The threats to which (re)insurers’ capital is exposed seem to multiply with alarming regularity. Today, the industry is contending with risks that were barely imaginable (at best) 20 years ago. In an age when carriers must respond to casualty catastrophes, the possible effects of climate change and financial market calamity - perhaps all on the same earnings call - it’s natural to wonder if the right tools and techniques for the job are available. Risk and capital management have only grown in complexity, a trajectory that is quite likely to continue - and probably accelerate.
Many (re)insurers instinctually look for ways to cope with these developments in the practices and technology already at their disposal. This may work as a stopgap measure, but, eventually, the emergent risk outpaces the capabilities of those tools. Risk managers, in the process, are forced to assess considerable amounts of risk often with resources insufficient to the task. To call this a crisis of capital management, however, would be to willingly conceal the underlying cause: a lag in innovation.
Catastrophe models, economic capital models and enterprise risk management (ERM) are but a few of the advances made by the (re)insurance industry in addressing an ever-evolving risk environment. Innovation is happening, perpetually inspired as the intellectual capacity of the industry adapts existing premises, methods and technology to create new applications that more accurately address increasingly complex risks. It shows in the development of fresh solutions to old problems, and the refinement of existing mechanisms. With leading tools such as MetaRisk®, i-aXs® and Casualty CatTM - among others - Guy Carpenter has identified not only the needs of risk bearers but ways to address the threats to their capital.
The existence of innovation and its potential to build and serve a thriving (re)insurance marketplace depends on the industry’s willingness to understand its nature, the necessary investment and the inherent risks - as well as rewards. This is the double-edged sword of innovation.