DVS 2012: McGavick - Innovate or insurance will become little more than a utility

Insurers were challenged to embrace innovation in Munich today after Mike McGavick warned that the industry’s “relevance is in decline”.

In a stirring speech, the XL CEO acknowledged that clients were finding it increasingly difficult to find appropriate products, and said this was slowing down human progress as companies decided to retain their capital rather than share it.

Despite acknowledging the potential for increased market share in specific areas such as cyber risk, McGavick recognised that in the course of the past decade, insurance as a share of global GDP has been reduced from 3.8% to 2.8%. He said insurers needed to work closer with clients in order to offer them the insight and loss avoidance they desire.

McGavick said recent CBI claims as a result of the Japanese tsunami were “proof that the industry is not doing its job efficiently”, and argued that insurers need to innovate and work closer with their clients in order to better manage and understand the risks which have been evident for decades.

Looking to the future, McGavick encouraged the industry to ensure that the greatest minds were free to innovate. He added that the days of long data sets are over, and that companies must fundamentally change the way they invest in analytical tools in order to provide the insight required to create new products.

McGavick added, however, that issues of compliance and capital adequacies, such as Solvency II, have the potential to prevent insurers from innovating. He warned of the potential of unwarranted regulation to “force extensive M&As due to the need of insurers to rationalise their capital bases to accept the lower return - not unlike a utility. And the sad thing about utilities, of course, is that they are hardly the most innovative of creatures”.

He added: “I can think of no greater threat to consumers of insurers than an industry that is comprised of fewer players with less of a need to listen, and yet that is where I think inevitably, if it continues as it is, the current regulatory thrust will lead.”