Duperreault: Reinsurance between two worlds
The reinsurance sector is in the throes of transformation and its current position has been likened to being between the digital and analogue worlds.
That was the analogy used by industry veteran Brian Duperreault, chief executive of Hamilton Insurance Group, as he gave his views on the challenging environment the sector finds itself in.
He was one of three leading executives who expressed thoughts on the state of the industry at the Bermuda Reinsurance Conference's signature “view from the top” panel discussion.
In recent years the sector has faced disruption on a number of fronts including pricing, excess capital, and the growth of alternative capital investment
However, as tough as things have been, a mood of optimism permeated the opinions of Mr Duperreault and fellow panellists Michael Butt, chairman of Axis Capital, and Kevin O'Donnell, chief executive officer of RenaissanceRe.
Inflows of capital, both traditional and alternative, and the climate for mergers and acquisitions, are all indications that reinsurers need to reform themselves, according to Mr Duperreault. “We should think about what the insurance company of the future should look like,” he said.
“We are between the digital and analogue worlds. The digital world is better at putting things out quicker and cheaper,” he explained. “And we have this alternative capital chasing old risks. What we need is this new money chasing new risks.”
Many of the 200 industry professionals attending the conference, which was sponsored by PwC Bermuda and Standard and Poor's Ratings Services, attended the opening panel discussion on Tuesday at the Hamilton Princess.
They heard about challenges presented by the digital age where new opportunities are to be found, ranging from Uber transportation services, to Airbnb, big data, cyber risk, and emerging markets. At the same time, there are issues weighing on the sector, such as the soft pricing environment, excess capital and high expense ratios.
With 50 years of experience in the industry, Mr Butt lightheartedly referred to himself as “Mr Analogue” in relation to Mr Duperreault's earlier analogy. He said: “Things are difficult and it's going to be a slow recovery, but it is going to recover.”
Mr Butt also said there were signs that the era of banks subsidising debt and punishing savings may have bottomed out.
Another concern was the high level of expense ratios within the industry. Mr Butt noted that, while no insurance company has gone bankrupt, expense costs were gobbling up the same percentage of revenue as they had 50 years ago, despite efficiency savings and the advancement of technology. Some of this has been due to increased costs related to greater regulation.
“When profit margins decrease, expenses become more important. In the past 50 years the expense ratio has not changed,” he said.
In the first quarter of this year total reinsurer capital hit an estimated $580 billion globally. When asked by The Royal Gazette what he thought about the level of excess capital in the sector, he replied: “Is it a good thing? It gives us the capacity to take more risk and it is being well applied.”
More capital flowed into the insurance market during the era of low interest rates as investors sought better returns, but acknowledging that the winds of change are never far away, the Axis chairman said that inward flow of capital would likely moderate once interest rates begin to rise.
Mr Butt said the industry was consolidating and stabilising and he has “a good feeling” for the future.
Giving his perspective on the sector, RenaissanceRe's Mr O'Donnell, said: “Those looking from the outside see good returns; we see it differently.”
The lengthy spell without significant insured catastrophe losses impacting the sector will eventually come to an end, and once things “return to normal” he said a more accurate picture of the relative strength of the industry will emerge.
“I see tremendous innovation taking place. We will become smarter about where risk and capital enter the frame,” he said.
“We should work hard to continue to facilitate investment,” he added, mentioning mortgage risk, cyber risk and California earthquake risk among areas of opportunity.
For Mr Duperreault, the speed of change is a significant factor. Whereas 100 years ago industry changes might have evolved over the course of a decade, that is not the case today. “We have five minutes the way things are going. The digital world has shrunk the timeframe,” he said. “We need to continue to evolve, adapt and adjust.”
Arthur Wightman, PwC Bermuda territory leader and insurance leader, moderated the panel discussion. He believes an air of optimism in the sector was reflected in the panellists' opinions.
“The big thing is the challenging environment. There are so many factors, such as the speed of evolving technology, that are factors in the minds of the insurers and reinsurers,” he said.
Mr Wightman said one of the reasons he feels upbeat is because the 17 sustainable development goals identified by the United Nations represent an opportunity for the insurance industry to collaborate in good business growth while helping to solve global challenges.
He added: “The amount of reinsurance that is needed in the world is growing. There are gaps to be filled in the emerging economies, and opportunities are being identified.”
And he said Bermuda was well positioned to lead the way, having historically played a key role in leading market innovations.
“Bermuda is a seabed of innovation. It has fostered innovation, and for that a great deal of credit goes to the stakeholders and to our regulations, both in a practical and risk-focused way.”