Risk selection trumps price for tier 1 players

12-09-2016

The idea that tiers are emerging in the reinsurance industry is valid, but not in the way some expect. The industry’s new class of tier 1 players are nimble, innovative, savvy in their use of technology, cutting-edge in their risk selection and have their costs and expenses under control, Kathleen Reardon, chief executive of Hamilton Re, told Monte Carlo Today.

“We may call them tier 1 reinsurers but I think a new normal is emerging in terms of the type of reinsurer that will succeed in this market,” she said. “The industry is surrounded by disruptive forces from alternative capital to new forms of risk transfer, and the high levels of capital in the industry are keeping rates low.

“For reinsurers to survive in the long term in this environment they are going to have to be a very different type of player from what we have seen in the past. They will need to embrace technology, control their costs and make better underwriting decisions than their peers. That is what a tier 1 player will look like—it won’t only be about size.”

She said that Hamilton Insurance Group, formed in 2013, has been able to shape itself in this way. From the start, chairman and CEO Brian Duperreault sought diversification, with Reardon overseeing the development of a balanced book at Hamilton Re, writing property, casualty and specialty business in equal measure. The company launched insurance operations in the US and also established a presence in Lloyd’s last year.

Through its partnership with technology firm Two Sigma, Hamilton Re has made analytics, data and risk selection a core part of the business. 

“We are very quick to respond and make decisions; we have that mindset of a start-up,” Reardon said. “We are also very open and collaborative in our culture—every voice is heard.”

She admits a strong balance sheet is important—“certain table stakes are needed to play”—but she also believes that it is these other qualities that will set the reinsurers that are successful in the future apart and allow good risk selection, a vital tool if the soft market environment becomes the new norm.

“Risk selection will become the key differentiating factor,” she said. “The market was historically cyclical but we are in a period of low rates and I am not sure the highs will ever come back.

“To achieve sustainable, profitable growth in such an environment, you need more than just expense controls, you need excellent risk selection. We believe that selection trumps price in this market. 

“It has to be based on the sophisticated use of analytics and data science and how that information is interpreted to make better decisions. The margins are now so thin that risk selection will become critical and the reinsurers with the tools and culture to embrace that approach will succeed.”

 

Diving in 

Reardon adds that diversity in the people working for reinsurers is an important part of creating this new innovative model. As one of the few women running a reinsurer, she is well placed to comment on the difference this can make.

“When you are starting a company with a blank sheet of paper, having a culture that is open to diversity in terms of people and ideas is vital,” she said.

Hamilton is heavy involved in several industry initiatives that promote diversity including Insurance Careers Movement (ICM), established earlier this year, which has Duperreault as its executive lead.

He has been joined by Inga Beale, CEO of Lloyd’s, Dan Glaser, president and CEO of Marsh & McLennan Companies, and Mike McGavick, CEO of XL Catlin, among other industry leaders.

Reardon says ICM was prompted by the growing talent gap emerging in the US, with baby boomers retiring, and by millennials’ lack of interest in insurance as a career. Its primary focus is attracting millennials to the industry and changing perceptions of insurance as a dull and purposeless career choice. “We need to get more people of that age group joining the industry,” she said.

Reardon is also involved in the Dive In festival, held for the first time last year at Lloyd’s, driven by Beale’s desire to enable diversity and inclusion in the market. The festival has expanded to 20 cities and countries, including Bermuda where Reardon is executive lead. The Bermuda Dive In programme later this month will comprise seven events—the most anywhere in the world outside London—and include a number of CEOs from Bermuda’s reinsurers.

This story was first published on Intelligent Insurer. 

Kathleen Reardon, Hamilton Re, Monte Carlo Rendez-Vous 2016, Bermuda, Europe

Bermuda Re