Monte Carlo- simulating reality?

As (Re)insurance executives contemplate the forthcoming industry get-together (or Bacchanalia?) that is the Monte Carlo Rendez-Vous, it may be time to take stock; and to reflect on some of the themes and trends that are likely to be topics of discussion (or commiseration). None are particularly new, but that does not mean that they should be disregarded.

So, in no particular order, Awbury would respectfully suggest:

– M&A: the catalogue of transactions, both modest and material, consensual and contentious, continues to grow, as realignment within the industry to meet changing perceptions of the strategies needed to survive and thrive shift from “specialization” to “diversification”. And, there appears to be a new player in town- the Chinese quasi-conglomerate seeking to deploy capital and gain influence, some with surprisingly little obvious knowledge of or experience in the industry. Only a fool would underestimate their potential appetite, or resources. And, of course, the Japanese major carriers continue seeking to diversify outside their home markets. So, the guessing game of “who’s next?” will continue. Just beware of those preaching synergy; and check the terms on which your share options vest!

– Capital: it is now a truism that there is a surfeit of capital available from an ever-expanding range of investors seeking supposedly non-correlated returns in a financial landscape distorted by the policy decisions of central banks. Being able to earn appropriate and sustainable risk-adjusted returns is increasingly problematic

– Data: as we have written before, the rise of so-called “Big Data” should enable the industry to analyze and price its risks better; yet at the same time it poses a material threat to current business models, particularly in commoditized product segments. If it isn’t Google, it will be someone else!

– Culture: an intangible; but critical to the ability of any business to survive and compete effectively. Trying forcibly to meld organizations with different cultures usually ends badly, because human beings are remarkably sensitive to such actions. They may appear to conform or accept, but will consciously or unconsciously behave in ways that effectively sabotage performance and destroy value

– Risk: It’s all about the risks. Of course it is. (Re)insurance exists to manage it. However, in the face of larger aggregates; weaker terms; and relatively untested coverages (such as “cyber”), one has to wonder how robust existing ERM systems are

– Regulation: the bane of a many a senior executive’s life; with “compliance” being a true growth industry not just within the benighted banking industry. If it’s not Solvency II (which is currently giving many senior executives waking nightmares!), it will be IAIS, or the Feds, or the NAIC. We do not question the need for oversight and regulation of an industry that has such an impact of economics and human welfare; but we continue to wonder at the ever-increasing complexity and the ultimate purpose of those who aim to impose yet more of it

– Model Behaviour: Of course, everyone is on their best behaviour at the Rendez-Vous… but in a world in which models and algorithms are increasingly dominant, are you sure that a), you have the appropriate models; b) that they are robust and fit-for-purpose; c) that those who created and manage them know what they are doing; and d), that they actually provide you with a competitive advantage and quality risk management, rather than providing a false sense of security?

So, enjoy the rosé and the late summer weather, but try not to lose too much at the Casino…

The Awbury Team

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