Podcast transcript: How commercial and reinsurance insurers can unlock growth

Peter Manchester

Good afternoon, everyone. About three years ago, EY launched its thought piece on the future of large commercial and reinsurance sectors. Now, as we know, a lot has happened over the last three years, a pandemic, inflation, global economic stresses and strains. 

And we’ve now taken the opportunity to refresh that outlook and to take a view on some of the key themes and measures that we are seeing in the marketplace.
I’m delighted to be joined here today by Simon Burtwell. Simon leads our EMEA insurance consulting business, with a particular focus on the large commercial and reinsurance sector. Welcome, Simon.

Simon Burtwell

Thanks, Peter. Nice to be here.

Manchester

So, just on the theme of three years is a long time, obviously, the macroeconomic picture has changed substantially in that period of time. Does that provide perhaps a different context for the insurers and reinsurers in the marketplace today?

Burtwell

I think it does actually. All of this major macro upheaval we’ve seen going on has brought into some sharp relief the risks that are around in everyday life for us as individuals, and obviously for major corporate concerns. And it’s perhaps no coincidence that the industry has had two of its largest ever loss years in 2021, 2022, over 100 billion of insured losses in each of those years.

And those are a very diverse range of losses now. It’s not just very sad natural catastrophes that we’ve seen under climate change, but we’ve seen, the war in Ukraine create enormous problems for things like the aviation industry. Bigger problems on the ground, of course, but all of those aircraft trapped in Russian airspace having to be paid out to the lessors by the insurance sector.

Yes, I think we are definitely dealing with a different world now than we were three years ago. But you can’t forget the impact of COVID, can you? Three years ago we didn’t know nearly as much about non-damage business interruption as the insurance sector as we do now because, let’s face it, pretty much every business in the world, big or small, had an impact of that from COVID. There have been some real challenges to the claims situation and the pay-outs in different jurisdictions.

Three years ago, we challenged the industry about being relevant. we’ve probably got less of a problem with its relevance, but it needs to step up in a number of areas, which we’re highlighting in the report.

Manchester

In our initial work, we postulated that the very static linear value chain from insureds through brokers, through insurers to reinsurers, would start to break down and become much more componentised as organisations made decisions about where they would play along that whole value spectrum. Has that come through as quickly as you thought it may?

Burtwell

Yes, we postulated that there would be a dynamic value exchange, rather than that linear block and tackle type chain that we’ve always had in the industry. It hasn’t happened as quickly as I think we thought it would, but it is happening. And you’re seeing it happen in a number of different ways.

You’re seeing tier two and some of the larger organisations look to buy up the value chain, and some brokers are really looking to expand their capabilities up and down the chain. But you’re also seeing some really interesting strategic partnerships forming along the chain, and actually forming all the way up the chain, so more and more embedded insurance type solutions happening, not just at the personal lines end, but even at a commercial end.

We’re aware of commercial fleet original equipment manufacturers (OEM) getting into bed with the insurance sector far more than they were ever in the past. And obviously, there’s an awful lot of movement along the intermediated sector, what we now call intermedial capital. The MGA, the delegated authority space is really, really prevalent. 

Most brokers will now have a tie-in or many tie-ins with players in that sector. Of course, reinsurers want to get into that sector, want to get closer to the source of risk. So, yes, those partnerships are forming.

One of the major hindrances to those partnerships and to that dynamic exchange has been the absence of data standards in the industry. And a lot of work is going into formulating data standards, forcing through the connectivity and the digitalisation that’s really going to revolutionise the industry in the next few years.

Manchester

Yes. I know we’ve seen new entrants coming into the sector, new challenger organisations. And perhaps we’ve seen more flex in that distributional landscape than we’ve seen previously. I guess particularly we talked in our document around the rise of MGAs as a vehicle, and perhaps on the other side, or sometimes linked, the increase in the use of captives. Do you see that as a fundamental and more long-term trend?

Burtwell

Oh, absolutely. Absolutely. When we’re talking about this sort of fragmentation and reinvention of the value chain, these are not necessarily new factors, because let’s face it, MGAs and captives have all been around 20, 30 years, but the prevalence of them now is really, really coming to the fore. I think three years ago, people were saying, as the market hardened, those sorts of things would go away, particularly the delegated space, the MGA space. Actually, the opposite is true. The bad ones went away. The ones that didn’t write for profit went away. But wow, the good ones really, really became hotbeds of innovation, creativity and talent.

It’s fascinating to see how much young innovative talent in the sector is flooding towards the MGA-delegated authority market.

Captives fascinate me, they really do. I think we’re seeing a level of premium now in captives that we have never seen before, and an escalation of the number of new start-ups in the captives’ sphere.

Some of that insurers would say, well, it’s because the market’s hard and we’ve put our rates up. That’s to some degree true. But I think the other side of that is captives have gone away from being tax-related vehicles in businesses. Regulators have forced them to have substance. That means talent, that means technology, that means proper capability.

Once you invest in those capabilities, you’ve then got an asset that you want to sweat, and that asset becomes not a procurement asset anymore, it becomes a strategic management asset of risk.

And the best of our multinationals and mid-sized corporates now are really using those businesses as profit centres, to expand along their value chain, bringing ever more third-party risk, and also doing a lot more creative pay-outs around cyber, around BI, and these days around more ESG challenges that the industry is facing.

So, yes, captives, definitely here to stay.

Manchester

Just on that, you talked about hard markets and you talked about some of the new risks such as ESG. One of the corollaries to a hard market is there’s less capacity potentially. does that just serve to increase the protection gap that we know exists, so 60 billion at the latest estimate? do you feel that insurers and reinsurers are really innovating enough around products and coverages to actually help match and meet that protection gap?

Burtwell

Sadly, I don’t think they are. I think one of the core callouts of this report is, yes, in the core product, the historic product area, it is relevant, but innovation isn’t coming through fast enough. And where innovation is happening, it’s tending not to be in the grassroots insurance and reinsurance community.

Now, we all know that they put rates up, and you can’t complain about that really. In most classes of business, the rates are still lower than they were in 2014. So, it’s a cycle. And of course, inflation has meant that every class that’s basically underwritten on asset values, those values have gone up, therefore pricing’s going up.

So, if you look at the growth that has been achieved, it’s mostly actually asset inflation even more so than rate. But that has priced a lot of corporates out of wanting to buy discretionary covers. It’s also forced many to increase their retention levels on different classes of business.

And I suspect, once you get more and more into the working layer with your retentions, you start doing the mathematical analysis as to whether it’s worth buying the top-up layer from the market. I was working with a pharmaceutical company recently, and it had a 750 million each and every loss retention layer on its casualty programme. Well, once you’re there, getting a top-up of 250 million is not really worth buying, is it? You may as well take the whole risk on the chin, or look to reinsurers for a CAT-type exposure.

So, it’s changing. The levels of innovation just aren’t coming through fast enough in the whole areas of business risks, as your C-suite would witness them today. So, I think any time you see the top ten risks that a modern business worries about, very, very few of them are insurable. Very few.

Elements of reputation, it might be within D&O, but it really is the large-scale cyber outage not caused by anything on prem. It is the intangible asset base. It is the supply chain base. It’s obviously environmental issues, reputational issues, brand value issues. So, much of that is not getting picked up by the traditional product set.

what we are also finding frustrating is the enormous opportunity for the industry to monetise its data and come up with a much broader range of services and options for its client base.

Wouldn’t it be wonderful if the insurance industry was famous for helping people not have losses, rather than just funding them once they’ve occurred? Clearly, in our modern lives, none of us want that. And we all assume, where the data exists to reduce or prevent exposures and losses, it will be used, it will be available to us in some way. No one’s monetising that yet, and that seems like a big miss.

Manchester

Yes, I agree with that. And I think what struck me actually working with a client recently on the area of green infrastructure, and they were saying one of the issues they have is that the product sets, the current product sets from insurers are very monoline. So, you do liability, or you do property, or you do risk, whereas actually, if you look at something like green infrastructure, you need to cover the end-to-end cycle from hydrogen storage to battery storage, to real estate, to real estate management.

So, it is perhaps also getting insurers to think and move more away from individual product lines to a more holistic view in terms of risk and coverage.

Burtwell

That’s very true. And I think when you look at things like the multinational programme space, which obviously is very prevalent in this part of the sector, the account management proposition is very poor.

So, the industry is still going to its market by class of business, lining up behind each other to sell their individual policies, rather than seeing this as an integrated business where, when they have a loss, likelihood is several policies will be triggered by the same event. And the client won’t want to look at it as if it was four or five different separate events. They’ll want one way of handling all of this.

Manchester

To conclude, one of the observations we have in the document is that a number of the insurers we deal with in the market, or the market overall, is investing a lot in transformation. Actually, we’re starting to see that tick up in some of the benchmarking that we do. If you were thinking of that client set, what advice would you give them as they start on that transformation journey?

Burtwell

Five years ago, maybe ten years ago, let’s be fair to the industry, ten years ago, when people first started talking about tech-driven change, they were looking very internally. They were trying to replace often greenscreen type technology with slightly more modern policy admin and claims systems.

But if you’re looking at transformation in this industry now, you are looking at an industry that will have data standards, will be digitalised, will all be about dynamic value exchange and connectivity.

So, your tech has got to be all around integration. It’s got to be agile, cloud based. So slick, agile technology that allows you to make a compelling differentiated proposition about how quickly you can connect with strategic partners, how quickly you can extract meaningful data, valuable data from your systems and processes, how well you can connect to your end user clients, and how well you can manage the money flow. That’s what tech has to do for you now.

that means that, yes, people who updated their core systems have got a better start at that than people who haven’t, but even they are having to put lots of interesting front ends to cover the pre-buying space, agile underwriting, analytics, pricing modelling, let alone the whole distribution chain which is a really exciting space to look at at the moment from a tech point of view.

So, I think we’re going to see many years of transformation to come. And the changes happening in this industry that’s already happened in, say, capital markets, when technology is a core part of the value proposition, connectivity, the community that that enables, that’s where you really get your strength.

Manchester

Simon, thank you very much. A very interesting discussion around the market and some of the key trends that we see. Our thought piece around large commercial and reinsurance will be out in the next couple of weeks. I hope people can get to look at that.

And actually, the next in our series of what we call next wave thought pieces is around the life and health sector, and that will be coming in about two or three months’ time. So, thank you again, Simon.

Burtwell

Pleasure.