Re/insurers must reconsider the risks they left behind

There are many, often substantial, pools of risk in the world untapped by the re/insurance industry. Efforts around innovation should focus on finding risk-transfer solutions for these, believes Eric Andersen, chief executive of Aon Benfield, speaking ahead of this year’s Monte Carlo Rendez-Vous.

Andersen gives a number of examples of risks that the industry either covered historically but has since shied away from or which are covered by governments rather than the private sector.

Given the challenges around growth the industry faces, he believes innovation around these risks is now vital for the industry.

“There are a couple of ways that we think about innovation,” he said. “As an industry, we’re trying hard to figure out how we improve our value proposition to both insurers and corporate customers. This can come by way of new products, but also reinsurers are looking for ways to reintroduce non-traditional products, especially products that fit into the cat liability umbrella, that were once in the market but have left due to losses or a lack of capacity, etc.”

He gives several examples of risks no longer insured by the primary market including product liability for pharmaceutical companies or professional liability for large banks or institutions.

Another set of risks worthy of consideration include terrorism and some types of flood and earthquake risk, which have largely moved into government pools.

“There’s a lot of work going on right now to develop products using the models and capabilities to effectively grow the private market pie,” Andersen said. “It is important to remember that when an insurance market pulls out of something, the risks don’t just go away; they get transferred either to the public sector or to the balance sheets of corporates.”

He said the industry has a better chance of finding solutions thanks to the development of tools that did not exist 25 years ago. These could be used to bring these products back in a sustainable way.

“There’s also a lot going on about how we’re using the data that we have as a way to build insight into growth for re/insurance clients,” he added.

Cyber is another complex risk that could represent a growth market. Andersen asks whether insurers are developing sufficient products in line with demand and whether this is slowing reinsurers’ participation.

He draws comparisons between this risk and employment liability insurance. “That was the last major specialty practice development to hit the mainstream and it started in a very similar way,” Andersen said.

“People were looking at it and wondering how do you understand and quantify it and how do you transfer it; that is similar to cyber now.

“People are trying to be thoughtful and creative, but the market has yet to coalesce around what is the right product mix that will address the needs of the majority of corporate customers.

“I don’t think we’ve reached the point yet, but the industry is certainly working towards it and I think the reinsurance industry has a lot to offer in helping guide the evolution of the product. My guess is that over time there will be a mainstream product that gets tailored to industry or size.”

This need for such innovation is made more urgent by the challenges around growth that re/insurers are facing. Andersen describes this as the single biggest difficulty facing Aon Benfield’s clients.

“Everyone is trying to figure out how to grow their business in a low growth GDP environment. People are coming to us looking for new products, regional expansion, M&A—everything attached to finding 5 to 8 percent organic growth over the next three to five years,” he said.

“A lot of the strategic conversations we’re having are about finding new risks or areas that are new to them either geographically or product-wise. Everyone is chasing the same thing. They’re looking at a macroeconomic environment, which is not all that exciting, and trying to find a way to compete inside that to gain a competitive advantage.”