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McGavick: insurance industry must adapt

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Seeing opportunity: Mike McGavick, CEO of XL Catlin, speaks at the ILS Bermuda Convergence 2017 event last week (Photograph supplied)

Rapidly evolving risks have rendered the insurance industry less relevant, according to Mike McGavick.

But the chief executive officer of XL Catlin believes the industry can re-establish its importance in the global economy, if it cuts costs, develops better products through greater risk insight and builds more trustworthy products.

Mr McGavick gave the keynote speech at the conclusion of the two-day ILS Bermuda Convergence 2017 conference, the fifth staging of the event, which attracted a record 350 delegates from 12 countries.

“Our sector is becoming less and not more relevant, as things stand today,” Mr McGavick told delegates at the Hamilton Princess.

“Risk is mutating at a rate we’ve not seen before. Our industry is like a car driver always looking behind him or herself.

“We’re always asking ‘what does the past tell us about the risks ahead?’ And when you think like that you drive off cliffs.

“We have a backward-looking industry with rapidly mutating risk. This is a bad match.”

Insurance had historically grown in lockstep with economic growth, he said, but that correlation had broken down.

In the decade from 2007 to 2016, while global gross domestic product grew at 3.5 per cent per annum, property and casualty insurance as a percentage of economic activity had dropped from 3.1 per cent to 2.8 per cent.

The main reason for that decline was that many of today’s value-creating things were intangibles — like code, reputation and ideas — rather than the easier-to-insure physical goods that dominated value in the past, he argued.

To win back its relevance, the industry had to cut costs.

“There’s something wrong with a system that does something this important and on average gives back about 60-something cents on the dollar, with all the rest of it disappearing into various kinds of costs,” Mr McGavick said.

“For consumers, as a pool, this doesn’t seem like a very good trade — and in this day and age, it’s an intolerable trade.”

No one liked buying insurance and adding to the poor consumer experience was that the format of the product was “inherently distrustworthy” he said. Insurance policies were, for most people, lengthy and unreadable contracts that the buyer could be sure would “work in favour of the house and not me”.

“This is our product, so why would we think that this would be a happy moment in this person’s life and therefore, why wouldn’t we think that cost has to be driven out of the system relentlessly?” Mr McGavick said.

Insight was key to understanding risks better and lowering costs, Mr McGavick said, and while technology was improving insight, there was a long way to go.

Trust was the third issue to address, he said. “When we can get products that work on third-party, independent, verifiable triggers, instead of being caught up in an analysis in centuries of torque claims, there is inherently a bit more trust in the system,” Mr McGavick said.

“In many, less mature economies in the world, there is massive distrust of the insurance mechanism itself. Any business innovation that attacks the trust problem creates more opportunity for breakthrough than any other idea.”

Mr McGavick highlighted several areas in which breakthroughs should be targeted.

One was changing risk pools. “Most of the risk pools we work with today have been around for centuries, simple notions that can be traced back to Lloyd’s coffee house,” he said, adding the sector had been slow to adapt.

He spoke about the “internet of things”, how machines communicate with each other and the connectivity between them changing the nature of risk. The machines themselves could add insight for insurers and in turn create the opportunity for dynamic pricing.

Under-insurance was also a great opportunity for the industry to put more of its capital to work, while playing a more meaningful role in society.

“You hear people say ‘there’s too much capital in the insurance industry and alternative capital makes it worse’,” Mr McGavick said. “My attitude is I always want to be in an business that’s attractive to capital. We just need to learn how to apply it right — that’s my job, because we create risk pools.

“What we are not doing is solving enough problems and getting after flood [underinsurance] could get us on the way to becoming a capital-deficient industry, which could be a lot more fun than where we are today.”

On average, only about 30 per cent of the economic losses in a natural disaster are covered by insurance — in the developing world, it is much lower. “In my view, that’s us not doing our job,” Mr McGavick said. “Usually because we lack insight.”

Cyber-risk was another area of opportunity, which he described as a scary risk for an insurer, because of connectivity.

“If whole big systems go down, it’s very hard to create pools of risk big enough to pay for an event like that,” Mr McGavick said.

Some governments around the world were seeing cyber-risk as the largest risk society faces — and they were getting very little help from the insurance industry right now, he added.

More data was becoming available on what happened when cyber losses occurred, helping insurers to tread carefully into this area.

Barriers insurers would face included that liability theory has not evolved with new risks. He gave the example of driverless cars and who would be to blame when something went wrong. Governments would need to write new laws to keep up with the changing world.

Another potential barrier was privacy law, which in some cases, would be a boundary between insurers and the information they needed to improve risk insight.

“Governments should want us there in a big way,” he added. “Why? The history of the property-casualty insurance industry is one of wealth transfer from our shareholders to society.

“This is not an industry that, over time, has made its cost of capital. Individual players have, but not the sector. That is a wealth transfer. If I’m a member of society, I want to see more of that, not less.”

XL Catlin CEO Mike McGavick