November 5th, 2009

Finding (Re)Insurance Innovators

Posted at 1:00 AM ET

mckeown_christopher_bioChris McKeown, CEO of Global Analytical and Specialty Practices

It seems that everybody claims to be on the leading edge when it comes to the best tools and latest ideas for the (re)insurance industry. Capital models, dynamic financial analysis and Enterprise Risk Management (ERM) practices abound. So, how can you sift through all these toolboxes to find the most valuable, genuine and applicable instruments of innovation?

The stakes are high: the right choices can protect your capital, help you deploy it optimally and ultimately bolster shareholder value. Faux innovation, on the other hand, can slow your growth — or leave you exposed to unexpected risk. To cut through the wide array of alternatives, ask yourself five straightforward questions to help you identify the innovators in the insurance business.

1. What problem does a solution address?

Innovation for its own sake may make for interesting research and development, but it doesn’t always have a direct impact on your ability to manage risk and capital. The most important innovators in the (re)insurance industry help carriers tackle the most vexing problems they face — like systemic risk, hidden accumulations and casualty catastrophes. New ideas are brought to market which profoundly change how risk and capital are managed. Of course, a focus on today isn’t enough: the innovators also anticipate the future challenges that (re)insurers are likely to encounter, developing solutions before they are needed.

2. How does the resolution work?

To deliver a meaningful return, a solution must have staying power. Cobbling together outdated tools from disparate platforms only shrinks an already shortening path to obsolescence. Robust processes and integrated technologies, on the other hand, are more likely to endure in a rapidly changing marketplace … especially if they are flexible and extensible. A myopic approach to risk and market conditions can yield a commensurate result.

3. Where do you see the results?

A truly unique, powerful application of leading thinking should force an innovator’s competitors to change how they operate in order to keep up with the industry. The advent of catastrophe modeling, for example, resulted in increased risk transfer stability despite the ongoing volatility of results due to natural and manmade catastrophe events. This has led to improved capital management capabilities. The implications of effective innovation, therefore, should be evident not just in the portfolio but on your financial statements.

4. How does it compare to peer alternatives?

When several solutions seek to address the same concern, you need to determine which one is best suited to your needs. The most reliable innovation usually provides maximum upside relative to total investment, reducing costs and the need for dedicated internal resources. Consider, therefore, such factors as ease of use and the relevance of additional functionality alongside cost and commodity functionality.

5. Is it a one-hit wonder?

Companies with long track records of innovation know what it means to solve problems. Chase the latest fad, and you could wind up wedded to a tool or practice that loses its luster quickly, eventually forcing you into stagnation. Companies that have made innovation a priority, conversely, are more likely to deliver and support their solutions effectively, even as they are working on the next wave of innovation. Partner with an innovator, and you’ll keep ahead of the pack.

The (re)insurance industry has no shortage of tools and techniques for managing risk and capital, and the responsibility for (and consequences of) making the right choice rest solely with the risk bearer. Guy Carpenter has a track record of being at the leading edge with real tools for managing catastrophe risk, modeling capital and optimizing balance sheet efficiency. Yet, we know that making the solution available is only the start: you have to make the final choice. By opting for innovation, (re)insurers and their shareholders will see the difference. Missing the next industry-changing initiative will lead to a game of catch-up that is rarely won.

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