Keeping a weather eye on the horizon

Data, technology, and a new generation of consumers and professionals will define the next 25 years of insurance in Asia. That was the message from the first morning sessions at the 25th Indonesia Rendezvous.

Otoritas Jasa Keuangan (OJK) Non-Bank Financial Industry chief executive Riswinandi officially got things rolling with his keynote address in which he stressed the importance of embracing technology.

“The technological leap is inevitable,” he said, adding that insurance will be overwhelmingly supplied by “tons of data” from AI, IoT, and sensors in smart devices.

He said the data sent by these devices will be used by actuarial databases to gain more insights into customer behaviour and risk profiles and would “yield better service value both for company and customer”.

McKinsey Lead for Indonesia Client Development Apung Sumengkar said insurers should not see themselves as standalone entities in the future, but rather a part of an ecosystem. He added that insurers should not to look upon InsurTechs as a threat, but potential partners to work with.

Adapting to the next generation

Mr Riswinandi also touched on how the market landscape will slowly change over the next 25 years, particularly with regard to changing demographics. Current parlance on demographic changes has focused heavily on millennials, but he pointed out that following the next quarter century, Generation-Z (those born from the year 2000 onwards) would start leading trends and force insurers to cope with their traits and characteristics.

“They are very futuristic, require personal interaction, and are even more tech-savvy than millennials,” he said. “The insurance industry should be more adaptable with their style to engage with its primary target market in the future.”

He emphasised the need for adaptability, saying that how insurers act upon disruptive changes will affect their success rate, and how fast they adjust their strategy and the involvement of proper technology will be crucial in their future business.

Taking the time to plan

When it comes to preparing for the future, Munich Re Singapore and Southeast Asia CEO James Park said people need to spend more time thinking about where the industry will be in the next 25 years, rather than dwelling on legacy issues.

He pointed out how in 25 years’ time, most people in the room would be retired and no longer working, and it would be critical to have a proper succession plan in place – embedding new skillsets into day-to-day operations, and attracting talent for the future.

The millennial’s view

The discourse on attracting future talents and leaders has predominantly seen insurers talk about how to attract millennials to come work for them. This time, two young millennials – university students who were winners of an essay competition organised by AAUI – were given the opportunity to take centre stage and voice their opinions.

Prasetya Mulya University student Michelle Tanujaya said one of millennials’ biggest concerns is that they are afraid to express their ideas as they may not be taken seriously due to their age.

Satya Wacana University student Maria Anastasya said millennials need to be taken seriously as they will be leaders of the future.

The two students also said millennials are averse to working with large piles of paper with lengthy sentences, and that going digital with more online apps would make the industry more attractive to them, and open a lot of doors of opportunity.

Honouring the past

Even with the focus on the next 25 years, there was time to honour the last 25, as Mandiri AXA General Insurance Commissioner Frans Wiyono paid tribute to the three founding fathers of the Indonesia Rendezvous – Mr Teddy Hailamsah, Mr Peter Meyer, and Mr Munir Syamsuddin.

Mr Wiyono presented video interviews with the three men as they talked about how the current iteration of the Indonesia Rendezvous came to be since its inception as the Batam Rendezvous in 1994.

Global reinsurers to rebalance their CAT exposure

By Anoop Khanna

Most of the top 20 reinsurers have chosen to increase their catastrophe exposure relative to capital to benefit from the rise in rates.

Although risk discipline is likely to prevail, global reinsurers’ greater exposure to catastrophe risk could heighten their earnings and capital volatility, said S&P in its report ‘Global Reinsurers Aim to Rebalance Their Natural Catastrophe Exposure’.

A few reinsurers have, however, stuck with defensive measures, allowing their exposure to contract further, as they had in 2018.

On average, reinsurers’ property-catastrophe risk appetite at a one-in-250-year return period rose to 29% of shareholder equity, but some reinsurers saw reductions of more than 5 percentage points.

Global reinsurers continue to have very strong capital adequacy, which is providing them with a cushion against catastrophe exposures, despite the fact that insured Nat CAT losses were the highest on record in 2017 and the fourth highest on record in 2018, said S&P citing statistics from Swiss Re’s sigma research.

Nevertheless, the report pointed out that losses from natural catastrophes wiped out earnings for five of the top-20 reinsurers in 2018.

Magnitude of 2018 losses pushed up prices for 2019 renewals

“The magnitude of the 2018 losses – about 50% higher than reinsurers would expect in an average year – also helped push up prices at the 2019 April and June/July renewals,” the report said, noting that property catastrophe rates increased by 15%-25% on loss-affected accounts.

The costliest event in 2018 – typhoon Jebi – has seen high loss creep which has affected reinsurers’ earnings for this year. At the end of 2018, the industry had estimated losses from Jebi at $6bn; by the first half of 2019, losses had been revised up to about $15bn, making it the most-costly Japanese typhoon on record in terms of insured losses.

Alternative capital growth however has paused

Meanwhile, the growth of alternative capital seems to have slowed down, at least temporarily, the report said, noting, however, that this has not materially shifted reinsurers’ retrocession strategies.

Although the retrocession market has seen price hardening with significant rate increases, its use by primary reinsurers has been flat, the report said.

“As of 1 January 2019, insurers were choosing to reinsure about half of their one-in-250 exposure, on average,” S&P said. Further rate hardening could lead global reinsurers gradually to cede less of their exposure to the retrocession market.

Difficult strategy if the cycle turns

Indications that reinsurers are relaxing their underwriting discipline remain weak, however, and reinsurers will face difficult strategic decisions if the cycle starts to turn. Overexposure to CAT risk could adversely impact their balance sheet and earnings, although underexposure would cause them to miss out on the higher returns that the property catastrophe space might offer.

Needless to say, each reinsurer will need to find the right balance.

Indonesia afflicted by severe floods in 2019

Heavy rainfall has caused severe flooding in parts of Indonesia this year, affecting tens of thousands of people across the archipelago.

Earlier this year, South Sulawesi and the Jayapura Regency in Papua were struck by floods as a result of torrential rainfall, resulting in 68 and 113 fatalities respectively.

The January floods in South Sulawesi impacted 10 regencies or cities and affected 5,825 people, with 2,694 houses and 11,433 hectares (28,250 acres) of land being inundated, according to the Indonesian Board for Disaster Management (BNPB).

South Sulawesi governor Nurdin Abdullah estimated that financial damages in Jeneponto Regency alone will be in excess of IDR100bn ($7.03m).

Later in March, the Jayapura floods displaced over 11,000 people and damaged about 11,725 households, in addition to public facilities and infrastructure.

Notably, Sentani’s Adventist Doyo airstrip was affected. Damages at the airstrip were estimated to be around IDR454bn.

The winning formula for a reinsurance broker in 2025

Willis Re International’s James Vickers predicts what a successful broker will look like in the future.

Over the last 20 years, reinsurance strategy has moved from being largely an underwriter-driven decision process to being a C-suite decision. Successful reinsurance brokers have navigated this change in buying behaviour by developing deeper insights into the broader issues relevant to the C-suite that their clients are facing.

The challenges that the managers of (re)insurance companies are facing are multiplying and complex, although they can be broken down into a number of overarching themes.

Emerging themes

First is capital; both its sources and the different requirements of alternative sources of capital.

Second is access to risk, which encompasses increasing insurance penetration, client engagement, client value and all aspects of distribution.

Third is increasingly complex compliance and regulation requirements from regulators, rating agencies and a range of other stakeholders including shareholders and boards of directors.

The fourth relates to operational excellence and efficiency, covering aspects such as underwriting, claims management, portfolio optimisation, digitisation strategies, analytics and cost reduction.

Finally, the growing focus on the purpose of insurance and its role in wider society, principally its ability to manage risk at the same time as helping to promote and support more sustainable practices.

New sources emerge

Adding to the challenge of excess capital is the fact that some of that capital is no longer just coming from traditional equity or corporate bond investors but from other sources such as pension funds with different investment profiles and requirements.

This is setting up a clash between traditional equity capital investors, that are likely to be targeting returns in the low double digit range, and pension fund capital which can accept mid-single digit returns.

The reinsurance broker of 2025 needs to have a deep understanding of these new types of capital and how it can be harnessed to help its clients achieve their targets. This emerging skill requires a mixture of reinsurance brokers’ traditional skill of sourcing capital through global networks of connections and knowledge, along with deep balance sheet management understanding of how best to structure optimal capital solutions.

Too much competition?

Observers of (re)insurance companies’ investor relation reports are all familiar with many CEOs’ comments about excessive competition and the difficulty of growing their companies’ top and bottom lines.

For far too long, the insurance industry has taken a product-driven approach and sought to sell to its customers, rather than listening to them and developing more customised products that appeal to different client segments who are seeking different value propositions from their insurance provider.

Similarly, the insurance industry tends to focus on the same segments of large commercial, small-and-medium-sized enterprises and personal lines customers who are able to afford reasonable levels of premium. This approach leaves huge gaps of under/non-insurance, be it at a low/micro personal lines level, because of under-penetration at a personal lines level or policies that no longer match the needs of commercial clients.

Look to the future

Faced with this wide variety of challenges, the successful reinsurance broker of 2025 will have to be able to develop the wider and deeper set of skills as mentioned earlier. The key differentiator will be the ability of the broker to bring the appropriate knowledge and skill to its client, at the right moment to support the client’s development, and to deliver the service in an appropriate fashion, whether from a cultural or local regulatory standpoint.

The reinsurance broker of the future who can manage this combination of tried and tested skills, along with the new skills, will rightly be able to claim that it has achieved the status of being a client’s trusted adviser and can look forward with confidence to a rewarding future.

Mr James Vickers is chairman of Willis Re International.

Artificial intelligence in insurance

Breakthroughs in AI technology over the last few years have opened up many new and exciting possibilities. DXC Technology’s Jerry Overton talks about how AI can help insurance companies and their customers.

You may have heard the terms analytics, advanced analytics, machine learning and AI. Let’s first clarify their exact meanings:

• Analytics is the ability to record and playback information. You can record the customer transactions and report the number of insurance services that a customer uses.
• Analytics becomes advanced analytics when you write algorithms to search for hidden patterns. You can cluster customers based on which insurance services they use.
• Machine learning is when the algorithm gets better with experience. From examples, the algorithm learns to predict the insurance services that a customer will use.
• AI is when a machine performs a task that human beings find interesting, useful and difficult to do. Your system is artificially intelligent if, for example, machine learning algorithms infer a customer’s need and recommend a solution.

AI is often built from machine learning algorithms, which owe their effectiveness to training data. The more high-quality data available for training, the smarter the machine will be. The amount of data available for training intelligent machines has exploded.

For insurance companies used to traditional sources of customer information like transaction history, income and age, the importance of this new data may not be obvious. But using this data to get to know customers is central to creating value.

More affordable

Fraud is wasteful for insurance companies and expensive for customers. The McKinsey Global Institute reports that 10% of property and casualty claims costs are potentially fraudulent. AI can detect anomalies in insurance claims. It can monitor claims and patterns of customer interaction that suggest fraud. It can reduce the amount of resources wasted on fraudulent claims. Insurance that costs less to provide can become more affordable for customers.

More responsive

Responsive insurance companies require the right staff. AI can forecast customer demand so that insurance companies can handle spikes in service needs. It can also help administrators plan staffing to best meet those needs. McKinsey also states that insurance companies can increase productivity by 6% to 8% by using AI to optimise staff and resource availability.

More personal

Insurance companies have a chance to personalise relationships with customers. Take, for example, customising insurance risk based on individual driving behaviour. AI can learn patterns of driver behaviour, improve risk calculation and personalise policy terms in response. An insurer may drop risky driver behaviour by 53% by personalising risk calculation.

More valuable

Personal service is most valuable when it is delivered in real time. AI allows insurance companies to automate policy decisions, which simplifies the interaction between customer and company. According to McKinsey, 39% of administrative activities can be completely automated with AI.

Applied AI is a differentiator

If we see AI as just technology, it makes sense to adopt it according to standard systems engineering practices: Build an enterprise data infrastructure; ingest, clean and integrate all available data; implement basic analytics; build advanced analytics and AI solutions. This approach takes a while to get to ROI.

But AI can mean competitive advantage. When AI is seen as a differentiator, the attitude toward AI changes: Run if you can, walk if you must, crawl if you have to. Find an area of the business that you can make as smart as possible as quickly as possible. Identify the data stories (like detecting fraud or the next best service offer) that you think might make a real difference.

Mr Jerry Overton is a data scientist in DXC Technology’s Analytics group, where he leads the strategy and development for DXC’s industrialised AI offering.