The numerous challenges the insurance industry faces mean that innovation is critical to tackling them. Rob Bentley, Chief Executive Officer of Guy Carpenter's Global Strategic Advisory, describes how Guy Carpenter is helping its clients manage these challenges—especially the conundrum of InsurTech, in an interview that appeared in Intelligent Insurer magazine.
Rate pressure, lower investment income, emerging risks, evolving technologies, new capital sources and regulatory changes are creating an environment in which earnings and growth are impacted. How do companies find opportunity in such conditions?
The short answer is: by innovating. Gone are the days of cyclical pricing and commoditized risk products. Companies have to find new technologies and channels to match the most efficient capital to their risks, increase operational flexibility and optimize return on risk capital.
New sources of information are creating data that didn’t exist before, reshaping how we understand, access and price risks. Advanced data-mining techniques are identifying high-severity claims sooner and highlighting potential fraud. And the digitally-skilled iGeneration is entering the workforce; becoming home, auto and small business owners and influencing distribution with expectations of on-demand, real-time service. As we move past the initial disruption caused by InsurTech, alternative capital and Solvency II, companies must institutionalize new processes, platforms and business strategies to address these dynamics and offer the tailored capital advisory solutions today’s insureds demand.
II: ‘Innovation’ has become a cliché in the industry. How do companies execute it? What is Guy Carpenter doing to help clients develop an actionable game plan for innovation?
RB: Guy Carpenter is particularly focused on three areas: alternative capital. By developing a robust strategy around these areas, innovative companies can develop more flexible capital structures that allow for more complex, customized covers that meet the needs of individual clients. These carriers can rely less on equity or debt issuance to finance operations and more on capital markets and reinsurance, leveraging the balance sheet to facilitate capital-efficient corporate structures.
II: Describe Guy Carpenter’s initiatives around InsurTech.
RB: Our biggest InsurTech initiative is GC Genesis. Our clients have consistently and broadly voiced their need for a trusted partner to help them navigate the InsurTech landscape to identify those solutions most likely to help them, and GC Genesis does just that. Through strategic reviews of business priorities and operational units, we help clients articulate their current baseline capabilities in the context of growth objectives. Then, leveraging our proprietary InsurTech database of over 2,000 startups, we identify each vendor by line of business, technical function and insurance process to identify best-in-class providers who align with the clients’ objectives. This ‘fitting process’ is unique to each insurer. GC Genesis also includes the InsurTech Alliance, a collaboration between Guy Carpenter and Numerati® Partners and its ecosystem of world-class academics, scientists, and engineers working to identify and assess new technologies for insurers. Ours is not the only industry struggling with technological change, and banks have discovered that collaborating with other stakeholders on research saves money and produces better results. Learning from this, the InsurTech Alliance brings innovative insurers together with technical experts for deep dives on technology offerings and capabilities. Members can access in-depth scientific and technical insights, as well as proofs-of-concepts and pilots, commercial contracting support and technical assistance.
II: What does an insurer gain by participating in GC Genesis?
RB: Simply, a streamlined, concise understanding of the InsurTech landscape and technical support to stress-test and deploy new platforms at a fraction of the go-it-alone cost. Guy Carpenter has already narrowed the field of fintech providers to slightly over 2,000 insurance-applicable startups that add value to a particular line of business, a technology such as machine learning or an insurance process such as distribution. Our knowledge of a client’s capabilities and goals gained through the fitting process combined with our risk management expertise then allows us to further trim this list and identify those vendors most likely to advance the client’s strategic goals.
With roughly 150 to 200 new startups emerging every year, many of which may fail, the challenge is to find the right offerings for your company. There is execution risk associated with licensing a new product or service, and nothing is more expensive than technology that doesn’t work. Carriers need an InsurTech advisor uniquely dedicated to their needs — GC Genesis provides that.
GC Genesis can help regardless of where a company is in its InsurTech journey. For firms looking for an actionable roadmap to accelerate their innovation agenda, the fitting process imparts our risk and InsurTech expertise to help initial planning and identify potential partners.
For companies looking to improve operations and results using insurance technologies, the InsurTech Alliance provides access to technical research and expertise. Companies can also participate in both the fitting process and InsurTech Alliance, or become an InsurTech Alliance Founder for concierge service and training and enhanced access to Numerati Partners’ curated technology ecosystem for greater input on the direction of future innovation.
Take an insurer with slow claims processing and poor claims audit scores seeking to improve transparency, speed up payments and reduce costs. Through the fitting process, Guy Carpenter identifies their current systems as non-interoperable, legacy platforms. We also note that the client’s expansion plans will likely increase claims frequency and severity.
GC Genesis suggests several vendors to help update systems and analyze claims data, and the client selects a few for further evaluation. The client then chooses to participate in the InsurTech Alliance to engage with domain expert teams conducting technical assessments of products and services, further narrowing their list to two startups offering artificial intelligence and machine learning functionality.
Together, these vendors identify bottlenecks in traditional claims audits and loss drivers in claims records, helping the client improve audit scores and payment times and enable practices to address the company’s evolving operations.
II: How are you helping clients better understand their risk profiles and optimize capital at the portfolio level?
RB: In today’s volatile market, (re)insurers are reviewing portfolios to properly allocate capital and maximize profitability under various solvency regimes. But the complexity of new regulations combined with emerging risks such as cyber and flood makes this increasingly difficult. In response, Guy Carpenter is leveraging advanced analytics to help clients use reinsurance and the capital markets rather than equity capital to support customizable solutions and improve operational flexibility to capitalize on new opportunities.
Part of our strategy in this regard is to embrace partnerships and actuarial approaches that address risks in real time. We have announced a global strategic partnership with Reynolds Porter Chamberlain Consulting (RPCC) to license and develop proprietary applications within RPCC’s Tyche software, giving us exclusive access to Tyche among (re)insurance brokers and certain other industry parties. Tyche combines a cutting-edge computational engine, the ability to process extreme amounts of data in real time, and a broad scope of solutions to deliver advanced underwriting, pricing, reserving, portfolio optimization and capital management analytics on a single platform. It expands our ability to build and deliver powerful, flexible, bespoke applications to support increasingly complex solutions and new lines of business with unparalleled speed and efficiency, and is easily scaled to support massive amounts of data, lower operating costs, and improve model runtimes. This scale is transformational as accuracy generally improves with the number of simulations you run, so there is an ever-greater need for increased analytical power to clarify dynamic risks.
Tyche supports models running one million scenarios with ease, even on a single machine, and with RPCC’s new Hive grid technology, models can now process hundreds of terabytes of data at a time.
A regional insurer ran its capital model 150 times faster on Tyche than their last-generation software, improving runtime from five hours to two minutes, and another carrier reduced its gross underwriting model runtime from two and half hours to one and half minutes.
Tyche is also interoperable, allowing Guy Carpenter to integrate data and insights from our proprietary capital model MetaRisk® and other tools with Tyche’s complementary capabilities when developing advisory and broking solutions.
Guy Carpenter and RPCC have already collaborated on a Tyche-built application to provide real-time inward and outward reinsurance portfolio analysis, which is being piloted in the London Market. The model aims to help our clients optimize their reinsurance underwriting by reflecting portfolio-level economics at the point of sale, helping companies manage aggregations, renewal strategies, return on capital and retro purchases.
II: How is Guy Carpenter improving its clients’ understanding of, and access to, the capital markets?
RB: GC Securities,* a division of our affiliate MMC Securities, has been an insurance-linked securities (ILS) leader for years. We helped the National Flood Insurance Program (NFIP) place the first-ever indemnity-triggered catastrophe bond exposed to flood from tropical cyclones, complementing its traditional reinsurance also placed by Guy Carpenter and creating a capital-agnostic risk transfer program that reduces costs, diversifies capacity and improves liquidity.
This will ultimately benefit policyholders and taxpayers and expands the private markets’ role in managing flood risk.
We also recently placed Cal Phoenix Re, the first purely wildfire-exposed bond, the first to benefit a corporate sponsor using an indemnity trigger and the first to offer coverage for third-party liability property damages. These deals represent important innovations in the ILS space and bode well for additional market expansion.
But we offer more than just transactional ILS expertise. We’re also improving access to this market and streamlining placement activities. Cerulean Re, our Bermuda special purpose insurer, provides syndicated (if required), cost-effective placement of collateralized reinsurance and private placement bonds and generates significant efficiencies while providing bespoke solutions that eliminate credit risk and ensure a transparent claims process.
Cerulean Re has placed a bond supporting a carrier’s regional catastrophe reinsurance in Texas and Louisiana, markets that traditionally use indemnity reinsurance coverage.
GC Securities has also noted rising interest in parametric risk transfer, especially among public entities, emerging markets and clients with hard-to-quantify exposures seeking fast, transparent claim payments. Such solutions are widely viewed as the best hope to address the protection gap, so we are developing a platform called GC QuakeCube(sm) to design and place off-the-shelf parametric earthquake solutions. Using underlying technology GC Securities has employed on prior catastrophe bonds, we can increase deployment of such covers by automating trigger design and capital deployment, reducing the need for dedicated analytics for each transaction.
GC Securities used this technology for FONDEN, the bond benefiting the government of Mexico that verified a full-limit payout within five weeks of the Chiapas earthquake in 2017—one of the fastest default confirmations in the market’s history. By partnering with capital providers in advance and using an electronic placement system, placements will become more efficient and less costly. GC QuakeCube also increases speed in the design stage and minimizes basis risk by using advanced optimization algorithms developed in cooperation with leading research institutions.
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. **Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.