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Jean-Jacques Henchoz, Chairman of the Board of BMS Group and former CEO of Hannover Re, gave an impassioned plea for the reinsurance industry today to make inroads into narrowing protection gaps, seeing innovation, technology and a culture of experimentation as key, while the capital markets are a vital tool to achieve this.
Speaking at the annual PwC breakfast briefing in Monte Carlo this morning, Henchoz’s comments were a refreshing and realistic scorecard for the industry’s efforts in narrowing protection gaps, as he highlighted that in fact they continue to expand as uninsured losses rise in many cases.
He encouraged a reinsurance industry embrace of the capital markets and alternative capital, seeing it as having the potential to support the traditional industry’s efforts to make inroads on protection gaps.
Which comes in stark contrast to the comments from some major reinsurers, as we reported earlier today.
Henchoz explained the problem the industry faces is one of reputation risk, as re/insurers have made a lot of noise around the protection gap topic over the years, but evidence of narrowing is not especially apparent yet.
Looking back to conversations he has had, Henchoz said, “I was expressing a concern about the future relevance of the reinsurance industry and the reason for that is that I felt that these protection gaps were on the increase. I felt that over time, if you don’t react as an industry, it would be increasingly challenging for us to have the reputation we need to do our business.
“I do believe that as an industry, and really across the board, we really need to stretch ourselves on innovation. We have to up our game as an industry, to really show, demonstrate, that we can push the frontiers of insurability.
“And then if we are in that position, I believe, frankly, that we have a good set of arguments to tell other stakeholders that we’ve done our job.”
Henchoz then highlighted that the natural catastrophe protection gap, between economic and insured losses, hovers around the 60% mark globally.
“So almost two-thirds of losses for large nat cat events are not covered by insurance. So clearly that’s at the core of the reputational risk I was mentioning,” he explained.
“In emerging markets generally, the insurance penetration remains persistently low compared to industrialised economies, and this is a significant opportunity for the reinsurance industry.
“It will improve, of course, with the emergence of middle classes. But we’re still at a point in time where there is a very significant opportunity to tap into.”
Henchoz believes the industry may face a crisis of credibility if it fails to demonstrate progress and fails to show that it is truly embracing the innovation opportunity, his comments suggest.
He continued, “I think as much as we need to raise our voice to address these topics, I think we are becoming a bit too much in a defensive mode lately. I do believe that in order to gain in credibility as an industry, we need to show that we’re really taking innovation seriously, that we try very hard to narrow down protection gaps.
“If we do so, I think we will have a much more credible voice in this debate across stakeholders, particularly governments, who are an important part of the response here.
“It doesn’t seem that innovation, per se, is perceived as a key success factor to growth and competitiveness in our industry. At least, if I take my experience of the last 10 years when I spoke to analysts, there were a few questions on innovation, but not that much. And I dare say that probably the valuation of reinsurance companies has not been driven materially by innovation.”
One area where the industry has the opportunity to both stretch itself and demonstrate true innovation, is around alternative reinsurance capital and insurance-linked securities (ILS), Henchoz believes.
In fact, ILS and the capital markets were highlighted by the senior industry executive before anything else, as innovative tool that can assist the industry to really make more progress on protection gaps.
“We have some good cards to play, nevertheless, and one card to play is very much the alternative capital market. Which cannot be so easily separated from traditional reinsurance, there is a lot of cooperation,” Henchoz explained.
Continuing to say that, “I believe that this is a market which is not only here to stay, but also a market which will expand, largely now in the nat cat space, the ILS market has grown by over 10% year on year, and it supplies roughly 15% to 20% of global capacity. So not bad.
“It provides diversification, liquidity, flexibility, and this beyond the traditional balance sheets. But as importantly, I think the alternative market continues to look for expansion outside of the nat cat space, and this is, for me, very, very good news.
“I do hope that in the next five to ten years, we are going to see the emergence of a cat bond market in cyber which will be needed to create capacity to support the market.
“So we need to really make sure we can use the power of the capital market for innovation.”
Henchoz further called for action during his speech today, saying, “Without meaningful action to close protection gaps, the reinsurance sector risks losing its societal license to operate, and with it, its recognition as a vital shock absorber for the global economy.
“This is about shaping the future of risk, as opposed to letting it shape us. Relevance must be earned.”
We need to use the power of the capital market for innovation: Henchoz at PwC event was published by: www.Artemis.bm
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