3 March 2015 Alternative Risk Transfer

Five key insurance trends: McGavick

There are five key trends in the insurance space that are currently producing two consistent responses, according to Mike McGavick, chief executive officer (CEO) of XL.

Speaking at the Economist’s Insurance 2015 event, McGavick said that increasing globalisation means that XL sees the need to serve clients in a fully global way as central to XL’s operations. He added that he believes that less than ten insurers could create a globally compliant product because the actual risk faced by companies changes incredibly fast and different countries are governed by different sets of rules.

Eric Andersen, CEO of Aon Benfield, also speaking at the event, said that brokers need to be able to understand local dynamics in order to compete.

“In all honesty, it puts enormous stress on the business model. In the past, our business was built around centres of excellence. But not a lot of business has been staying local, and so, rather than pouring money into the old world, we have been pouring money into the new developing markets,” he said.

McGavick said that the second trend is the use of new sources of analytics that can be harnessed and put to work for clients. The third and fourth trends, respectively, were the changing relationship between brokers and the market as a result of consolidation and the flood of alternative capital.

Finally, McGavick noted the effect of regulators on the industry: “The simple fact is that regulators have made the use of capital more expensive. We have been living in the failure of the banks amid the concern that these things could happen in insurance,” he said.

These five trends have produced two consistent responses of consolidation and innovation, noted McGavick.

“In each of these cases, size will matter more. There is a heavy cost for being globally compliant and few can provide this outside of the Lloyd’s cover structure. For analytics, the scale of your own data is where you can gain an advantage. On the broking side, if one broker consolidates, then the other players tend to consolidate to gain equilibrium,” he said.

“In terms of alternative capital, only the very best will have the capability to serve their clients and put it to work. On the regulation side, the cost of compliance is high and therefore best done against a bigger balance sheet. This also means regulators view the insurer as more resilient and trustworthy.”

Peter den Dekker, insurance and risk manager at VimpelCom, noted a threat to consolidation in that people may not be able to connect without the threat of losing commission which means that customers will need to find answers for themselves.

Andersen was quick to add that there are two ways of making a global firm nimble enough.

“Firstly, it’s important to have subject matter expertise, whether topic or product specific, and ensure it is linked globally,” he said. “Secondly, and most importantly, it’s essential to look at the leadership of the company. Is it culturally acceptable for someone in the Netherlands to call someone in Latin America and provide the solution without having the conversation about commission. Sharing makes the company more successful in the long run.”

On innovation, McGavick said: “The expectations of individuals are so radically changed that we cannot help but reinvent every element of the process. In the future, underwriting will be the core thing that the industry contributes to the world.”

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