Innovation leadership, recovered.

July 31, 2021

Jerad Leigh
Jerad Leigh

Why does everyone think reinsurance is stuck in the past? Following Ben’s piece on the critical ingredients for an effective reinsurance market, this article takes a look at the industry’s historical leadership in adopting new innovations, and why we are now on the cusp of our own digital reinsurance revolution.

The original ecosystem

The reinsurance industry has historically stood as one of the best examples of a truly global ecosystem. But what is an ecosystem, exactly? For McKinsey’s Venkat Atluri, it is “a complex network of interconnected businesses that depend on and feed on each other to deliver value for their customers, to the end-users, and their key stakeholders”. In reinsurance, the need to rely on a wide array of distributed counterparties is a defining characteristic, and has helped to forge a dependable ecosystem for getting deals done and protecting cedents effectively.

What sets reinsurance apart from most modern financial sector ecosystems is the very gradual development of this paradigm, evolving over the course of a few hundred years. Long before becoming the global network that we know today, these models of interaction emerged as a hyper-localised response to significant losses in high-exposure locations like London, Hamburg, and Boston.

These original ecosystems brought together capital and risk management expertise and drove innovations like the advent of fire departments. As the industry grew and expanded around the world, localised hubs such as New York, Bermuda, Singapore, Munich and Zurich grew in reputation and representation as additional centres of reinsurance excellence.

Rapid expansion into new geographies and products further fueled the growth of the ecosystem. Lloyd’s of London offered its brand, regulatory influence and distribution network to capital providers alongside what would ultimately become the Bureau: a means of centralising premium and claims payments across an increasingly complex syndicated market. Simultaneously, MGAs and MGUs became an ever-more familiar part of the journey from risk to capital, injecting further variety into the supply chain and crafting new propositions for customers in niche and hard-to-reach markets.

Thus was the ecosystem exemplar of the reinsurance industry established: an essential and high-functioning pillar of the world’s economy, constructed almost entirely in the absence of twenty-first-century technology.

The early bird, or the first mouse?

This is not because the reinsurance industry was reluctant to innovate. Contrary to the widely-held belief of outside observers, the reinsurance industry has often been at the forefront of leveraging technology to the benefit of clients.

Technology has shown time and again its ability to improve connectivity and make the world smaller and typically, the reinsurance market has been quick to respond to emerging trends. Buoyed by the rise of large, international firms (frequently through acquisition), the industry was one of the first to adopt telephony, telex, fax and email. Brokers leveraged these new technologies to access global networks and provide an array of capital solutions for clients, while reinsurers quickly found ways to build large portfolios of diverse, non-correlated risk.

Counterintuitively, the rise of computers kicked off a dark age for the industry, in large part due to the fragmented nature of early software solutions and the relentless pace of digital innovation. As firms moved quickly to adopt seemingly cutting-edge systems, to improve how they captured policy information, processed premiums and claims and managed clients, they also unwittingly accrued what would all too rapidly become enormous ‘legacy debt’.

These early systems, built-in silos, were intended to serve the specific needs of each specific firm rather than establish any semblance of a standard process. In time, ACORD would emerge to help try to develop and implement industry standards, but already, the damage was done. The resulting difficulty of getting these systems to talk to each other proved to be significant, and efforts to move data to newer, more efficient systems often required expensive, multi-year IT projects to which executives were understandably reluctant to attach their reputations.

Despite the positive intentions and entrepreneurial spirit that drove early adoption, the fragmentation resulting from introducing countless ‘closed’ technology solutions in a highly-connected, pre-existing reinsurance ecosystem was a fundamental design flaw that would take the industry decades to recover from.

As new firms emerge without this technical debt and with interoperability front of mind instead, we’re seeing clear cases where the second mouse gets the cheese.

The unfulfilled promise of blockchain

After decades of expensive projects with limited tangible results, the industry was ready for a silver bullet, and right on time, blockchain technology emerged as a potential saviour for the industry. With its promises of efficiently connecting everyone’s information into a shared, immutable version of the truth, it’s not hard to see why the reinsurance industry was so enamoured.

Like many new innovations before it, the fledgling technology was looking for a powerful use case that could highlight its full potential and the reinsurance industry, inspired to reclaim its position as the innovation leader of the financial sector, was ready to bring blockchain into the real world.

Ambitions were quickly dashed as firms realised that several decades of siloed innovation would make this leap far greater than initially anticipated, with thousands of counterparties having each developed their own unique ways of working in specific niches across the market. Each firm building, buying, modifying and partnering with solutions to solve their specific and unique challenges meant that moving towards a global standard, especially one as rigid as blockchain, would prove incredibly challenging, if not impossible. Added to that, the prohibitive costs of developing this technology would see it reserved for only the industry’s most wealthy players.

At the same time as blockchain, another buzzword was beginning to enter the industry vernacular, presenting an alternative path forward. The time for ‘insurtech’ had arrived, and with it came an opportunity for reinsurance that connects.

A digital ecosystem for reinsurance

As digital ecosystems emerge, McKinsey’s ecosystem definition might be revised to focus on a complex network of interconnected solutions that depend and feed on each other to deliver value to businesses, their customers, to the end-users, partners, and key stakeholders.

We are inundated with digital ecosystems in our daily lives, with an expectation that information will flow from, to and between various sources into multiple other locations where we want to consume it. Thanks to cloud services and APIs (application programming interface, which provides a connection between computers or between computer programs), we can upgrade our smartphones and keep music, photos, email, and apps instantly available without needing to start from scratch, while Open Banking has allowed us to build a centralised view of bank accounts, investments, and loan balances regardless of which banks, investment firms and lenders we prefer to work with.

In recent years we’ve begun to see the emergence of these same interconnected ecosystems in our working lives. There has been a significant increase in start-up technology companies solving a specific pain point for a targeted audience, and then allowing their solution to connect with and talk to whichever other solutions a specific company is using for numerous other pain points.

At Supercede, for example, we lean on GSuite, Trello, Confluence, Slack and GitHub. Updates and information are sent between and across solutions so that colleagues are able to spend the bulk of their time within the apps that are most effective for their work, greatly improving everyone’s efficiency. We are certainly taking notes from these experiences, as we help lay the groundwork for where reinsurance technology goes in future.

Following the collapse of the Aon/Willis merger, we may reach a hiatus in industry mega-mergers. In the meantime, we are anticipating a continued rise of new entrants across the value chain, each with their own unique needs for data and insight and each looking to take advantage of a blank digital slate.

As these companies look to build out a modern tech stack they’ll look for the tools and solutions that best fit their needs. The needs of a US Catastrophe-focused ILS firm, for example, will vary dramatically from a specialty MGA, and differ still from those needs of a global reinsurance broker. However, regardless of which solutions they choose to adopt, the information captured and shared between parties across the value chain should be effortlessly transferred, allowing each colleague to work in the solutions best suited for their role without a subsequent need to spend copious hours rekeying data.

This approach is central to our ethos at Supercede. We are excited to share our vision for reinsurance that connects with a myriad of industry leaders and technology providers and, as I write, a number of us are preparing a whitepaper together to deep dive into this topic more fully. Watch this space!

Reinsurance has a storied history of driving innovation and leveraging technology to the benefit of clients and partners. The perception that reinsurance is the laggard of the wider financial sector is a relatively recent one, and one that I believe will be short-lived as we prepare for our own digital revolution: a revolution that will benefit cedents, brokers and reinsurers alike.

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