The battle to innovate It is interesting to note that an increasingly common theme in the industry right now is that the world is becoming riskier, yet the insurance and reinsurance industries are failing to keep pace with the demands of their clients. Big names such as Pat Ryan and Mike McGavick have been beating the drum of late calling for more innovation from the industry. McGavick has warned that the industry risks irrelevance in an increasingly global, complex and technology-led world, while Ryan claims the amount of insurance purchased by corporates in the US has been consistently shrinking. These claims certainly have some foundation. But when you ponder the history of the insurance industry for a moment, the argument that the

industry is not innovating is actually quite strange. Granted, insurers and reinsurers have been slow to adapt to modern processes and technologies, but when it comes to assessing, managing and offsetting risks, the industry has adapted to the pace of change remarkably well. Arguably, the pace of change could not have been as fast had it not. Consider for a moment the rapid development of the world since the first insurance deals were signed on scraps of paper in a fledging Lloyd’s market where brokers and underwriters gambled their money on the safe passage of ships and cargos. The industry quickly adapted to cover the vast growth and technology that underpinned industrialisation and has kept pace with a rapidly changing and ever more technical world since. So are people such as Ryan and McGavick wrong? Are they just impatient with an industry that is not, in fact, too far behind? Or are they right? And, if so, what has changed in an industry that has been fantastic at dealing with new risks? The answer could lie in the structure of the modern insurance industry and the regulatory foundations that now underpin it. For a long time, the industry was associated with genuine risk-taking. As such, individuals have made and lost a lot of money. But with most of the bigger companies listed these days, and both shareholders and regulators watching their every move, perhaps it is more difficult for modern companies to innovate. The history of the industry is littered with insurers and reinsurers brought to their knees after moving into lines of business they did not understand. Would modern companies ever get as far as taking such risks, given the checks and balances in place? In part at least, I suspect, this is the case. The expectations of shareholders and quarterly earnings announcements also force companies to commit their best people to the lines that are the most profitable. The research and development of new solutions to new risks must take a back seat. The regulatory dilemma is a different dynamic. Insurance companies should, of course, be properly

regulated and consumers protected. But in the more sophisticated business to business world of reinsurance, this need not be necessary. The battle lines are drawn in terms of how reinsurance is regulated in different countries going forward. For the sake of innovation and economic progress, it should be light, based on trust and allow for risk-taking and innovation. Ryan and McGavick have valid arguments. Many insurers and reinsurers are stuck between a rock and a hard place when it comes to innovation. Yes, the industry should take this seriously and invest in solving new risks. But the message should be directed equally to shareholders and regulators—there are battles of understanding the industry must look to win on both fronts. Regards, Wyn Jenkins Editor

© Intelligent Insurer 2012

11/9/2012http://www.intelligentinsurer.com/