How the insurance model is coping with lasting negative rates and protectionist sanctions

Strategic Risk: In a world of lasting negative rates and protectionist sanctions, is the insurance model still sustainable?

Hervé Houdard: Yes indeed, the insurance model is definitely sustainable and will continue to respond to clients’ needs. Moreover it is in the insurance DNA to find solutions to such a situation with negative rates that fully impacts life insurers’ assets and liabilities.

Lasting negative rates and protectionist sanctions means a narrowing margin to generate respectively operational and financial profit. That is why insurance does help insureds to sustain their business model despite the volatility of their exposures. In other words, insurance is one of the ways to improve business resilience with prevention and long-term strategy, linked to Corporate Social Responsibility. 

SR: Faced with the multiplication of contradictory sanctions and injunctions, can insurance still operate globally? 

Houdard: I think so! Global insurance programs have existed for many years and we can observe that the market and particularly the brokers have always adapted to an increasingly regulated environment. It is up to us to try to find the right path to stay competitive and efficient for our global clients, whilst complying with local and international regulations.

Insurers and brokers are used to facing legal constraints for global programs regarding admitted vs. non admitted operations. Legal issues have to be considered through:

• Country information using interactive data bases;
• Compliance with local regulations;
• Use of admitted processes for premium and claim flows that need to meet the insurance and reinsurance legal framework requirements.
• Integration of sanction regulations in the policy and avoiding any side agreement to bend this golden rule.

SR: Can emerging risks, still unknown, be transferred to the market? Shouldn’t companies keep more risks since they know them, master their data, allocate capital, be their own insurer through captives? Will technology break pooling in favour of anti-selection or provide other more native solutions? 

Houdard: If there is a hazard, the companies will find allocated capacities in the market (insurance and reinsurance) and a real involvement to develop innovative solutions. Emerging risks always represent a difficulty for insurers, as they lack the statistical experience and models on which to base their underwriting. Using captives can be a very useful and efficient way to manage the cost of risk for any company but it has to be done with a specialized player.

The market remains reluctant to write unknown risks. Insurers need to rely on data and to understand exposure, to set up reinsurance treaties, provide pooling solutions in order to get enough financial leverage. For example, “Non Damage Business Interruption” (NDBI) has been emerging for a few years but without enough commitment from the markets due to the current lack of risk understanding and inadequate mutualisation.

SR: What does the shifting landscape mean for risk managers and insurers?

Houdard: The customer relationship between clients and brokers is a long term partnership. There is significant benefit for clients who have brokers that have a thorough understanding of the client’s business and processes, as well as its insurance procedures and risk management strategy.

There is now a paradigm shift taking place towards a structural change on one hand (legal constraints, sanctions, climate change, global digitalization then cyber risks), and an insurance market downturn on the other hand. Indeed, non-life markets, especially financial lines and property, have been becoming more difficult over the last 18 months, leading to both strong increase of premiums and deductibles, and reduced commitment from insurers who reduce their share in order to protect their book’s volatility. This paradigm shift will lead to:

• An increase in self-insurance retention through dedicated tools (captive),
• The promotion of data analytics and risk assessment as well as initiatives to improve business resilience (establish Business continuity plan, early warning systems, the hiring of head of resilience managers or chief resilient officers in order to reinforce risk management)
• The reinforcement of risk prevention & mitigation.

The broker’s role is key to supporting clients in this shift.