“I feel the need, the need for speed.” This line by Tom Cruise’s character in Top Gun is one of the most frequently quoted lines in arguably the most quintessentially 1980s film. Fast forward 30 years, my two- and four-year-old boys’ favorite TV show is Blaze and the Monster Machines. The catchphrase of the monster truck that is the protagonist of the show is, “AJ, gimme some speed.” When I ask my boys how fast they want to go, they answer as Blaze does, “Super fast!”
Who doesn’t want to go fast … at least in theory? In conversations with a broad cross section of our (re)insurer clients, we’ve found that many still operate at a slower pace, particularly as compared to the rest of the financial services industry. For example, many of the (re)insurers we regularly talk to roll up their portfolios either quarterly or monthly. In the banking sector, such a pace would be untenable. It is typical for CEOs and certainly CROs to see daily reports of their enterprise risk. High frequency trading (HFT) firms execute thousands of trades per second while simultaneously optimizing their firm-wide risk levels in real time. Why can’t the same be said for (re)insurance?
Property casualty (re)insurance is indeed a part of the overall financial services industry, which also includes life and health insurers, commercial and investment banks, asset managers (including hedge funds), and new entrants such as the HFT firms mentioned above. All of these players match suppliers with users of capital, and of course take their spread. While they are different on the surface, on some level they are doing exactly the same thing: managing risk. So why do some financial services companies operate so much faster than others?
The easy answer is that hedge funds and (re)insurers are still very different businesses with very different cultures and regulatory structures. That being said, it is hard to argue that the (re)insurance industry wouldn’t benefit by operating at a faster pace. Practically all (re)insurers are facing rising combined ratios and squeezed margins as a result of the soft market. So how do you make money in a soft market? One answer is greater speed.
Faster, more relevant portfolio analytics can help find better deals by influencing decisions with more information earlier in the process and with existing analytical staff. The application of modern portfolio principles to create a strategic plan and enable execution according to that plan can also be supported by better and faster analytics. Most companies we spoke with mentioned the desire to analyze more deals so they could pick the potentially more profitable ones that align with company strategy. We also heard a need for more robust optimization of retro programs. If it is possible to better optimize programs during renewal periods and spend less on retro cover, then margins will increase.
Clearly much of the above is easier said than done. And to be fair to the industry, the technology to enable faster and more frequent portfolio analysis simply didn’t exist until recently. But now the technology does exist to achieve this end. The only question is—will you or your competitors get there first?