Many of us can remember the analytics arms race that took place between the three big brokers at the turn of the century, resulting in them reaching a comparative level of maturity.

Analytics

Since then, however, rather than a clear path towards future innovation being laid out by these pioneers and followed by everyone else, the approach has been one of bolt-ons and fix-ups where gaps have naturally appeared.

Technical innovation may not come naturally to a well-established industry, where paper slips are still required in physical marketplaces and human relationships rule supreme.

Certainly, compared to other areas of financial services, the insurance and reinsurance sectors have lagged in getting with the digital programme. This is due, in part, to the nature of our business: we have contracts of reinsurance that are annuity-based, which breeds a certain lethargy and a lack of bravery when embracing new technologies. Currently, a vast amount of change is being driven from a regulatory perspective – for example Lloyd’s mandating that an ever-increasing number of placements be completed electronically. However, there are signs of the industry starting to take initiative – and these changes are coming from places we need to be alert to.

Our clients’ needs are changing, along with their buying behaviour. The challenges they face are evolving rapidly and we need our part of the sector to keep pace – or even get ahead – to ensure we can serve them in the longer term. One of the key issues is how to match capital with risk more efficiently. At the moment there’s so much inefficiency in the system. While tech can help resolve that issue, cultural changes are needed too.

Another is to accurately price emerging and systemic risks, which include items we have barely tackled before such as cyber, climate change and social inflation – these are soon going to be a major part of our world.

Today’s challenge

We need to recognise the threat climate change poses to our entire sector and get a handle on what it means for our clients. Regulators are asking (re)insurers to demonstrate their exposure to these, and other sustainability-related risks, over certain time horizons, but many are ill-equipped to do so.

Additionally, although these are important measures and stress tests, they are also futuristic and not necessarily relevant for an insurance company making decisions today about its portfolio. Our clients need the tools in their arsenal to more accurately measure the near-term impacts of climate risk, using factions of science such as extreme event attribution. This is no different to any other type of risk that they need to be able to measure and monitor to manage.

In our analysis of earnings calls in the first quarter of 2021, we found 60 percent of large insurance and reinsurance companies referenced climate change.

This was due to Winter Storm Uri, which hit North America hard and created losses of around $15bn. The reason climate change was attributed, in part, to the Uri loss was because of a weakened polar vortex that resulted in colder air shifting further south than usual. These unexpected, “known unknown” losses are likely to become more frequent, as meteorologists grapple with the anticipated effects of climate change on the global weather system. Despite being very high on the industry’s agenda, we lack the necessary tools and expertise to deal with climate risk without support from other sectors and academia.

That said, with every challenge there is an opportunity and product ideation will be a key factor in the industry’s response to climate change. We need to think longer term about policy structures to make them more impactful from an ESG perspective. For example, adding in a floating premium that adjusts on a climate index to encourage more sustainable behaviour. This could see a shipping company incentivised to send its fleet on the greenest route, tracked through satellite technology, if it attracts an adjustable premium. Parametric products will also have a role to play, particularly if we can develop indices that align with the meteorological changes we are seeing.

To innovate in the industry, we need to start thinking about how to use catastrophe models in a more intuitive way, because many are just using the results that appear from a black box in their pricing models. They need to adjust these models to better reflect what we’re experiencing today, and we need to be part of the solution to help carriers react more quickly in the event of a loss to access pools of capital.

Historical data sets have been used by our industry for decades, but we need alternative solutions for assessing the impacts of future risks especially for a future that is changing with such speed. We also need to address the data gap. Here, there are still huge gains to be had in enriching and augmenting clients’ exposure data, particularly outside the US. The data all exists and as an industry we need to harness third parties and share the cost across the value chain. 

However, this is a challenge that some are already working on. Real-time analytics is beginning to come to the fore, particularly around recording meteorological sensor and geographical data. We could be looking at a system akin to an Internet of Things, which reinsurers could translate and use across their own pricing models – but this will take a concerted effort across the industry to come to a landing on data standards and application.

We have some of the skill sets in the industry at the moment to help us do all this, and I believe this could be achieved with industry collaboration, but it would need significant buy-in and investment from a wide range of participants.

New faces

This is likely to also change the face of our industry – a sector in which leaders have usually looked to recruit people in their own image and skill set by fishing in the same traditional pools.

In the future, we will welcome a bigger number of data scientists and developers. We already have a number of roles open for people with those skills.

As providers of cover and those servicing them, we have to work closely with the world and how it is changing, or risk being disrupted by those who have a better grasp of what this change means.

For our sector, along with the aforementioned risks of climate change, this also means computer processing power.

Unless we adapt more quickly to the sea change in technological development that many in our industry are reticent to investigate, the likes of Amazon or Google will disrupt our whole industry as they have already begun to do in the smaller, more homogenous areas in which we operate.

Of course, we still have the advantage over these disrupters in the more complex, knowledge and expertise-sensitive commercial and reinsurance business areas, but, even so, the winners will be those carriers and brokers that can embrace technology the fastest.

There are also start-ups within our sector that are already challenging the status quo. Starting with a blank sheet of paper as they do, for them it is an easier ask than upending legacy systems, but they are not to be ignored.

It’s encouraging to see what John Neal, CEO of Lloyd’s, is doing with the Blueprint Two mandate, trying to strip out as much inefficiency from our market as possible. But we need to remember that Lloyd’s is a marketplace and it relies on the carriers and brokers to get aligned with, and act on, that vision too.

We have been considering all this, which spurred us to create our recently launched platform.

Gallagher Automated Insurance Analytics (GAIA) is a proprietary, single, scalable, automated analytics platform, which houses all analytics capabilities in one place, free of the constraints of legacy systems. It offers clients a more tailored view of risk, which allows them to differentiate themselves from their competitors, as well as saving up to 80 percent of their time through automation.

The world is an increasingly uncertain place, and our clients must navigate an environment of heightened, emerging – and increasingly systemic – risk. Our role as brokers is to advise and innovate, so we must lead the charge on product development and matching risk with sustainable sources of capital.

We also need to ensure the future of analytics remains at the fore of technological, industrial and scientific change.