Be like the banks: create an insurance Swift
From super low interest rates to rapid technological innovation, the re/insurance industry faces challenges on all sides. The time is right to create a real secondary market for insurance, AkinovA’s Dennis Mahoney tells Bermuda:Re+ILS.
“AkinovA can become that entity—an industry exchange, not just for ILS but for insurance and reinsurance generally.” Dennis Mahoney
Dennis Mahoney is a man on a mission. Having spent 50 years in the re/insurance industry, in a career that has spanned some of the biggest names in the re/insurance business, including Marsh, Aon and Willis, in his most recent move he has become a senior advisor at AkinovA.
Mahoney believes that the Bermuda-based trading platform can help him realise a dream he has pursued for decades: the creation of a secondary market for insurance.
He has long advocated such a market. In 1997, while serving as chairman of the World Insurance Network (WIN), he worked on what he describes as the insurance equivalent of Swift—the bank-owned, interbank messaging platform that revolutionised trade settlement and reconciliation between banks.
“Many years ago, the banks recognised that the processing of trades and transactions is a commodity,” explains Mahoney.
“There is no real or sustainable value added in the process, hence the creation of Swift, which has been a huge success.” He believes a similar idea, applied in the insurance industry, could be revolutionary.
“If you are the head of risk for a company, you have to deal with many risks that are not part of your core competences,” explains Mahoney.
“Interest rate risk, currency risk, commodity price risk—all are extraneous risks. All have deep and liquid markets that allow companies to mitigate and manage that risk.”
The risk manager does not, however, have the same ability to manage insurance risks. Businesses typically hold multiple policies with multiple carriers, covering a range of different exposures, but no broker, however professional, can guarantee to the client that there are no gaps or overlaps in coverage.
“More crucially, insurance markets are generally neither deep nor liquid,” he says.
Swift is not the only example of competing institutions working together to build improved infrastructure for the greater good. Credit card companies Mastercard and Visa have also collaborated to compete, he adds.
Great ideas never get old
Mahoney recognised the need for something similar for the insurance industry way back in 1997. He was not alone, he says. “The management of the major brokers have long believed the insurance industry should create its own version of Swift,” he says.
However, the WIN initiative did not come to fruition. “Everyone supported it except Lloyd’s, which wanted its own unique system,” he recalls.
“Lloyd’s saw it as a broker power play. The initiative never went anywhere and the work we had done was eventually passed on to ACORD.”
Now, Mahoney sees an opportunity to revive the idea with AkinovA, which has been a vocal advocate of the same idea.
“My job is to raise awareness about the inefficiencies in the insurance market and promote the idea of an insurance industry equivalent of Swift,” he says.
“If the industry shares that vision, I believe AkinovA can become that entity—an industry exchange, not just for insurance-linked securities (ILS) but for insurance and reinsurance generally.
“It would enable brokers and their clients to take business directly to the capital markets, as well as the traditional markets of course.”
With Bermuda already the global capital of ILS, and home to AkinovA, this would reaffirm its central role in the re/insurance industry.
“There are only two true insurance markets in the world that really matter: London and Bermuda,” says Mahoney.
“No other markets come close to those two. If London is not willing to engage with AkinovA, Bermuda will, and it will run ahead. As with ILS, London will then be following.”
Despite Lloyd’s having played a central role in scuppering his previous efforts while at WIN, Mahoney does not write off its ability to embrace change and work with AkinovA alongside Bermuda.
“In Bruce Carnegie Brown, John Neal, Fiona Luck and Vicky Carter, Lloyd’s has a great team—the best it has ever had,” he says.
“It has tremendous bench strength. If they cannot drive through change at Lloyd’s now, it will never happen.”
Having tried, and failed, to deliver such an initiative in the past, Mahoney could be forgiven for being defeatist. He admits the process will be highly disruptive, leaving many players disintermediated. With many large institutions invested in the status quo, change will be difficult.
Some might prefer to reflect on a 50-year career while devoting more time to fishing or gardening, but Mahoney remains passionate about his cause.
“It is the client who should decide who adds value here,” he says. “Every institution in this industry should be asking itself what value it is adding.
“Vested interests are always going to fight change, and this may be because they know that actually they aren’t adding value and there is no place for them in a more efficient market.”
Things are different this time
Mahoney draws confidence from the rapid pace of technological change sweeping the industry, which he is confident will make this time different from his experiences at WIN.
Having worked with ChainThat, another insurtech provider that uses distributed ledger technology (DLT) to reduce frictional costs in the insurance industry, he has seen the transformative potential of technology at first hand.
This also plays into the generational shift in which a generation of baby-boomers is coming to the end of their careers. They are being replaced by younger people who are used to technology infiltrating all aspects of their lives and who want to trade electronically.
“DLT is evolving rapidly and offers the perfect infrastructure for this kind of venture to be built on,” he says.
“Meanwhile, the industry faces a plethora of existential challenges, from super-low interest rates and low profitability to competition from insurtechs.”
The challenges do not stop there. Mahoney points to asbestos claims which are still coming in, and increasing demand for products to manage pollution and climate change exposures, which re/insurers will need to find capacity for.
“Then there are the new issues that have been exposed by COVID-19, most notably around business interruption exclusions,” he adds.
The interest rate environment is a particularly acute challenge for re/insurers, says Mahoney, making the need to modernise insurance’s infrastructure equally severe.
“Interest rates are at least as important a driver in this as COVID-19,” he says. “Many people predict rates will fall even further, which leave re/insurers under-reserved at a time when capacity demands mean they need to increase the value of their reserves.”
The interest rate environment also ensures greater demand for insurance products among capital markets investors. With few expecting rates to be raised any time soon, investors are hungry for higher-yielding opportunities, which should guarantee interest in even relatively high-risk products.
Mahoney points to consolidation as another reason to be optimistic. “The industry is consolidating rapidly and that also helps because bigger re/insurers means more sophisticated re/insurers,” he explains.
He believes that a single event could set off the chain reaction that could culminate in the creation of a secondary market for insurance. “It could be just one really bad hurricane season, or one devastating earthquake, which could force the industry’s hand,” he says. “Once things start to happen, I think the current system could unravel quite quickly.”
There is of course no guarantee that AkinovA will be the platform that the industry coalesces around: in Swift, the banks created a new institution, rather than agreeing to support an existing private company.
As an industry collaboration, ACORD might be a more obvious comparison, given that most re/insurers are already members.
“Over the years I have suggested many times that insurers and brokers have the ideal vehicle in ACORD in which to create the industry’s Swift,” says Mahoney.
That has not happened and today, given the speed of technological innovation, it arguably makes sense for the process to be driven by an insurtech company that has won plaudits from many in the industry for its own efforts to develop a secondary market.
Mahoney certainly thinks so. AkinovA’s challenge is to be ready, and he is keen to ensure it is.