Safe and forward-looking: Bermuda post-COVID-19

COVID-19 has highlighted new possibilities and challenges for the re/insurance industry. David Brown of EY Bermuda gave Bermuda:Re+ILS his view of the future.

“The current environment confirms the relevance of the industry and the importance it has for our communities, businesses, citizens and the broader world.”
David Brown, EY Bermuda

Bermuda’s handling of the COVID-19 pandemic has drawn plenty of praise. From the government’s decisive and clearly communicated response to the re/insurance industry’s ability to switch almost seamlessly to new working models, the Island has stayed in good shape and re/insurers have remained in business throughout. But what does the re/insurance landscape look like now, and what role will Bermuda play in a drastically altered future?

Through its four service lines: assurance, consulting, strategy and transactions, and tax, EY helps its clients to capitalise on transformative opportunities, and there is no doubt that the re/insurance industry is currently facing just such an opportunity.

In EY’s new report, “NextWave Insurance: large commercial and reinsurance–How insurers can redefine the possible on the journey to 2030” the company outlines its optimism about the future of large commercial re/insurance.

We asked David Brown, senior partner of EY Bermuda and insurance leader of the EY Region of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands, to elaborate on this view, addressing the impact of COVID-19 and the way Bermuda has responded.

“Despite the unprecedented challenges related to COVID-19, we are bullish on the future of insurance and reinsurance.”

As we return to work, what are the most important changes re/insurers need to make?

We live in a transformative age. EY’s NextWave Insurance studies highlight that traditional insurance business models are being challenged by new thinking, new competitors, new ways of working and new challenges.

Insurers are under pressure to change now. Insurance leaders need to seize the upside of this disruption and anticipate and adapt to these emerging needs. The time has come for one of the oldest industries on the planet to reinvent itself. The re/insurance sector has struggled with sluggish growth and flat margins for far too long.

Attracting and retaining the best talent is another key focus for the re/insurance industry. A poorly articulated social purpose and an out-of-date image contribute to the industry’s struggles to attract and retain the right talent, including data science, analytics, and data modelling professionals.

Insurers are also looking to hire digital-first strategists, as well as to build more diverse and inclusive workforces. Insurers must equip their people and teams for remote working and adapt their cultures accordingly.

Despite the unprecedented challenges related to COVID-19, we are bullish on the future of insurance and reinsurance. The re/insurance industry, after coming through a long soft market, is seeing premium rate increases that underwriters have not seen for 15 years.

Although we are clearly in uncertain times, and at times it appears sharks are in the water everywhere, with social inflation, expanding coverages and new risks, the current environment confirms the relevance of the industry and the importance it has for our communities, businesses, citizens and the broader world.

In the report “NextWave Insurance: large commercial and reinsurance–How insurers can redefine the possible on the journey to 2030”, you say the re/insurance industry has traditionally struggled to embrace new technology and strategic, tactical and organisational change. What makes you think they can change that now?

The opportunity is significant for the re/insurance industry. By focusing on product innovation for intangible risks and targeting fast-growth markets, insurers and reinsurers can seize the huge potential upside.

Insuring the risks for intangible assets, such as brands, intellectual property, networks and experiences, and virtual supply chains, should provide significant opportunity for the re/insurance industry.

As for technology adoption, artificial intelligence (AI), machine learning, and big data will be critical to drive growth. That is especially true in pricing intangible products. It is the combination of technologies (eg, AI, machine learning and sophisticated business rules engines, blockchain, and other enabling tools) that will make the difference for insurers.

Rate increases will form only a fraction of the market growth over the next decade. Better technology and increased automation will deliver massive gains in process efficiencies and, therefore, considerable cost reductions.

More effective loss prevention will make a significant bottom-line contribution, thanks to more precise data-driven risk assessments and real-time risk visibility. Acquisition ratios will fall as direct and digital placement becomes more common. Cloud-based and blockchain-enabled platforms will connect customers and carriers more closely than before.

In terms of expense ratios, automation will eliminate many time-consuming manual activities. Distributed ledgers, cloud technologies and AI will enable straight-through processing for simpler and homogenous risks, as well as helping to lower headcounts in administrative roles across the front and back office.

Blockchain and the cloud are vital technologies for improving ratios and unleashing growth. By streamlining the matching of capital and risk, increasing visibility into changing risks, and enabling smart contracting and automated loss resolution, blockchain is already proving itself to be a transformative technology for insurance.

Beyond releasing capital tied up in on-premise data centres, cloud environments simplify collaborations with external suppliers and can help streamline product development and launches.

Do you expect to see a significant number of the larger players struggle to adapt to the changing market and lose market share?

It is exciting to see the recent success of some of the insurtech companies, for example Lemonade’s initial public offering and rumours of others in the sector. These companies will challenge historical norms and drive our industry forward.

We are seeing many companies using AI and real-time underwriting and pricing to insure risks for just the period that the individual or company needs the coverage.

As to replacing significant players in the industry, I always go back to the two most important things for re/insurance to be successful: talented underwriting and access to capital.

I believe the more likely scenarios will be a limited number of insurtech companies making it on their own and becoming major players, but the more substantial outcome will be the insurtech companies partnering with large existing players, those with strong balance sheets and reputations, or seeing the larger players acquiring insurtech companies that will accelerate the traditional re/insurer’s digital agendas.

The other key wildcard is the opportunity for one of the significant technology companies that have so much data that could assist in underwriting and would have natural distribution channels with access directly to the customer, especially on the individual retail area.

“Today’s lean and tech-fuelled organisations place more value on preventing losses than on transferring risks.”

Which specific areas of the business do re/insurers need to focus on as their top priority?

Given how fast—and fundamentally—their customers are changing, re/insurers must develop new offerings. Without new products and new ways to serve customers, insurers will struggle to seize the top-line growth opportunity that sits before them.

EY NextWave research confirms that businesses of all shapes, sizes and sectors are aiming to be more platform-like by:

  1. Building highly sophisticated and fully integrated digital infrastructures
  2. Operating on and trading through the cloud
  3. Processing transactions frictionlessly
  4. Innovating continuously, largely via collaboration and co-creation with suppliers, partners, and customers
  5. Generating scale and expanding their footprints to create diverse revenue streams
  6. Enhancing and personalising customer experiences
  7. Relying on flexible sourcing and contingent workforce strategies; and
  8. Participating in emerging ecosystems to support risk protection and loss prevention needs.

In the past, the largest businesses were built on mostly tangible assets and insurers priced commercial risk based on the number of those assets, as well as a firm’s revenue and headcount.

Pricing for intangible risks will be predicated on a fundamentally different set of assumptions than traditional pricing models. Today’s lean and tech-fuelled organisations place more value on preventing losses than on transferring risks.

They will increasingly expect insurers to bring forward-looking insights to them so they can make policy adjustments proactively. Thus, standard language and traditional policies may not fit the unique situations of individual companies.

Similarly, annual renewal cycles may not be frequent enough to reflect constantly evolving risk profiles, especially those related to virtualised supply chains or reliance on third parties.

Tomorrow’s customers want policies that are tailored to more accurately reflect their actual assets and operations. Policies will need to be more flexible and usage-based. Insurers need to find new ways to quickly underwrite and price emerging risks (such as pandemics, cyber attacks and climate change), and carefully monitor client needs going forward.

Although not every company will be a unicorn, consider the implications of one of the bigger stories in commercial insurance in the last few years. The world’s biggest peer-to-peer property rental company moved the largest-ever real estate portfolio into the commercial insurance market.

The most astonishing fact was not necessarily the amount of premium, but that the customer doesn’t own any property—its assets are almost entirely intangible, meaning risks have shifted from being primarily asset-based and first party-oriented to being third party-oriented and liability-based.

Does Bermuda face any particular challenges, or have any advantages or disadvantages?

Bermuda is the leading jurisdiction related to risk transfer and we expect Bermuda to continue to play a prominent role going forward. You can see this in recent announcements for startups in the traditional markets as well as the insurance-linked securities space—Bermuda continues to be the best location to form a re/insurance company.

Bermuda is nimble in responding to market needs with a focus on collaboration and speed to market. Bermuda is a well-respected jurisdiction with a strong regulator in the Bermuda Monetary Authority as evidenced by the Island’s recognition as Solvency II equivalent.

In addition to speed to market and Bermuda’s strong but agile regulation, Bermuda has the additional advantages of strong talent in the areas of underwriting, actuarial, reinsurance accounting, and service providers. Its close proximity to major markets in the US is also a clear advantage, and during the COVID-19 crisis, it is likely one of the safest places in the world, with virtually no active cases.

How does COVID-19 compare to other challenges the re/insurance industry has faced?

COVID-19 will be a significant catastrophe event for the industry. We have always talked about the risk of a global pandemic, but it has been a century since we have had an event of this magnitude.

There are two key challenges with COVID-19 or a similar pandemic. First, unlike most catastrophe events, it is affecting almost every person and business in the world, in contrast to an impact on a specific geographic location such as from a hurricane, tornado, earthquake or wildfire.

Perhaps the only thing you can compare it to would be a global cyber event that impacts everyone, especially as our reliance on the internet and cloud computing has become a true necessity.

The second challenge is the fact that many governments are trying to expand the coverage of policies to cover losses that were clearly not contemplated in the policy wordings. Certainly, there were event cancellation policies that were covered, but most of the business interruption coverages required a property loss to trigger the business interruption coverage—which has not occurred.

Although initial court rulings have generally supported the industry’s positions, the path forward is not clear.

In an industry roundtable hosted in late spring by EY, panellists discussed how the pandemic has introduced new risks and accelerated others. Third-party risk is now much higher, given the transformation of operating models, balance sheets and the supply chain itself.

Assessing third-party resilience is critical; traditional cyber risks now have a COVID-19 twist. Remote working has increased these risks and vulnerabilities.

EY also hosted a roundtable for chief information and technology officers in the summer and almost unanimously they agreed that the value of recent IT investments was reflected most immediately in the virtually overnight transition to remote working—especially for companies that did not previously have a work-from-home culture. These transitions went off without a hitch, at least on the technology side.

How different will re/insurance workplaces look going forward?

It is difficult to predict the future in the middle of a global pandemic, but I believe it will change the way we work. From the C-suite roundtables we have hosted, it was clear that COVID-19-induced working from home has accelerated digital transformation across the industry. We heard that people that were previously reluctant to use certain technologies were forced to use them and now will never go back.

Although collaboration tools such as Microsoft Teams and Zoom have become a part of everyday activities, we still believe that much of the personal interactions on the underwriting side will resume, but the industry has learned that much can be accomplished in a different and more efficient way, which will be a focus as the industry has struggled with reducing expense ratios for many years.

Speaking of expense ratios, we believe companies will look differently at their real estate needs and the recent stay-at-home experience will be a catalyst to drive flexible work arrangements for many companies.

I do feel that the pendulum may swing too far that way at first, so companies will need to focus on maintaining their cultures if more employees are working from home. Companies will also have to further invest in defences against new and increased cyber risks.

The views expressed by the author are not necessarily those of the member firms of the global EY organisation. David Brown is senior partner of EY Bermuda and Insurance Leader of the EY Region of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands. He can be contacted at: david.l.brown@bm.ey.com

Image: ElementsEvanto.com / ivankmit, ElementsEvanto.com / 2020Photos

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September 2020

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