Well, Tech me…

Everything seems to be acquiring a “-tech” suffix these days- perhaps in the hope and expectation of achieving that mythical “unicorn” valuation status? After all, what’s the odd billion dollars these days? 10 digits is so last year!

The (re)insurance industry has “insuretech” (or is it “insurtech”?), while reinsurers should perhaps try to popularize “re-tech”, but the definitions and scope are somewhat slippery, because it can be difficult to distinguish what is the truly disruptive from the merely incremental.

Certainly, business models are having to adapt, or risk becoming obsolete, but what should the test be to distinguish evolution from revolution- the “It’s (re)insurance, Evan, but not as we know it” moment?

It seems to us that any major (re)insurer CEO should already be paranoid, and trying to create an in-house “skunk works”, populated by those who possess a range of aptitudes and knowledge, and who are given licence to challenge and question received wisdom. Of course, managing and controlling such an operation will be an interesting exercise in avoiding bureaucratization, while at the same time channeling outputs in ways that can be profitably harnessed and developed.

More to the point: what should the focus be?

Should it be on products; the uses of AI; re-engineering processes, such as claims; enhancing risk selection and pricing; cost reduction; or risk management? “Framing” is likely to be an issue, as true disruption and innovation tend to come from those who are able to think without constraints and truly imagine something that does not yet exist. On the other hand, the current state of the industry means that there are surely plenty of “soft” targets that should provide the opportunity for creating value. After all, it is surely madness that costs in the London Market exceed 41% of every 100% of premium paid, or that literal “manuscripting” still exists.

And yet, (re)insurance is a very large and complex industry; and, like banking, an essential component of any modern advanced economy. So, can the potential disrupters challenge the industry as a whole, or just segments of it? And who is likely to have the more defensible business model? Clearly, those who are able to harness “insuretech” to improve their processes and returns will prevail over those who do not or cannot. In that sense, resistance is futile, but being part of the collective is likely to be a losing proposition.

One key question is whether the new participants will be seen as competitors or partners; as the established companies will probably struggle to distinguish between the two. Quite clearly, at the one extreme, a start-up such as Lemonade is a direct competitor, whereas a firm that focuses on part of the value chain, such as claims-processing, is more a partner; and, as we have written before, what if the likes of Alphabet or Amazon make a serious effort; Facebook aims to create “affinity” groups; or Tesla bundles insurance into a service package? And what of all the intermediaries who still proliferate and aim to take their cut? Many of those seem likely to be dis-intermediated!

Ultimately, the factor that is most likely to distinguish between those who survive and prosper and those who fade away, or are replaced, is the ability to create value that addresses the client’s needs. People will aim to pay as little as possible for something they can “buy” anywhere (such as commoditized covers in the P&C realm), but will pay a healthy premium (in both senses) for products, solutions and structures that enhance their competitiveness, or mitigate their risks in ways that have hitherto not been possible.

At Awbury, while being a true value-added insurance company, we are also generators of intellectual property- just like the “techies”.

The Awbury Team

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Wash my car…

The “Lava Jato” (Car Wash) bribery and corruption saga continues to unfold in Brazil, with its impact and scope seemingly ever wider, giving the impression that corruption must be endemic throughout the Brazilian economy. Debate continues as to whether it is merely the largest corruption scandal in Brazilian history, or in the world.

The catalogue of politicians and business leaders who have been implicated or toppled from power is, indeed, extraordinary, with the current President at some risk of being impeached and removed from office because of his own alleged involvement in at least condoning bribery.

And all this has taken place against an economic background that has seen Brazil suffer its worst recession since the Great Depression. So Brazil must be an economic and political “basket case”, não?

Well, not so fast. The Brazil of today, with all its faults and issues, is not the hyperinflationary and autocratic state it once was, well within living memory.

Firstly, in spite of seemingly never-ending setbacks, the economy has begun to crawl its way out of recession in the last quarter, growing by 1% after 8 consecutive quarters of contraction, helped by a bumper soybean crop.

Secondly, the state’s government and governance structure has not collapsed. While the extent of political corruption may be astonishing, the judiciary has become relentless in investigating and punishing it; while those in power have not been able or effective in thwarting due process, even if some have tried. The previous President was impeached and her iconic predecessor, Lula, was himself unable to resist investigation for corruption.

Thirdly, in a world in which demand for protein in all its forms is rising inexorably, Brazilian agribusinesses produce what the world wants, even if they can fall victim to scandals over tainted meat, or the vagaries of commodities pricing.

Fourthly, the Federal Government has begun to reform the ridiculously expensive pensions system, and other areas of government expenditure. There are no certainties, but the fact that the attempt has been made in the face of political turmoil, recession, and a complex parliamentary ecosystem does show that there is room for some sense of “what needs to be done” to prevail.

Fifthly, Brazil is much less vulnerable than most to a currency crisis, as barely 2% of its sovereign debt is denominated in foreign currency.

Sixthly, the central bank is competent and appears free from political manipulation.

Of course, none of these factors means that the future is certain; but, as always, the negative weighs upon perceptions more than the positive, affecting judgements made and actions taken. We would never say that there is no risk in Brazilian exposure, but we do believe that one has to take into account all relevant factors to create an informed decision.

At Awbury, we are constantly monitoring, assessing and re-assessing the key political economies across the globe, looking for connections and correlations that could have an impact on the business we write, so that we can create effective mitigants that will minimize the risk of an unexpected outcome. It is all part of our obsession with effective risk management.

The Awbury Team

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