Silent supporters increasing industry influence
While re-insurers have been the industry silent supporters for many years, recent events have pushed them more into the spotlight. They are no more the silent supporters and play an important role in the industry, particularly at times when insurers are faced with massive catastrophe claims.
Re-insurers have become more pertinent over the past decade. The terror attacks in New York in 2001 were the first real events which brought the profile of this silent industry backbone to the fore. Since then, we have had hurricane Katrina, the 2004 tsunami in Thailand, hurricane Sandy, and various other catastrophic events which have tested the insurance industry.
Calls for dynamic models
While these events, it is assumed, occur once every 100 years, there are increasing calls for re-insurers to change this viewpoint and prepare for these events to happen on a more regular basis. A prime example of this was the severe hailstorms which hit Gauteng in 2012. Just as the industry was coming to terms with the damage caused by this, a similar storm hit the same area in 2013.
Dr Torsten Jeworrek, Board Member of Munich Re, mentions that there needs to be a rethink in the models that are present in the industry as the nature of risks are changing. “Companies need to adopt a diverse business model in order to add value to customers. There is a shared value chain in terms of products and there is a concentration of risk in certain areas. This has an effect on insurers who then turn to reinsurance for assistance,” said Jeworrek.
This is particularly important in the South African context. At a business forum held last year, meteorologists not only showed the changing nature of weather patterns, but also the growth of the Midrand area, which has more than doubled in size over the past ten years.
Big Data player
The problem with the above scenario is that you have the risk concentrated in a specific area, but how do you design a product or cover that will fully prepare an insurer when they are not even fully aware of the risk an event proposes. Insurers in the US learned from their experiences after hurricane Katrina, but they did not know if they would be facing losses on a similar scale when hurricane Sandy was making a landfall in New York.
This is where Big Data will become an industry game changer. Hurricane Sandy did not have the same effects as hurricane Katrina, but the damage was significant.
“In order for US insurers to prepare themselves for a similar event in the future, they can use the information gathered by data mining in order to see which were the worst affected areas and how they can handle their claims process strategies,” said Jeworrek.
Beef up on cyber cover
It looks like Cyber risk will become one of the most important societal risks for this decade. While we have a conventional view regarding terrorism, have we considered what the effects of a concentrated cyber attack would be?
The problem with cyber policies is that the rate at which the nature of the risk advances makes it hard to set definite product parameters. How do you design a product when you are not fully aware of the true nature of the risk? Bernd Kohn, Head of Divisional Unit GAPA4 at Munich Re, mentions that this is another area where Big Data will show its true worth. “Most of the damage with regards to cyber risk comes from the business to customer channel. But what happens if there is an attack directed from business to business? Are similar interruptions likely to occur? And will there be any cover that deals specifically with reputational damage?” asked Kohn.
We need to look at the possible extent of the damage. In the past LinkedIn was seen as a major social media network which was dedicated to the corporate sector. But as Jeworrek points out, the influence of Facebook in the corporate sector is growing at a rapid rate.
This is a concerning trend when it comes to reputational damage. The public is not afraid to vent their frustration over social media. As of April 2014, LinkedIn had a user base of 300 million users. In January 2014, Facebook’s user base was at 1.23 billion.
“We cannot take a ring fenced approach when it comes to reputational damage. We need to combine this approach with what is currently happening in the industry and the triggers which would affect reputational damage. The recent Sony Entertainment hacking saga is a good case study in this area,” said Kohn.
Follow the yellow brick road
In a period of tough economic growth, companies are always on the look out for the yellow brick road, a path that will lead them to profit without any major risks or setbacks. In order to remain relevant in society, insurers need to join their clients on this quest.
With climate change being such a pertinent issue, there is an increased focus on renewable energy projects. However, the bricks on the road towards these projects are not a bright yellow, but they have a certain dullness about them. These projects are characterised by long start up periods and significant cash investments.
“Investors want to see a return on their investments and are a bit sceptical to wait for long periods associated with the projects. Insurers need to see this as a gap in the market and there are certain policies in the market that offer a performance guarantee where they will pay out if there is no return on the investment over a certain period of time. This encourages investment in this area,” concluded Jeworrek.
Editor’s Thoughts:
The dynamics of the insurance industry are shifting towards a closer engagement with all parties. This perforates from the insurer to the client. We know that there is traditionally a close relationship between insurers and re-insurers, but perhaps there is a gap in the market for a closer collaboration where re-insurers can play a role in product development. At the end of the day, the customer is king and it is their best interests we seek to protect. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
