The global insurance and reinsurance industry needs an “iconoclastic moment” on a similar scale to the introduction of catastrophe risk models in the 1990’s, if it is to ensure its long-term sustainability, Chris McKeown of re/insurer Vantage Risk has said.
Speaking with Reinsurance News around the Monte Carlo Rendez-vous event in September 2022, Chris McKeown, Chief Executive, Reinsurance, ILS, and Innovation at Vantage, explained some of the main threats to the industry are of its own making.
“There’s two primary threats to the industry: habituation and structural inertia,” McKeown said.
“Firstly, habituation leads to complacency in risk awareness. With the exponential growth in computing power and access to large databases of exposure information, we can’t continue to simply rely on the legacy methods of data collection or risk analysis.
“To understand actual risk, it’s necessary to continuously question assumptions, seek new information, and synthesize and apply it in new ways.
“In today’s rapidly changing world, outsourcing catastrophe risk analysis completely is more insufficient than ever before,” he explained.
Billion dollar loss events are happening with increasing frequency, McKeown noted, while risk is becoming ever more costly and complex, while frequency and severity trends accelerate.
At the same time, the interlinked and highly interconnected nature of our world means risks are closer together than ever before as well, with hazards “more often emerging concurrently in the same location,” he explained.
Leading McKeown to state, “Relying on long-established habits of thinking will blind you to the risks that are evolving and emerging in real time.”
On the structural inertia in the industry, this comes down to a reluctance and sometimes inability to change as fast as it perhaps could.
“Our industry operates in a vertically integrated manner,” he told Reinsurance News. “Reinsurers rely on brokers, rating agencies, and vendor modelling as a framework for success. This inadvertently can constrain innovation, as the operational constraints can create challenges to differentiation.”
McKeown continued, “I don’t think the industry fully challenges the limitations that leveraged capital, syndication, and model bias might bring to our industry, nor have we done a great job at innovating around these issues.
“Collectively, we’d do well to continue to find ways of bringing more capital (and more efficient capital) into our industry to improve our relevance in a rapidly changing risk landscape, whether due to demographics, inflation, or climatology.”
Harking back to the early days of catastrophe risk modelling, which drove significant innovation and change across insurance and reinsurance, as well as opportunities for the industry to expand its footprint and importantly its usefulness to society, McKeown believes we could see future advancements of this nature.
But this will require open-minds and broad change, as well as for re/insurers to step outside of their traditional business models and to think more broadly of how technology and risk can interact.
“Karen Clark, who founded AIR, now known as Verisk EES, and others changed the face of our marketplace through the use of cat models to apply stochastic analysis to exposure information in the 90s,” he said.
“That technology is essential, and we make use of cat models, but I think we all would do better to collectively question whether new approaches to analyzing cat risk might be within our grasp, 30 years on.”
In closing, McKeown called for change, saying, “To ensure the industry is sustainable long-term, I think we need a similar iconoclastic moment.”