S&P Global Ratings roundtable: insurtech’s effects become clearer

In attendance:

Johannes Bender, director, insurance ratings EMEA, S&P Global Ratings

David Flandro, global head of analytics, JLT Re

Franz-Josef Hahn, chief executive officer, Peak Re

Johannes Martin Hartmann, chairman of the board of directors, VIG Re

Adrian Jones, head of strategy & development, SCOR Global P&C

Frank Reichelt, managing director, market executive Germany & Nordics, Swiss Re

Massimo Reina, chief executive officer of Continental Europe and MENA, Guy Carpenter

Alkis Tsimaratos, managing director and head of Europe West, Willis Re

Moderator: Christian Wuestner, Intelligent Insurer

Insurtech, with its potential for re/insurers, is driving change in the industry. Reinsurers are promoting change by offering capacity and taking equity in new technology-driven products, while primary insurers are at risk of missing growth opportunities and being left behind if they don’t invest in the business.

Executives representing reinsurers, service providers, cedants and brokers debated a number of key issues at the roundtable sponsored by S&P Global Ratings at the 2017 Baden-Baden Reinsurance Meeting.

“Blockchain technology will change our industry to a similar extent as the move from dial phones to smartphones,” said Peak Re CEO Franz-Josef Hahn. “It will move us forward in one huge leap.”

Also known as distributed ledger technology, blockchain allows vast amounts of data to be stored across a network of computers around the world rather than on one local server, which is deemed to make it safer than current processes.

Hahn believes that blockchain will have the biggest impact in claims payment, which has to be accurate and fast at the same time. Founded exactly five years ago in Hong Kong, Peak Re has no legacy to serve compared to older players. Given its specific setup, Peak Re pays 90 percent of its claims within five working days, he claimed.

But Peak Re is about to speed up the processes further by moving on to a blockchain platform. The company expects the move to make claims payment more efficient, reducing the processing time further from the current five days. In future, it will happen within seconds, Hahn said.

VIG Re CEO Johannes Martin Hartmann noted that the underlying issue is that transaction costs in the re/insurance industry are extremely high and need to be addressed. Blockchain may be a solution to it.

Partners instead of competitors

While insurtech may become a disruptor for the industry, it is not necessarily a threat to the incumbent players, Hartmann said. He argued that the more favourable role of insurers will be to partner with technology companies—with insurers securing innovation and the tech companies gaining distribution and size.

“What we are more likely to see is that insurtech companies will try to partner with traditional players, because while they clearly have something to offer in the value chain they struggle to reach out to customers,” Hartmann said.

“At VIG we are trying to incorporate insurtech players and partner with them in order to revitalise and redefine our processes,” he added.

David Flandro, global head of analytics at JLT Re, agreed. “It’s different from fintech, which did in some ways squeeze out and transform the banking sector,” he said.

“Many insurtechs are getting their funding from existing insurance players,” he added. While many startups are operating in partnerships with big players, Flandro speculated that only 2 percent of the new companies are likely to be successful.

Change is happening

Insurtech developments are going to affect cedants and carriers in different ways.

“In terms of underwriting we have all kinds of different tools that carriers are trying to implement in terms of predictive technology,” Flandro said.

If insurtech can actually help you shave a point off the combined ratio, this would be amazing, he said. On the premium side, insurtech will help to find new growth opportunities which include predictive modelling and saliency analysis.

Frank Reichelt, Swiss Re market executive Germany & Nordics, noted that for him insurtech is synonymous with reinventing the insurance industry. Its emergence serves as a warning to the traditional sector, and the latter has understood and is reacting to the message.

New technology is coming on board and a lot is around claims, but it actually covers the whole value chain, Reichelt said.

While most of the innovation is happening on the insurance side, this will affect the reinsurance sector as well, he noted.

Blockchain is a platform that will bring insurers and reinsurers together, but reinsurers such as Swiss Re are also partnering with their clients to develop new products and growth opportunities through technology.

“We need to be aligned there. If we can’t support our clients in reinventing their business models we will fall apart as well,” Reichelt said.

An eye on the competition

Johannes Bender, insurance ratings director EMEA at S&P Global Ratings, said the way the agency is looking at insurtech developments is to find out whether they might represent a threat to the traditional reinsurers it rates in terms of disruption, and if there is new competition forming that may make them obsolete.

So far, it seems that reinsurers are “well advanced in terms of partnering with insurtech companies”, Bender noted. “When you look at US insurtech startup Lemonade, most of the capacity comes from existing reinsurance companies,” he added.

While reinsurers appear currently to be well placed, smart sensors and the internet of things are offering quite sound growth opportunities for reinsurers towards targeting the protection gap and growing the business, Bender said.

Adrian Jones, head of strategy & development at SCOR Global P&C, said that a few years ago venture capitalists had discovered insurance as a great new field. “We have noticed that this trend is starting to come down this year,” he said.

There is little record in the re/insurance industry of any sort of long-term disruption, he noted. One example of disruption may have been the retro market, the lowest barrier of entry in the market.

“On the insurance side, there is very little history of anyone being able to disrupt the market without being in a partnership,” Jones said.

Alkis Tsimaratos, head of EMEA at Willis Re, suggested that companies are starting to get their heads around what they want to do with insurtech.

“The word ‘disruption’ is fading away. We clearly see an insurtech agenda within virtually every client at the moment,” he said. Local national companies are using insurtech to differentiate themselves from competitors. Larger multinational groups are transforming their business models, and this is likely to result in cost reductions.

“We are starting to see opinions formed over insurtech which are more realistic compared to a year ago,” Tsimaratos said.

The kind of change

Massimo Reina, CEO of Continental Europe and MENA at Guy Carpenter, said that insurtech and technological advancement represent major opportunities for the industry and will affect the cost line, claims, operations and client acquisition.

It will also affect underwriting. By using the data insurers now have they can achieve significant improvements in profitability.

“It’s a great opportunity,” Reina noted. The biggest challenge the industry will face when adapting to technological advancements and the new operating environment may be the culture in the sector, which might differ significantly from the mentality in the insurtech sector.

“That will be a big challenge,” he said.

But Flandro noted that there is a good chance that the industry might be missing something because that is how disruptive innovation usually works. “It’s true that our sector is quite impenetrable for new entrants,” he said.

“We need to be careful that we don’t all think that this is just going to be an incremental change which is carefully managed and harnessed by the insurance companies and the brokers.”

The new breed of insurtech executives are evangelists; a couple of them are going to be very successful and they will drive significant change, Flandro explained.

“There is a chance that there are cheaper, easier, tech-enabled ways to do insurance and our customers might discover them before we do, and that’s the risk. We need to be on top of it,” he said, pointing to insurtech startup Lemonade, for example.

The core insurance product, the pooling of risk wrapped up in a contract, works very well, Jones noted. The problem starts when getting beyond that, when selling and distributing the product and the user experience around that, he explained. “That’s something we need to take the lead on,” Jones suggested.

This may be a great opportunity for reinsurers, Hartmann said. “There will be areas where someone clever will have a great idea and we might have to follow that route,” he said. “But overall, particularly reinsurers with their understanding of new technologies can support traditional insurers to become ready for the future.”

Cooperation between insurers and reinsurers is key. Reinsurers need to work closely with cedants, Reichelt said. In addition, Swiss Re is looking for different skillsets when hiring new employees than in the past. The focus is geared towards experts from the primary industry or from insurtechs that understand a more dynamic and unconventional approach to insurance and understand the insurtech language in order to add new skills to the company, he explained. “This will bring us closer to our customers,” he added.

Peak Re, a much younger company, has set itself different priorities.

“We want to avoid building up legacy systems. That’s why we are enhancing our IT solutions,” Hahn said. “We want to make it faster, we want to make it web-based and we want to make the implementation of changes as easy and smooth as possible,” he said, while noting that this is one of Peak Re’s differentiators.

Driving market change

“Our clients would not appreciate it if we got involved in the primary, personal business,” Reichelt said. “They want us to work together with them to create solutions,” he noted, pointing to a recently launched new flight delay insurance product.

In September, Chubb and Swiss Re started a new insurance offering covering the additional costs and inconvenience travellers face due to flight cancellations and delays. The claims will be validated in real time using data from FlightStats, a provider of real-time global flight data to consumers and the travel industry, and paid within one hour, or at the latest within 72 hours of arriving at their destination, according to the press release at the product launch.

“These are the kind of product developments our clients want to do with us,” Reichelt said.

Jones added that company executives are approaching SCOR as they plan to launch a new product in a new market or to penetrate an existing market in a different way. SCOR provides these companies with reinsurance support.

“It is also very important to have some equity in a startup if you are providing capacity to it, because the two pay off in different circumstances,” Jones noted. “As a reinsurer, you have the downside risk. With an existing client, you can balance the downside against the rest of their programme, but with a startup you need the investment for upside balance,” he explained.

Reinsurers possess a different kind of funding than venture capitalists for these insurtech firms, Flandro noted. “When it comes to risk and risk transfer, reinsurers usually understand the science of risk transfer better than venture capitalists,” he said.

He mentioned a case where a startup had failed to get funding, but using big data and reinsurance JLT Re was able to help supply the required backing.

“The nice thing about being a broker is that we don’t compete with our clients,” Flandro commented. “One of our roles is to be imaginative—to throw spaghetti against the wall, to bring ideas to the table,” he said, referring to blockchain as a tool to increase efficiencies but also to bring opportunities to grow premium income through technology.

Disruption is everywhere

With the new dynamics in the market driven by insurtech firms the lines between insurance and reinsurance and brokers may blur.

“We could easily be disintermediated in certain areas, and I think this applies to all of us,” Flandro said. “In order to protect our businesses, we must innovate.”

Tsimaratos noted that the big groups might need peer benchmarking. Large national players are asking Willis Re questions and the broker is helping to find the right areas to invest in. At the same time, smaller insurers tend to go to their reinsurers for help and advice.

Phase two of this development will be very different, Tsimaratos suggested. “Who will be the new Admiral in 10 years’ time?” They are unlikely to be running on a 95 percent quota share basis at a later stage, he noted.

In the next couple of years, the support to startups through capacity and funding is set to grow rapidly, Reichelt suggested. He agreed that this will change over time as the companies grow.

Hartmann expects new technologies to enable the industry to target the growing share of non-material risks such as reputational risk and cyber risk. Here the industry has failed to find answers in the past, he explained, but new technology paired for example with behavioural economics will allow for new approaches.

In order to keep on top of developments, insurers may have to seek support for new projects outside of the companies.

“Insurers that today offer a range of products that are mainly developed in-house are realising that they can’t be on top of everything and that they don’t have the resources to keep up with all the new technological developments,” Reina said.

He suggested that companies will rely a lot on third parties such as brokers and reinsurers to keep their product suite as attractive as possible.

Jones believes that while new insurtech activities need expert support to take off, at the moment developments are going the right direction. “The best ideas are getting funding and reinsurance backing and the others will slowly disappear,” he said.

The speed of the claims payments in the re/insurance business is increasing  through new products such as parametric cover. For example, Swiss Re has launched a parametric product for typhoon risk in China in partnership with Ping An Property & Casualty Insurance Company of China. China’s first mobile-enabled typhoon property parametric insurance solution is designed to provide an affordable, easy-to-use insurance product to individuals and enterprises located in areas that are prone to typhoons, according to the companies.

Bender described this as a good example of how a new business can develop with the involvement of a reinsurer. The question may be whether reinsurers are generally quick enough to grab the opportunities in the market and push away alternative capital and other disruptors, he suggested.

There will be winners and losers. “Not everyone will make it,” Hartmann said.

An opportunity for reinsurers to become more agile may be the adoption of blockchain technology. Faster claims payments will be one of the first places where blockchain will have an effect, Flandro said.

Technologies such as blockchain may help the reinsurance industry reduce its expenses, he added. Expense ratios in the sector are too high and reserve releases are diminishing while underwriting has been tough and investment yields are also under pressure, he said. “The next place to look into is expenses,” he noted.

Claims services are arguably becoming more important to the re/insurance industry and can be sped up through technology. “Claims is one of the most important client-facing services,” Tsimaratos said.

Technology may allow companies to reduce the time they need to run the claims, giving them more airtime to provide other services to clients. “I think insurance companies will transform into service providers and blockchain will help,” he said.

While in the past claims processes have been an important part of customer interaction, blockchain might take it away and replace it with services. “That will be a major change in the coming years especially for the incumbents,” he concluded.