The innovation game

Valandis Elpidorou, global head of analytics, Matrix, talks to Baden-Baden Today about the power of innovation and how it applies specifically to the company as a broker.

Where do you see innovation in the reinsurance industry today?

Innovation is everywhere. However, it is important that we are precise when we talk about innovation because it is an overused term—people talk about innovation as if it were a recent trend, something we discovered just a few years ago. Innovation is what a company or an industry does to remain relevant, and the reinsurance industry is still relevant because of it. But to be completely fair, there is some truth to the hype.

We see what futurists call ‘accelerating change’, a perceived increase in the speed of progress. We have experienced the operational and economic impact of digitisation in many industries, so with technologies such as the internet of things, machine learning and big data analytics it is normal to think that we are racing towards a tech revolution in the insurance industry.

Do you believe that innovation in the reinsurance broking industry is a race?

I would say that innovation is a game rather than a race. It is not about who gets it first but who gets it right. In the last two decades we have seen a fundamental shift in what it means to be a reinsurance broker. It used to be that reinsurance brokers were marketers of risk, now brokers match risk to capital. Sustaining innovations has enabled this shift. But the innovation game has a darker side to it: the disruptive side.

The big question today is whether disruptive innovation is possible in the risk capital marketplace? The term disruptive innovation was coined to contrast with sustaining innovation, what incumbents pursue in order to improve their product offering and increase their profit margins. Analytics is a prime example of this.

Reinsurance brokers have used analytics to enhance their value proposition, initially to improve their margins and later to justify them. But in the disruptive game, incumbentsn usually lose.

What could be a disruptive innovation in the reinsurance broking industry?

That is a very good question. The definition of disruptive innovation in economic terms is the state where the marginal cost of doing business will asymptotically tend to zero. If you look at the reinsurance industry, this cannot occur because reinsurance is capital and capital has a variable cost, other than any fixed transaction costs. Even the insurance-linked securities (ILS) expansion, the so-called capital revolution, does not qualify as a disruptive innovation.

A cat bond lite has certain characteristics attributed to disruptive innovations, but it is still just capital that requires a return.

In the risk capital marketplace, where brokers earn their income primarily on a per-transaction basis, disruptive innovation is a possibility.

Some believe this possibility has a name: exchange-traded risk. I am not convinced.

Apart from the problem of original risk, I believe the bundling of transaction cost with capital cost would always mean that the marginal cost cannot tend to zero—unless we invent free capital or better said, free capital relief.

This year Matrix has been named Best Broker (<$1bn revenue) for Innovation in the Intelligent Insurer Global Awards. Where does the company focus its innovation efforts?

This is our second innovation award; we also received a national innovation award in 2014. It makes us really proud of what we have achieved in the recent years. From the early days of the Solvency II discussions, our focus has been on structured reinsurance, primarily capital relief transactions for non-life companies, prospective and retrospective.

As the implementation date was approaching we turned our attention to the problem of long-term guarantees and how reinsurance could be used to hedge investment risk in life and pension portfolios.

We developed solutions for credit risk mitigation for banking institutions and lately we have focused on the problem of contract boundaries and the solvency burden created by health portfolios that are treated similar to life.

Our innovation is in the customised approach. The usual approach is that there is a solution and we are looking to apply it to a problem. Our approach is to understand the problem and create the solution. This requires a dual ‘consultative’ approach with state-of-

the-art analytics to the cedant but also to the reinsurer, for a perfect match of risk with capital.

Are any disruptive innovations on the way?

I am afraid we cannot offer any excitement there. We stick to the sustaining side of the game.

Valandis Elpidorou is global head of analytics at Matrix. He can be contacted at: valandis.elpidorou@matrix-brokers.com.