“Wouldn’t you prefer a good game of chess?”
Thus spoke ‘Joshua’, the supercomputer from War Gamess, in 1983. Some forty years later, its echo makes for a neat introduction, as we consider whether the reinsurance industry truly understands the nature and gravity of the game played by its underwriters.
Today’s reinsurance analogy centres around chess, an ancient board game that Supercede CEO Jerad and I play together on a regular basis. For founding father Benjamin Franklin, writing in 1750, it was the game that could teach “foresight”, “circumspection” and “caution”: three values which, we assert, would more convincingly be observed amongst today’s reinsurance buyers, were they only equipped with the right technology.
Much like reinsurance, chess is a game where preparatory moves in the opening have an outsized impact on the ultimate outcome. Whether the cedent survives future storms depends on the readiness of its defences; in other words, the effective allocation of its material across the board. Too often, the outwards team is still assembling pieces by the time their opponents have made the first move.
The reinsurance buyer’s role is made all the more challenging in a hardening market, where market cycles, like cosmic referees, allocate a seemingly unfair number of pieces to the opponent's side of the board. Facing an ever more formidable set of attacking pieces – from pandemics and cyber attacks to climate change and class actions – the digitally unarmed cedent is left especially vulnerable to a checkmate.
Jerad and I have complete visibility over the board during our chess games. With a helicopter view of our portfolio, comprising pawns, knights, bishops and rooks, we carefully decide where to allocate our most valuable resources, and take turns to advance our queens and protect our kings.
There is no such luxury in the reinsurance industry today. Not only are buyers forced to commit to moves months in advance, they must rely on database extracts so foggy that they might as well be playing blindfolded. Yes, blindfold chess, or sans voir, is a real thing: but much like playing the piano upside down, it is a party trick, not a strategy.
Obstacles and data impediments aside, play the game these cedents must. Exhausted after months of manually groping about in the dark for convincing submission information, a signal from their coach, the broker, tells them their opponents are waiting for them. It's time for the outwards team to step up to the board, and make their first move.
“Later. Let's play Global Thermonuclear War.”
(Thus responds Matthew Broderick’s character to Joshua’s question.)
Like chess, reinsurance is a game played on the clock. Those who have a moment to pause and take stock of theirs and their opponent’s positioning will undoubtedly perform better on the reinsurance chessboard. But as foggy data clouds the brains of ceded re teams and their brokers, how many actually have time to try anything that supersedes a rinse and repeat of the prior year’s renewal?
Convention and calculation have determined a number of standard offensive and defensive openings in chess, much like standard structures designed to withstand various perils in reinsurance. But with cedents repeatedly setting up the same predictable openings –regardless of changes to their portfolios and exposure tolerances, and despite an alleged minimum of forty-two openings a humble chess player should know – one suspects they might not be setting up their reinsurance deals for the best possible outcomes.
Predictable openings lead to predictable results: typically an under-resourced middlegame; a bloodbath at the endgame; and ultimately, partners who – with an ailment particularly popular in property catastrophe at present – quickly lose interest in participating in your games. What can be done to stem this flight of worthy opponents, without whom we cannot play chess at all? What are cedents doing to persuade capacity, despite a reinsurance industry-wide failure to return cost of capital, that theirs is an event worth showing up for?
Let’s ask Joshua ourselves, because it seems reinsurance is too shy to talk to computers. Yes, like grandmasters, reinsurance professionals are well-attuned to the habit of recording and studying the successes of previous games. However, outside of windstorm simulations, reinsurance has barely scratched the surface of the computer-aided potential for discovery of the best possible moves. Compared to the much less well-funded chess “industry”, our gaggle of suited and booted geese down Leadenhall market exhibits a technology profile that wouldn't be out of place in a Jane Austen novel.
By contrast, most readers will be familiar with history’s many legendary duels between human and machine over the chess board. The de facto conclusion of such encounters has been that machines perform better, with only a handful of super-smart individuals even close to putting up a fight. So why do we back ourselves as having expert buyers, brokers and underwriters smarter than any machine?
“Is this a game, or is this real?”
(So asks Matthew Broderick’s character in War Games, when he begins to realise that Joshua wasn’t designed with his entertainment in mind.)
I accept that unlike the abstract game of chess, reinsurance is rooted in reality, and thus has room to benefit from the human touch. That said, we needn’t put all our faith in one or the other: a human-machine hybrid approach is possible. It would be nice to have at least some digital record of the epic stand-offs between reinsurance people and the world.
Ever more so today, and especially following the huge success of Netflix series The Queen’s Gambit, chess is thriving as a person-to-person ‘sport’ thanks to technology. Humans want to play against humans, and to bask in the glory of the supreme chess beings that occasionally emerge from our species: accordingly, millions tune in to watch livestreams of online tournaments, whilst artificially-intelligent calculation engines crank out live predictions of who is winning from move one onwards.
Perhaps that’s the reason we still pit the wits of underwriters against unknown perils: it’s a game we all yearn to play, and to watch be played, by relatable yet brilliant humans – not black-box calculations. These troubled geniuses are regularly depicted in works like Stefan Zweig’s Chess, and arguably, we’ve seen a few of them wandering around the reinsurance market too.
How can we help to unlock the talent of these market mystics? One step forward for our industry’s grandmasters would be to see them unburdened from the great leadweight pieces they must manually push, with the help of huge support teams, around the great reinsurance chessboard. If only, as with the giant wizard’s chess pieces in Harry Potter – magic enabled easy movement of the pieces, however large, from cedent to broker to reinsurer – then at least, our attention would more freely be focused on where the pieces should be placed: rather than simply placing them wherever is most convenient, which too often happens today.
We might also do well to overcome the ‘great man’ myth that pervades our own industry as deeply as the chess world. 'Where are all the women?', a recent piece of Insurance Insider research, highlighted an “extreme and counterproductive” fixation on CEO candidates with thirty years of manual underwriting experience, with predictable repercussions. An industry favouring digital prowess over relative antiquity would surely open our industry to more diverse leadership in future.
“The only winning move is not to play.”
(So concludes Joshua, when determining the possible outcomes for a game of global thermonuclear war.)
Might others fairly reach the same conclusion about our own industry, and ultimately, decide not to play at all? Many watching Hurricane Ian – a harbinger of under-modelled climate risks to come – would say so, as underwriters seek to reassure shareholders and capital providers that the reinsurance industry can and will remain lucrative.
Fans of The Reinsurance Podcast are by now well-versed in the planning pressure faced by cedents, as reinsurers cut back heavily on games in which they no longer wish to participate. Whilst the mantra “it’s the taking part that counts” has undeniable inertia in our industry, it will only go so far.
Gone are the days where a cedent can enter the endgame unprepared. Not only do you need reserves that outweigh your opponent’s claims to avoid a checkmate: to get a deal placed with favourable terms, buyers also need to come out of the middlegame looking in better shape than the cedents playing at neighbouring chess boards.
How can they achieve this feat? Echoing the words of BMS Re CEO Pete Chandler, cedents need to “get started early and have great data”. If that seems like an impossible task, take off your blinkers: we have reinsurance technology that needs to be seen to be believed. And, with Supercede projected to save the industry $300m of unnecessary manual effort every year, you might want to get in touch sooner, rather than later.
By embracing technology, the game of chess has not only endured into the twenty-first century: it has prospered exponentially. And in reinsurance, nobody will accuse you of cheating if you use a computer to help you with your preparation and decision-making – rather, they will celebrate you for it.
With the first truly hard market in recent memory, it might seem like global thermonuclear war out there. But 2023-01-01 isn’t the endgame for reinsurance buyers. For those willing to invest in reinsurance technology, it’s an exciting new opening.
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