Playing by a new set of rules
The reinsurance industry is changing at such a pace that what was once considered evolution of the industry is rapidly becoming a revolution as sources of capital and risk transfer techniques adapt to new challenges and explore new risks.
That is the view of Alex Moczarski, chief executive officer of Guy Carpenter, reflecting on the challenges and opportunities facing the company and the industry in which it operates.
He notes that business is evolving and the industry continues to see examples of disruption and discontinuity. Moczarski points out that both public and private organisations are affected by issues such as heightened cyber security risk, increased regulation, political and economic uncertainty, low interest rates, currency values, energy price volatility and slow economic growth. In the insurance industry specifically, there are many factors driving change.
“There are more participants as financial markets continue to embrace the sector and capital continues to flow into the market,” Moczarski says. He emphasises that Guy Carpenter is agnostic when it comes to the sources and types of capital that continue to enter the industry in different ways but, he adds, some of the relative newcomers also bring a different perspective that is driving innovation, with new risks and methods of risk transfer being developed.
“We must be able to work with all different forms and types of capital and provide the best advice in terms of structuring and delivering the right solutions for our clients,” Moczarski says.He is also increasingly seeing a blurring of the lines in other ways: between insurance and reinsurance, for example. In addition to this, he notes, it will be interesting to see how new capital increasingly targets risks outside its traditional sphere of catastrophe risks.
"We have consistently demonstrated our ability to apply groundbreaking new ideas to help our clients achieve profitable growth."
The change has been exponential. But where there is greater choice in a market there is also a greater opportunity for intermediaries who understand the options available and can deliver exceptional solutions that meet the individual needs of each client.
“We are very well positioned to advise clients on a range of issues. We have the broking expertise, insight and analytical tools, to help our clients succeed. The ability to do this requires a focus on innovation, and we must ensure we are at the forefront of that.”
Out in front
In a global organisation as big as Guy Carpenter, keeping pace with rapid change can be tough—never mind leading from the front when it comes to innovation. But Guy Carpenter has invested heavily in recent years in a number of initiatives that are regarded as being at the cutting edge of developments in the industry and has reaped the rewards.
The launch of GC Exchange ties in with Moczarski’s belief that new approaches to transacting business will emerge. GC Exchange has two platforms: GC MarketPlacesm, a web-based placement solution launched in January, facilitates treaty reinsurance transactions and allows Guy Carpenter to track real-time quoting behaviour of individual markets; and GC ReBIDsm, an electronic auction placement platform designed for entities subject to strict procurement rules and intended to support its Public Sector Specialty Practice.
More platforms are in the process of being created. “We have more information and analytics at our fingertips than ever before,” Moczarski says. “This is where we have invested our time and money in recent years. We need to ensure transactions are understood from a pricing perspective and these platforms give us cutting-edge information and analytics to achieve that.”
Breaking new ground
The company’s flagship securities unit—GC Securities—has also come into its own in this rapidly growing and increasingly dynamic part of the market. “GC Securities is focused on ensuring we deliver the appropriate solutions and most efficient capital to our clients,” he explains. The unit matches cedants with investors and has structured and placed some groundbreaking capital markets-based solutions in recent years.
These notable transactions include the first Italian-sponsored cat bond in a deal in which insurer Assicurazioni Generali used this form of risk transfer for the first time; the first Swiss Franc-denominated private cat bond in a deal called Gurten that covered Swiss natural catastrophe risks, and Tokio Solution’s Omamori, the first ‘cat bond lite’ or private cat bond issuance from the Tokio Tensai platform, as well as its first cat bond offering as a sponsor.
GC Securities has also been successful in working with government agencies and entities. For example, GC Securities served as the sole placement agent for the notes programme of the first catastrophe bond issued by the World Bank on behalf of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a deal that provided three years of protection from hurricanes and earthquakes affecting the countries participating in the CCRIF. It also served as sole structurer and sole bookrunner for the first and second catastrophe bonds issued by the Texas Windstorm Insurance Association (TWIA).
Also worthy of mention was the MetroCat Re bond, the sponsor of which was the captive insurer of the Metropolitan Transportation Authority (MTA). The MTA found that the usual avenues of insurance and reinsurance had contracted dramatically following the storm surge and flooding damage it suffered after 2012’s Superstorm Sandy. Not only was MetroCat the first catastrophe bond ever to protect solely against storm surge risk, it was also unique in that it transferred that risk directly to the capital markets investors without the usual intermediary in the form of an insurance company.
The ability to deliver customised solutions to specific segments of the market prompted Guy Carpenter to create a number of specialty practices, bringing together experts from across the business to focus on unique client needs.
“Our goal is to have our clients view us as an extension of their management team. At the same time, we must deliver the best solutions at the best price, provide expert strategic advice and the ability to identify growth opportunities,” says Moczarski.
This model has been applied to new practices that have been formed to service mutual companies, healthcare organisations and the excess & surplus lines markets. Additionally, Guy Carpenter’s Cyber Solutions Specialty Practice has been established to develop solutions and expertise around this rapidly growing but extremely challenging business line.
Most recently, reflecting the type of challenges solved by the MetroCat deal, Guy Carpenter launched the Public Sector Specialty Practice, which is designed to offer private sector solutions that relieve the cost of catastrophes now borne by government entities—transferring risk from governments and taxpayers to the private sector.
“The creation of private sector pre-financing options will not only relieve the burden on public finances and in turn taxpayers, but will migrate the management of these catastrophes to companies with expertise in claims handling and risk management—extending the availability of insurance and reinsurance around the world,” Moczarski explains.
This is potentially a big growth area for Guy Carpenter and for the industry as a whole and one that could also do great good in the world. Approximately 73 percent—$2.7 trillion—of natural catastrophe losses globally between 1970 and 2014 were uninsured. Guy Carpenter currently serves more than 100 public sector clients across the globe, Moczarski says, highlighting the scale of the opportunity.
To further support the needs of its clients, the company launched Guy Carpenter Strategic Advisorysm.
“Our clients increasingly require us to deliver value in an integrated and seamless way,” Moczarski explains. “They require the expertise of our reinsurance broking teams, the advice of our strategic advisory offering and our analytical expertise.
“The beauty of collaboration is that you create centres of excellence but it is also important that your teams remain fluid. Things are changing fast in the industry and having flexibility in the market at this time is essential.”
Through Guy Carpenter Strategic Advisory, the company has built teams of specialists in their fields to help deliver this. For example, Moczarski says, to help clients navigate evolving rating agency requirements, the company brought together a number of experts to form a rating agency advisory practice. Thanks to the plethora of regulatory changes and pending requirements in recent years, combined with changing methodologies within the rating agencies, this unit’s services have been in great demand.
Europe’s Solvency II’s influence has posed many dilemmas for insurers and reinsurers alike, as chief financial officers have grappled with how to implement sophisticated capital models to adhere to these changing regulatory and rating agency requirements.
On the other side of the world, the US Own Risk and Solvency Assessment (ORSA) requires all re/insurers that write in excess of $500 million of direct or assumed premium annually to undertake an internal process to assess the adequacy of their risk management programmes.
"Our clients increasingly require us to deliver value in an integrated and seamless way."
Rating agencies are now placing a greater emphasis on companies’ capital adequacy levels, pushing firms to devote more resources to capital modelling and analytics. Here is another scenario in which a broker with the right skills and analytics can flourish.
“This is a big area of growth for us,” Moczarski says. “Several clients have now engaged us to review and validate their risk tolerance statements for ORSA.”
In addition to its specialised teams, Guy Carpenter’s Capital Modelling Solutions offer clients a number of tools designed to help make better strategic decisions. Included is MetaRisk®, a risk and capital management decision-making tool, and MetaRisk® Reservetm that helps insurers quantify reserve risk—the largest risk on the balance sheets of most.
To help clients gain confidence in their results from catastrophe models, Guy Carpenter’s Model Suitability Analysis (MSA)® provides a natural catastrophe model evaluation framework built on transparency and scientific rigour.
Investing in advanced analytics
While investors and risk transfer techniques are changing, so too are the risks the world increasingly needs to manage. Such an environment can deliver opportunities for an intermediary with the right expertise.
“Today there are many factors driving change,” Moczarski says. “We are seeing the emergence of increasingly complex global risks, which are challenging the way we evaluate, manage and build resilience to their potential impacts.”
He names some of these new and emerging risks: cyber attacks, pandemics, terrorism, climate change and the increased longevity costs that accompany the growth of aging populations. Moczarski explains that new and emerging risks present an opportunity for the industry to innovate and that advanced analytics are leading the way for breakthroughs in assessing and modelling risk.
“We have always been at the forefront of change in our industry. We are a company of innovators, with a long history of industry firsts. We have consistently demonstrated our ability to apply groundbreaking new ideas to help our clients achieve profitable growth,” he says.
“One of the ways we do this is to constantly invest in our analytics platform on behalf of our clients.”
Recent product developments Guy Carpenter has launched include:
- CAT Risk Studio (CRS), a new division that will support Guy Carpenter’s MSA® initiative and will work closely with GC Securities on the development of parametric products for catastrophe risk transfer;
- The G-CAT® Canada Flood Model, the first probabilistic Canada flood model;
- GC ForCasSM, a new data-driven casualty catastrophe model that addresses losses from sudden disasters, such as an offshore oil rig spill or large losses resulting from financial institutions and cyber insurance policies;
- The G-CAT® Hail Model, a probabilistic hail model for Europe; and
- GC CAT-VIEWSM, a new satellite-based catastrophe evaluation service that analyses satellite and radar imagery, footage from unmanned aerial vehicles, the media and social media, and ground-survey data, to produce initial loss estimates.
A focus on clients
Some of the wider disruptive forces in the industry also play into this. The current bout of mergers and acquisitions in the industry means bigger players being created with more complex needs. Equally, Moczarski acknowledges, this process will also create gaps in the sector that will be filled—a perfect situation for an intermediary offering the right advice and tools.
“Scale is increasingly important both in terms of top line growth and in terms of expense synergies. But there will also be start-ups emerging and these companies too will need advice. That means opportunities for us to work with new players.”
He stresses, however, that despite the investment in tools and models, the real power of the company stems from its people.
“We are a people company, and innovation and teamwork are hallmarks of our culture. The versatility of the human brain—this is where we excel and how we remain relevant to our clients.
“We must have innovative products and solutions, but we must also have excellent relationships with our clients. We must always listen to their needs and understand what is impacting their business.”
Moczarski believes the company’s consistent growth—it has enjoyed organic growth in the past six years—shows that it must be doing something right.
Equally, he is unwilling to rest on his laurels. “We have to be aware of what is around us and attempt to predict what changes are coming,” he notes.
“There is no doubt we are operating in a period of great change but acknowledging that is the first part of retaining our leadership position and staying ahead of our clients’ needs.”