Tag: risk transfer

Data​: Ascribing meaning to risk / Deriving meaning from risk

The reinsurance industry is awash with discussions about data these days, not least thanks to the insurtech wave that continues to drive interest from the venture and private equity community.

But what are reinsurance and insurance-linked securities (ILS) market participants trying to do with data?

Yes, there’s a push for straight-through processing of claims along the market chain, which makes having one true view of underlying data absolutely critical (we’re not there yet).

Yes, there’s increasing sophistication in risk modelling and an expanding array of models, covering ever widening numbers of risks and perils as well (much more to do here).

Then there are initiatives and products related to marketplaces, electronic trading, following form using still relatively unsophisticated algorithms, and the still-early days of a machine learning wave that promises to deliver greater visibility of and transparency into risks, and a whole lot more.

But what is the industry trying to do with all of this, where will it lead?

Using data, I believe the industry is trying to ascribe meaning to risk.

By this I mean wrapping more understanding around risk, as well as the flows of risk and capital in the industry.

It’s also about redrawing, or installing, the boundaries around risk that will also aid in understanding it, but perhaps more importantly in structuring it, developing new product opportunities, classes of business and contract forms.

As well as deriving meaning in risks that have previously been lacking understanding, a key opportunity for the data-ready re/insurer or ILS fund.

The industry is also aspiring to derive more meaning from its risk data, of course.

But, by putting some additional meaning (or understanding) around the risks it covers, the reinsurance market can greatly expand its usefulness, by being able to manage and handle its risks, and portfolios of them, a whole lot more effectively.

Data comes in many forms and in ever-increasing quantities.

It’s important to be able to warehouse this, move it around your organisation, share it with your counterparties and generally leverage it to your advantage.

That doesn’t mean it has to be industry-wide standardised, that’s not what I mean.

Trying to get the industry to put its many systems and strategies behind single standardised data formats is not going to happen anytime soon, aside from in certain specific or niche business use-cases.

Ascribing meaning to something enables us to gain a greater or higher understanding of it.

This enables us to make more intelligent decisions, which is precisely what the reinsurance and ILS sectors’ need to begin to do.

There are going to be data winners and losers, as a result, with your ability to wrangle data in ways that allow you to extract more meaning and value from it set to become a key differentiator.

Data equals power, in a number of ways.

In reinsurance, the major globally active broking and underwriting groups hold a lot of this power, given they see a significant proportion of the data related to all of the business ceded across the market.

These major players have had a head start in putting data to work usefully, providing them a competitive-advantage over the last few years.

A number have done this particularly well and will prosper because of it. But some others have clearly squandered this opportunity, as they now languish behind in terms of their data abilities.

The top-tier of reinsurance brokers, in particular, have done a very good job of maximising value from data and their access to it and control of it.

You can see this not just in their pure data and technology-related initiatives, but also in some of the ways they’ve put their data-advantage to work to create underwriting facilities and capital pools for their clients.

An enhanced understanding of risk, capital and market activity gives an edge that can help brokers bridge the divide to the underwriters.

As such, it’s another area we, at Artemis.bm and Reinsurance News see reinsurance brokers and reinsurers becoming increasingly competitive.

It would be remiss not to mention the promise of machine learning and artificial intelligence, in helping risks be better understood, portfolios be better managed, and generally enabling a greater understanding of the predictability, or otherwise, of insurance risks.

Maximising your data advantage may be critical in reinsurance in years to come, so seeing more business can give an edge.

But, more important is having the technical plumbing and infrastructure to gather, arrange, sort, and understand this data lake, so you can better ascribe meaning to it and enhance your understanding of it.

Walled-gardens vs setting it free

In some industries it’s not just owning and securing data that’s important, it’s also having an understanding of how to use it to clients advantage, setting it free to allow it to be used in ways that ultimately deliver value and earnings back to you.

We’ve seen tech giants profit massively by allowing their clients to ride on their data coat-tails.

Reinsurance brokers can do this too, letting both cedents and capital providers surf their waves of data.

Which in turn will deliver more insights back to them and further enhance their ability to ascribe meaning to risk and market data, as well as to understand it (both how it’s used and what it means).

At the moment though, the data flow is really quite one-way and lacking transparency, unless you’re paying a lot for it and that’s likely on top of all your other brokerage costs.

Pricing (and clearing) data is king

In future, marketplaces could be one of the ultimate data-winners, as those that gather and own the true data insights on the pricing of risk, plus the technical ability to understand that data, will own one of the biggest differentiators in reinsurance.

There’s the market price. The fixed or range of costs attached to a risk or group of risks.

But there’s also the actual price it/they clear and trade at.

Knowing both and having the deep technical ability to harness data to the benefit of clients placement and trading of risk, while also extracting data insights for your own needs and to benefit the marketplace users, are significant areas of advantage in risk transfer.

This has played out in capital markets and one day it will in reinsurance too.

The push-back is increasing

This is already playing out to a degree, as reinsurance brokers send letters to clients cautioning them against using marketplaces, effectively saying “if you do, we can’t guarantee you best-execution.”

Which is a fallacy of course, as using technology to find the best price to clear trades at is accepted as the optimal mechanism, superior to human trading, in almost every asset class, except for risk (so far).

With a clear data advantage, if they can gain broad market adoption, a reinsurance marketplace or trading platform would also be the best venue for beta-style capital deployment, or following-form, or establishing facilities and the like.

Something reinsurance brokers are all too aware of, which is one of the factors causing the delivery of letters to clients that we’ve seen, and also something now holding back broad adoption of reinsurance marketplace tech, I believe.

So this area, of reinsurance brokers vs marketplace tech, could be where the data battle comes to a head.

Although the broker-reinsurer battle is set to accelerate as well.

Data wrangling = opportunity

Which brings me onto where the startup opportunities could be.

Helping cedents understand their data, apply meaning to it, manage it better, derive insights from it, is going to be key.

Once upon a time (25 years ago) I thought capital (how it’s managed, structured, deployed) would be an efficiency driver in reinsurance.

The capital markets and ILS have made a huge difference, but still haven’t gone as far as I’d thought they would (yet).

Data and the technology to use/understand it, has similar potential as an efficiency driver in reinsurance.

The industry is still in its infancy when it comes to utilising data, in really effective ways.

While reinsurance is a data heavy market, the future could see enormous gains made as streams of data are effectively put to work.

It’s advancing fast and is going to be a real point of both differentiation and competition in the reinsurance market.

Ability with data, has the potential to give some players additional leverage over their competition and an edge that others may struggle to match.

Could broker consolidation drive more direct reinsurance placements?

It’s always fun to think how major M&A can actually be a catalyst that accelerates disruption in a sector.

Take reinsurance broking, a sector that in recent days has been dragged into M&A focus by the announcement that giant Aon will acquire not quite so giant Willis Towers Watson.

The result will be a dominant player in reinsurance intermediation, if the regulators don’t force the shedding of some of this area of Aon’s operations.

Aon seems sure it’s going to get the nod to operate as the largest reinsurance broker in the space.

But this kind of consolidation that leads to domination can also drive customers to think about ways to reduce the stranglehold that a single dominant player can have on their businesses.

Making this a point in time that cedents might begin to more seriously consider how they can take more of their destiny into their own hands and look to directly and efficiently place their reinsurance programs with much less assistance from the intermediaries of this world.

It’s possible to place business through electronic marketplaces and platforms now, which can not only reduce brokerage costs but also result in a better optimised placement.

Could the fear of leaving so much of your destiny in the hands of an increasingly large behemoth drive cedents to consider such routes to capital even more seriously?

It’s happened before, in other supply and demand driven markets where intermediaries controlled the flow of business.

In reinsurance the flow of risk itself doesn’t always need an intermediary anymore.

Perhaps this particular reinsurance broker M&A transaction will drive greater awareness of that fact and continue the shift towards the unbundled re/insurance market I’ve been writing about for some years now.

Aon is already expert at service provision around the placement of risks and as ready as any intermediary to unbundle the brokerage costs and perhaps make even more through pricing the vast range of services it offers for clients.

At the end of the day, brokerage remains an old fashioned way to charge for the significant expertise that goes into a reinsurance placement.

As technology platforms and advances make the placement of risks to capital far more efficient and effective through marketplaces than a human could ever hope to achieve, it makes sense for the unbundling you accelerate.

Aon buying Willis Towers Watson could drive this change forward much faster, as it raises the awareness of just how much control dominant players have over the flows of risk and capital in this market.

Will be interesting to see how things develop over the next months as the M&A moves towards execution and the regulators way in.

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.

Cloudleaf 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…