Reinsurers must embrace data analytics


As reinsurers face a perfect storm in terms of a very challenging underwriting environment, Frank Fortunato, chief executive of CATEX, argues to Monte Carlo Today that using technology and data analytics to their full potential can help avoid problems for companies.

Reinsurers must embrace the data and analytical tools available to them if they are to avoid unwelcome surprises in the form of heavy losses when levels of catastrophic events get back to normal levels, especially in light of news reports that further use of reserve releases by many companies may be difficult.

That is the view of Frank Fortunato, chief executive of CATEX, the technology provider to the reinsurance industry. 

He stresses that the challenges facing the industry are coming from several fronts. He notes that most companies seem wary of further reserve releases to boost their results while continued soft rates in most lines of business mean that some companies may be writing certain business at below the cost of capital. 

“The industry has been lucky with low levels of cat losses for years now, but how long will the luck hold out?” he asks. “If claims return to normal levels, even a normal hurricane season will push people into the red. The first half 2016 losses seem to be a wake-up call.”

Fortunato believes that, to avoid ending up in this situation, companies need to embrace the tools at their disposal. 

“One key to getting a better understanding of risks and the cost of that risk is simply using the data at their disposal. There is no excuse to end up with nuggets of bad or under-priced business if the right analytical tools are used.”

He notes that on the fast-growing side of the business that utilises so-called alternative capital, including through the use of insurance-linked securities (ILS), participants and investors seem far more comfortable leveraging a more analytical approach.

But some of the more traditional players are lagging behind. “The tools are available to be more analytical,” Fortunato says. “Far be it from me to comment on how well they know their business but given the many challenges facing the market right now, a better understanding of what is on their books and what the correct technical price should be would be very helpful.”

He acknowledges that where a company is big and diverse enough, it can make sense for it to write below the cost of capital to protect market share. 

“There aren’t too many reckless players out there—this is the insurance industry after all—and given the cost of client acquisition it’s understandable if a reinsurer has the breadth and diversity to write a risk below the cost of capital in order to preserve a client relationship ” he says. 

“The big concern is with markets that don’t quite have that breadth and diversity who may have written risks below their cost. For them even a return to normal on the claims side could cause some of these companies problems.”

CATEX offers a variety of solutions that allow companies to better assess and analyse a risk. The company originally found traction for its products in instances where delegated underwriting authority risks were difficult to interpret and companies were seeking a better handle on the risks they’d already bound.

Fortunato says that while that part of the industry has benefited from regulatory attention, there could be a risk of a similar type of problem emerging in other parts of the industry as companies look to protect market share in the protracted soft market.

“Some companies are doing it really well; they have left us in awe of their sophistication and the way they can manage and understand risks,” he says. “There is a generation of underwriters coming through now who are very comfortable around data and using it to their benefit. But there is also a part of the industry still not using all the tools available.”


Accessing uninsured risks

Fortunato feels that the better  use of analytics and data can also help the industry grow. He notes that there are hundreds of billions of dollars of uninsured risks in the world, and technology and data analytics can provide the solution to help the industry understand and underwrite these risks.

“Without embracing technology and analytics there is no other way of doing it,” he says. “The market needs to respond to the needs of society and the global economy or risk becoming irrelevant.”

He says the tough operating environment for reinsurers is benefiting CATEX. More companies are willing to look at how technology can help them become more efficient and make better decisions. Brokers, it seems, have understood the importance of data and they are investing in offering more services to clients. 

But he still believes many in the industry do not grasp the true potential of technology and the use of data.

“It is a perfect storm for us, but in a good way—it is driving more enquiries our way,” Fortunato says. “We do have tools to help people but there is also an industry-wide point here, which is that there really are treasure troves of data available. Tremendous progress has been achieved in data analytics in the past 10 years but there is a lot more work ahead.”

Frank Fortunato is the chief executive of CATEX. He can be contacted at: 

Frank Fortunato, CATEX, Monte Carlo Rendez-Vous 2016, Data, Technology, Europe

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