Innovation and invention are often used interchangeably but they’re not the same thing. Invention is about creating something completely new, for the first time, while innovation tends to be doing something to an existing product or service to improve it or develop it. So what?
In response to the toughest reinsurance market in a generation, there is a temptation to think the whole reinsurance model is broken and needs a fundamental reinvention. But, rather than start from the ground up, we don't actually need to reinvent the wheel. Sometimes, it's the subtle changes to that wheel - the innovation - which can be just as significant. A pneumatic tyre for instance, replacing the admittedly puncture proof but unforgiving solid tyre, I'm sure was welcome relief to the saddle sore cyclist of the late 19th century.
Capacity is not enough
Here's the reinsurance equivalent: an insurer wants to offer business interruption cover for businesses vulnerable to earthquake risk. The problem is they don't have the capacity or the technical resources to structure and price a product. In days gone by, this would be the insurer's problem. Why would a reinsurer be interested in helping them solve it? 'Come and see us when you need to reinsure the risk you've already taken on' might well have been the response. Times have changed and in a hugely competitive business where capacity alone is no longer the unique selling point it once was, cedants are, and rightly so, expecting a little more from their reinsurers than simple risk transfer.
Why not help that insurer structure a new business interruption policy for their commercial clients; helping with pricing and wording as well as quota sharing out the bulk of the risk? The insurer benefits from not only a stream of new commission but also the ability to offer a wider range of products to its clients - helping to maintain customer loyalty and retain a crucial advantage in an increasingly competitive market. The client wins, while the reinsurer has access to a new source of premium.
The take out option
Another twist on the venerable quota share product is the ability to offer a 'take out quota share'. Say an insurer has a particular exposure to wind or flood risk in a specific territory for example, why shouldn't a reinsurer, instead of taking on the whole portfolio, offer a quota share on that part of the book and, in so doing, reduce the insurer's excess of loss spend too?
Quota share has been around for decades but these are two examples of taking the traditional reinsurance product and giving it a subtle twist. The result is more benefits for cedants while also growing the premium pie for reinsurers at the same time. So there is a choice: you can either restrict yourself to simply competing in an existing market or you can create a new demand and grow the market.
Innovate to deliver value
With insurers either challenging the need to buy reinsurance or opting to take advantage of the plentiful supply of cheap capital, a reinsurer can choose to simply compete on price – surely not a long term sustainable strategy – in a race to the bottom, or it can ask itself whether there is more value it can deliver through innovation and a desire to go beyond simply offering more of the same at a cheaper price. I know where we want Hiscox Re to be.
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