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Looking at the bigger picture Malloy points out that it has been a
tough market for re/insurers on the investments side of the business,
with depressed rates making it difficult for bond investments to
generate sufficient returns to support the business.
“We take less underwriting risk than some of our competitors, but
we make up for it by having a great investment strategy,” he says.
“Investors have been keeping their powder dry in the fixed income
market for the last 10 years by staying with short duration and high
quality, waiting for interest rates to pick up,” he adds.
“To make money you need either to invest at the long end, out to
around 15 years, and take duration risk, or to invest in corporate bonds
and take credit risk. You can’t any more count on your investment
account to supplement your underwriting results.
Malloy points to how Berkshire Hathaway makes significant
returns by investing its “float” using an array of investment strategies
including purchasing entire companies.
“There is volatility in equity returns, and we have reduced our
equity exposure this year from $1.4 billion to $850 million to allow
us to take more underwriting risk,” he says.
“The Third Point fund has generated returns of around 22 percent
year to date, so we remain convinced that it will continue to be a
major contributor to results.”
Tech advances
Malloy adds that the market is becoming increasingly differentiated,
partly due to improvements in technology such as artificial intelligence
and the ability to make sense of increasing quantities of data.
Driving the reinsurer’s strategy in this field is Govrin, president
of Third Point Re. He says that innovations in technology have the
potential to make a big difference to re/insurers in a number of ways,
but Third Point Re is most interested in developments that can help
it underwrite business more efficiently and with greater accuracy.
He explains that, in his view, insurtech companies can be broken
down into three types based on which part of a re/insurer they assist:
distribution, operations and underwriting.
“On distribution they are focused on selling insurance more
efficiently and at lower cost,” says Govrin.
“The operational-focused companies are trying to make the cost of
operating an insurance business more efficient, and in underwriting
it’s about how to automate the underwriting process and create a
product that is priced more efficiently and with greater accuracy.
“As a reinsurance company we are obviously very focused on that
third part, which is insurtech as related to product creation and
underwriting.”
He says that Third Point Re is often asked to invest in insurtech
companies, and it is most interested in those that have the potential
to improve its underwriting.
“The opportunities we want to pay the most attention to are those
where we’re being asked to provide capital support for insurtech
operations that are focused on using technology to better underwrite
the product, including lowering the costs associated with operating
and distribution and improving the ability to segment risks in new
ways,” he says.
According to Govrin, the pros are that they are all focused on
pricing and distributing products more efficiently. He points out
that the insurance industry operates with an expense ratio that, on
average, is about 40 percent, and a loss ratio that is, on average, 50
to 60 percent.
“As a result, if a company can create a product that cuts into the 40
percent of expenses and/or lowers the loss ratio by virtue of more
segmented pricing, then it can pass more of the benefit on to the
consumer and have stickier and less volatile products,” he explains.
“The cons of insurtech are that many companies will get it wrong
before they get it right.
“As a reinsurance company we are cautious on insurtech because we
see many opportunities where there’s more focus on the technology
side than on the underwriting side,” he adds.
“We don’t want to invest in or reinsure businesses that are loss
leaders on the underwriting side in exchange for significant premium
growth in order to drive up valuations. Many of the businesses we see
don’t have the right balance of underwriting and sales.
“We’re most interested in businesses where there’s a strong team
on underwriting and product creation, as well as on the technology
side—and there needs to be a technological differentiation in both,”
he concludes. ��
November 2019
Bermuda:Re/insurance+ILS
INTERVIEW: DAN MALLOY
“We take less underwriting risk than some of our competitors,
but we make up for it by having a great investment strategy.”
Dan Malloy