SCOR’s Kessler predicts the end of dinosaurs
Kessler, who described himself as an industry dinosaur who will also disappear eventually, was reflecting on how the industry has changed during the last 16 years since he joined SCOR as chairman and CEO at a Nov. 6 S&P Global Ratings conference in London.
The risk universe has expanded, and new risks have emerged, Kessler said. “They are much more complex, much more dynamic because of globalisation and interaction through networks of different types of technology,” he explained.
Risks are becoming increasingly complex to manage and to model, according to his presentation. Risks are, for example, less and less circumscribed in time and space.
“Unlike fire, storms or earthquake which take place in certain areas or regions, terror and cyber risks are very difficult to locate in space,” Kessler said.
“These two emerging risks are disseminating around the world and no one knows where a cyber-attack is starting and where it will end.”
The rise of the hypercane
As a result, there is an accumulation of exposure around the world which is quite unique and has not happened in the past, he noted. In addition, the risks are mutating fast, particularly in the cyberspace, he said.
“The risk universe we are facing in the future is incredibly complex due to developments in cyber, 3D printing, automation, driverless cars, anti-microbial resistance and nanotechnology,” he said.
In addition, Kessler suggested that the reinsurance industry will increasingly face severe shocks in the future. “One of the key threats is global warming which is expected to result in much more destructive natural catastrophes and the developments seem to be accelerating.”
Global warming has increasingly significant consequences on hydrosphere and weather, resulting in much more destructive natural catastrophes, according to the presentation.
Rising sea levels are likely to boost the frequency and severity of cat events, creating a higher frequency of extreme events like hurricanes, typhoons, windstorms, floods, droughts and heatwaves, Kessler suggested. He believes that the shocks the reinsurance sector will need to absorb are set to multiply.
He raised the possibility of the occurrence of a hypercane, an extreme type of a tropical cyclone which forms in very warm waters of around 50°C and produces wind speeds of over 800 km/h.
“This can knock over skyscrapers. Such an event happened 60 million years ago when a meteorite hit the earth making sea temperatures rise and the earth was covered in hypercanes which caused the disappearance of one third of the dinosaur population,” Kessler said.
“Climate change is not linear and will create multiple shocks,” he explained.
And, similar to terror and cyber, future events will no longer fit into a historical distribution of events as they will follow an unpredictable pattern, he suggested.
Recent events like HIM (hurricanes Harvey, Irma and Maria) or the 2011 tsunami in Japan may have been extreme, but they did still fit in the probability of catastrophe distribution, he explained. “This might be less the case in the future,” Kessler suggested.
“If someone emptied a bag of Anthrax from the SEARS tower in Chicago this might kill 100,000 people on a day with strong winds,” he said.
The strongest may not survive
In addition, the ability to reinsure risks is increasingly under threat in a world that is becoming more fragmented, driven by protectionism and populism, Kessler warned.
“It seems that we are entering a world of political and financial re-fragmentation driven by entropic forces that want to dislocate existing arrangements,” he said. He cited Brexit as one example, but also pointed to the US and Italy where similar movements can be observed.
“Nationalist forces are likely to push governments to adopt legislation and regulations that will cause a re-fragmentation of the world. The trade wars we are currently facing are one consequence of it,” he said.
International cooperation seems to be weakening while tensions between countries and regions are on the rise, according to the presentation. At the same time, global norms are being challenged, multilateral institutions appear to be weaker and populist movements are pressuring countries to affirm their sovereignty.
Kessler stressed that for the reinsurance industry it is absolutely fundamental to be able to freely allocate assets worldwide. “We need regulation that is converging globally as much as possible.”
For SCOR the US tax reform has been a major blow, Kessler noted. “It took us nine months to find a solution. We had to create a new company in Ireland and negotiate the tax treatment for this company. We now have two companies in Ireland, one for the EU business and one for the US business. This a good example of wasted time and energy.”
Re/insurers are also under increasing pressure from NGOs, social and environmental groups, Kessler noted. “Insurers are expected to take the first steps in fighting climate change,” he said. Stakeholders want firms to stop insuring coal or tobacco producers which means rejecting clients and business while consuming a lot of resources to address the issues.
“The current environment has become more complex and uncertain, potentially chaotic, more competitive more contestable and more fragmented,” Kessler said. “The solution is to mutate by integrating changes.
“It’s not the strongest of the species that survives, nor the most intelligent but the most responsive to change.” he said.
The dinosaurs will disappear, but SCOR will not; Kessler will disappear eventually, he pointed out, but in the meantime, he is trying to make sure that SCOR will be in good shape when he hands over the business to his successor by including technology in the processes.
“We can generate productivity and efficiency gains if we are able to integrate science and technology in the reinsurance processes to the benefit of insurers,” Kessler said.
