can deliver real-time intelligence into how a supply-chain is performing, for a single organisation but of course (extrapolated out) that could also provide intelligence on an entire industry chain as well.

Which leads me back to the future of insurance and risk transfer, as I strongly believe supply-chain disruption related business interruption coverages can be better designed and made responsive to organisations needs, through the use of sensors and advanced data analytical services + parametric inputs to risk transfer triggers.

Cloudflare could (should), if it isn’t already, speak to the likes of the world’s largest reinsurance firms in this regards (they may reach out to it anyway after reading this).

As, an integrated data analytics, sensors, AI and risk transfer approach to delivering business insurance coverage for supply-chain related risks could really be a responsive solution fit for the future.

Imagine a system that can forecast where pain is set to emerge in the system, calculate the potential impacts, release capital based on triggers calibrated using the data and supply-chain network health information, releasing just the right amount of insurance payment at just the right time for the customer.

That’s the idea of responsive risk transfer as a volatility-smoother, responding when its needed to even out the cycle of business (or our lives). A shock absorber, even a predictive and preventative one, for our lives and businesses.

That’s of course just one idea on the future responsiveness of insurance, reinsurance and risk transfer. But to me it’s a particularly compelling one that solves a coverage gap that exists today.

It also shows how data can enable responsive risk transfer and insurance product design, to deliver entirely new solutions that better meet client needs.

Thinking laterally similar models can fit to different challenging areas of the business world.

But, taking a step back, it’s the responsive model of delivering the financial protection in the right amount and at the right time (instead of the all or nothing of many re/insurance products) that I find a particularly interesting concept for the future of the industry.

That doesn’t always need sensors or ‘bigs-of-data’ to achieve it, sometimes it just needs someone to go back to basics, look at the user needs, design products appropriately for it.

It means more efficient use of capital for re/insurers, as well as opportunities to open up entirely new sectors and really work on closing gaps in protection.

More responsive re/insurance and risk transfer products can be created today.

In the future responsiveness should be a design tenet of every insurance and risk transfer product this industry creates, as it’s just a more satisfactory delivery model than the ‘claim and pray’ process we see today.

Risk financing based on intelligence, simplicity and user needs, intelligence furnished with data to design products that better meet the demands of our businesses and lives today.

More on the concept of risk transfer and insurance becoming more responsive in posts to come…

The risk transfer relationship: Connections & touch-points (an interface)

Everyone always talks about the importance of the “relationship” in reinsurance and risk transfer.

While it’s often over emphasised as a key market driver, it’s still absolutely the case that relationships really do matter in this industry.

But perhaps a little too much still, while other parts of the risk to capital chain are overlooked and their importance under-emphasised.

Market chains can be thought of like an interface.

Dotted with many and increasing numbers of connections and touch-points, some of which are more effective or important than others.

The relationship is one of the key connections in the world of transferring risk.

But these connections between parties are set to become increasingly abstracted away from the physical, with ownership increasingly fluid as a result (I believe).

Hence, maybe we’re better off thinking about the different connections along the risk-to-capital value chain of the insurance and reinsurance sector as interaction opportunities.

Chances for parties to generate value for their clients and as a result generate some loyalty in return.

Historically, the “relationship” was seen as the all-powerful route to owning a client, especially in the reinsurance or large commercial insurance sector.

Brokers “owned” their client’s placements, which often meant an entire program.

Despite the fact that one broker may be perfectly good for one risk or layer, but another better for the rest. Historically that hasn’t always seemed to matter.

Loyalty generated by years of transacting together has, in some cases, led to less than optimal placement results though.

I regularly speak with ceding companies, insurers or reinsurers and large corporates or sovereign protection buyers, who say they aren’t being given access to the full-range of innovative risk transfer arrangements, or capacity sources, by their brokers.

Sub-optimal placements mean renewing the same old program, at hopefully increasingly favourable terms and that’s often enough for ceding company executives.

But perhaps the placements could be much more highly optimised, if a fresh look at the placement and strategy was taken.

Especially if a fresh look was taken at the many connections along the risk-to-capital-chain and work undertaken to identify how to optimise each touch-point, to transfer risk more efficiently and at lower-cost.

The relationship is just one connection or touch-point that can be optimised in insurance, reinsurance and risk transfer, albeit one that is repeated along the market chain (agent, broker, wholesaler, insurer, MGA, reinsurance & retro placements etc etc).

In some cases the relationships are so numerous that there are clear opportunities to make more direct connections in the chain, to transfer the risk more effectively.

Connecting risk to capital more efficiently and directly is something I write about all the time over at www.artemis.bm.

In fact it’s a bit of a pre-occupation, as when almost any new initiative or start-up (insurtech or otherwise) emerges in reinsurance and risk transfer, one of the first things I ask is “could this be done more efficiently.”

That means efficiency in terms of speed, directness, cost, effort, as well as cognitive load on the client.

That last one is kind of key as well.

Cognitive load is something I’ve worked to reduce for users throughout much of my career, having led large teams of frontend design and development at internet companies, in addition to my work in risk and reinsurance.

Making it easy for people (users/customers) to achieve their goals is absolutely vital in every single industry today, although this is something that risk, insurance and reinsurance is really only just beginning to understand.

Hence, thinking of the connections in the risk-to-capital chain of the insurance and reinsurance industry as interactions, touch-points, opportunities to reduce the cognitive load, while improving the user experience and effectiveness of outcomes, is a good strategy to adopt.

These opportunities are many and varied, given the number of touch-points and interactions along the chain in risk and re/insurance.

This is the interface of the risk transfer market, offering incumbents and start-ups opportunities to target, enhance, speed up, or make more efficient, one or more of the interaction points along this still convoluted interface.

There is a wealth of opportunity for incumbents to do things better, generating greater client loyalty in the process and building relationships that matter and that will be rewarded for the right reasons.

I’ve said it before, companies and brands are interfaces, you’ve got to make them simple to use and interact with to generate the best and longest lasting client relationships.

It’s time to move beyond solely relying on the more traditional kind of relationships that the re/insurance market has been built on.

While still important, we need to think differently about these relationships, accept the fact that ownership is set to change and value generated at each touch-point will be apportioned differently in future.

A good way to do that is to start assessing the value you receive (as a client) at every touch-point and interaction with someone who hands you a bill for services along the risk-to-capital chain.

For those handing out the bills, it’s vital you look at your own services and measure the value you’re providing (if it’s none you’re in dire straits).

Savings and efficiencies are there for the taking for the strategically astute.

Perhaps more importantly, so too are innovation, new ways of doing business, more direct connections in the chain, as well as inspiration that will lead to new product design.

More to come on this in future posts…

Extending the insurance safety net (with responsive parametric product design)

Today’s news that the CCRIF SPC and the World Bank have successfully sold their first parametric insurance products for the fisheries industry got me thinking on a flight back from Zurich.

This product is a first of its kind (at least I think it is).

A parametric insurance product designed to protect an industry as well as those who work in it.

As the CCRIF explained, it’s both livelihood and sovereign risk transfer, in a single product.

Wrapped up beneath a parametric trigger is both tropical cyclone wind coverage for a Caribbean island or Central American nation fishing sector, alongside “bad weather” protection for the fishing communities’ jobs and income.

The trigger therefore will payout to protect assets and infrastructure associated with a country’s fishing industry when a tropical cyclone of a specific severity or greater occurs.

While also paying out when stormy weather impacts fishing communities’ livelihoods.

Alongside the CCRIF’s core tropical cyclone and earthquake parametric products for the sovereign buyers, this new industry-specific cover truly means the Facility is protecting both lives and livelihoods, as well as providing responsive and rapidly paying risk transfer protection.

In the same vein as my recent post on the need for the insurance and reinsurance industry to provide a more responsive, tailored, product design focused offering.

Providing contingent capital in a manner akin to shock absorbers for people’s lives and corporations business cycles.

This CCRIF / World Bank parametric product extends the safety net provided by insurance and risk transfer, something we need to see a lot more of.

It fills gaps in coverage, protects gaps and meets all the mandates of a product that helps at all economic levels (protecting government, industry, tax payers and all those relying on a sector).

This approach provides an almost layered risk transfer and protection product.

An all in one approach to covering a vertical slice of the economy, from top down to the smallest contributing people.

Can the same model work elsewhere?

Definitely. Think of any other industry or sector where there are impacts to productivity from severe weather or natural disasters.

By covering the economic productivity of a specific industry with a responsive parametric insurance product, the government benefits, the industry benefits, the workers benefit, and their communities do too.

Communities that rely on the ability of their fishing fleets (or farmers, or other relevant industry) to provide income, food and broader economic activity can benefit hugely from this approach.

While at the same time the sovereign level means the government can help itself, the industry in question and its people to recover, without needing to borrow, raise taxes, or apply pressure on communities at a time when they’re stressed anyway.

For years I’ve been thinking that the way to really narrow the much-vaunted protection gap is through tiered risk transfer approaches, responsive triggers, data / technology and efficient capital.

One of the issues that’s almost always missed in these discussions is that without some sort of coherent and complementary protection at each of sovereign, capital / investment, industry and community level, you leave key layers in the economy exposed to stresses.

In the event of disaster these stresses at any level cascade through the tiers and can even be amplified (especially when the gaps are from the top down).

When major natural catastrophes strike it can cause capital flows and investment to dry up, hurting the sovereign economy, industry and community layers.

Industry can be damaged and disrupted, affecting sovereign economy and community layers, with the potential to put off capital flows and investment as well.

Impacts to communities destroy lives, homes, businesses and that can affect productivity and all the other layers as well.

Confidence impacts can hurt across the tiers too.

The CCRIF’s new fisheries parametric product solves for some of these issues, by protecting across tiers right down to the economy.

It’s also a form of protection for the essential capital flows and investment that could back a country’s fishing industry as well.

That’s pretty unique to be honest (although I’m sure someone will know some other examples).

How effective it is has yet to be proven, it’s only just launched.

But this responsive parametric protection model has huge potential to be taken, utilised in other ways and means, to the benefit of millions of lives and livelihoods across sectors, continents and specific industries.

It’s intelligent and innovative risk transfer product design in action and for that I applaud the teams behind it.

It’s a sign of the future of risk transfer, a responsive, efficient, direct and highly complementary life and livelihood buffering financial support tool.

Add in real-time and a great deal of extra sophistication, which given the technology available to us now will in time transform the risk transfer sector. As well as the efficient, unbundled, lower-cost, product design focused approach I spelled out recently here. You have a good example of an insurance product (a shock absorber) that is fit for our future.

There’s a model for risk transfer product design emerging and it promises better protection, more closely aligned with user needs.

The old products of indemnity and the like won’t go away and are key here as well.

But, taking a step beyond designing new products alone, designing new systems for risk protection, where traditional and modern product designs dovetail neatly into a single ecosystem of protection, will get us all closer to the answers we seek.

Yes, I’m channelling Nicolas Colin and borrowed ‘safety net’ from his excellent book “Hedge: A greater safety net for the entrepreneurial world” (go buy it).

Rethinking re-insurance: Life belts or shock absorbers?

Insurance and reinsurance needs re-imagining.

For too long the industry has been focused on products that often only provide a limited financial injection when the absolute worst happens.

Of course that’s based on often confusing terms & conditions, only after proof of loss is provided, lengthy loss assessment, and negotiation over how much value was destroyed.

It’s not always clear-cut, or a quick and smooth experience for insurance and risk transfer customers.

For customers, so people, corporations and other end-users, traditional insurance (and reinsurance) operates like a life-belt.

The worst happens, disaster strikes, and the industry throws you a life-belt, to save you from drowning

But you still have to work out how to use it in the most efficient and effective manner, as well as make your own way back to the shore.

Given the way our lives and businesses work, in this fast-paced and rapidly changing environment, we need something new and more responsive than this.

Something more responsive to our needs, that dovetails into the cycle of our lives, businesses and communities.

What we need are shock-absorbers: financial and risk protection products that smooth out the bumps in the road that might otherwise have knocked our life or business off course.

Products that respond right when we need it, providing just enough in terms of recovery to push us back on track, helping us to help ourselves right at the point it’s most needed.

Insurance can become this shock-absorber for our lives.

Think of life or business like a wave-length.

wave-length

It has its ups and downs, which within tolerances is absolutely fine and expected.

But outside of those tolerances is when we really need help, something to soften the blows of peaks and troughs. Or to put us back on course.

In real-time and in a responsive manner, we need protection and services that kick in not on-demand but automatically (automagically), responding to the changes & challenges that our life or business cycles experience.

A more responsive and real-time, demand driven insurance ecosystem.

Living off the data we all create in our lives and businesses, this can not just better protect us against the bumps in the road, it can provide new product classes we don’t even know we need yet.

It’s about financial protection that offers true risk management, transfer, hedging and real-time protection. Responding to our needs, lives and the way we consume.

Not just a life belt, or ring, that is thrown to us in the hope we can save ourselves.

Financial products suited to our evolving lives, that can work for millennials and octogenarians, small businesses and the largest corporations.

A complete rethink of the insurance and reinsurance market structure could help, as for too long the industry has relied on policy limits and towers of protection, which may not be best suited to delivery of a more responsive set of re/insurance products.

It’s about rethinking the delivery and responsiveness of risk transfer (and insurance generally) to make it fit for the 21st Century and beyond.

This responsive approach to risk transfer and insurance should run through the layers, or tiers, of the market, with reinsurance protection designed to neatly match the exposures and wave-lengths of the real-time risk curves of the future.

It’s a vision of a better kind of financial product.

One that cushions you against the bumps in the road, rather than throwing everything it has at you in one go and then leaving you to work out your own recovery.

Of course the claims process needs to be entirely automated.

Today, the life-belt of insurance is only thrown out to save you after a lengthy and often frustrating interaction with the provider, called making a claim.

That’s got to go away.

It’s not in the slightest bit a user friendly, intuitive experience, and so often ends in a result that was never expected or wanted in the first place.

Insurance is among the only products we buy into based on our understanding of it at the time, but then when we actually need it, the experience often turns out to be something very different.

Ambiguity is rife in most people and businesses experience of interaction with their insurance provider.

Shock absorbers don’t come loaded with such ambiguity.

Yes, there will need to be tolerances set around what makes them respond (triggers), and these should to be as closely calibrated to our lives and businesses as possible, to offer the best protection and cushioning.

As well as being automated, in real-time, responding to the ever growing range of data outputs that our lives and businesses produce.

This will increasingly be augmented through new data sources as well, from sensors to remote sensing, and everything else in between.

Protection should be both “always there” and “always-on”, ready and waiting to respond and smooth out the bumps in our life/business/community cycles.

Backed by capital that represents whatever is most efficient, cheapest & secure.

An efficient and responsive risk pool, that pays its backers not just for bearing the risks but also for their responsiveness in paying out, as well as their willingness to top-up again.

In order to shift to this more responsive risk ecosystem, where risk transfer neatly fits into our lives and business cycles, responding to their needs in real-time, product design is so important.

As too is a focus on the customers needs and the user experience of insurance, reinsurance, risk transfer and hedging products.

Not enough focus has been put on designing risk transfer products that meet client and customer needs, resulting in a poor experience and negative opinions of providers as a result.

The usability of what we have today is, to be frank, shockingly bad in a majority of cases.

It is improving though.

Some are moving into rapid innovation and iteration to drive change in the insurance and reinsurance product.

But many are also overdoing the kool-aid, slurping down too much of the which has been liberally shared around the industry right now, resulting in questionable investments being made and super-expensive programs of work and change, that in too many cases are resulting in write-offs.

At the same time the insurtech world is adding incremental layers of lipstick to the insurance pig.

Not always in ways that will be ultimately successful, as this incremental beauty is often only skin deep, and the write-downs will be significant. But it is making the whole industry rethink itself, which is extremely positive.

There are some really fantastic insurtech start-ups coming through with innovative products and some of the incumbent giants in insurance and reinsurance are truly moving towards transformational change in the way they design and sell their risk product offerings.

Change is coming fast + only a few are truly embracing it in the right way = many incumbents are scared.

But unless the end-result is a radical departure from the insurance and reinsurance marketplace and product-set we see today, we’ll be selling the customer short and purely throwing them a shiny, modified life-belt for some year’s to come.