Insurance penetration gap a fake issue’
A panel discussion about the protection gap and how the insurance sector can address it got off to a blunt start when Michael Millette cast it as a fake issue.
The phrase describes the shortfall that exists between insured losses and total economic losses for a given event, such as a hurricane, earthquake, flood or drought.
But Mr Millette, managing partner of Hudson Structured Capital Management, said it was a polite term the industry used to talk about the falling penetration levels of insurance coverage.
“Fortune 250 companies wonder out loud what they are getting from insurance, and they think about captives,” he said.
“We have an industry that channels 40 cents of every dollar into expenses and distribution, and then we talk about protection gap?
“Please, let’s talk about tech penetration and efficiency. Those are the things we need to be talking about. Protection gap is the polite way to evade our real issues.”
Mr Millette was one of four guests on a CEO panel at the EY Global (Re)Insurance Outlook forum, held in association with The Insurance Insider, at the Hamilton Princess.
Kathleen Reardon, chief executive officer of Hamilton Re, saw an education gap that needs to be closed, referring to “the disconnect between the worth of the product and what you think it costs”.
She noted reports that Bermudian-based reinsurance companies will pay in the region of $25 billion to $30 billion towards insured losses from events in the third quarter, which include hurricanes Harvey, Irma and Maria.
Regarding the penetration gap, she said public-private partnerships have worked well, in particular in the aftermath of Harvey. She said the US National Flood Insurance Plan was buying reinsurance for the first time.
“It is responding and it has already responded to the Harvey hurricane. PPPs are working; we should explore them. That’s an avenue to bring some success in closing that gap.”
Ms Reardon said the industry’s value chain was wrought with expense and inefficiency and needed to be disrupted, broken apart and rebuilt.
Mentioning the success of market disrupters Airbnb and Uber, she said: “They know what their product costs, which is an advantage that we don’t have. But in other industries, he who has the lowest expenses wins. We need to start embracing that sort of mindset, and not be passing on 40 cents [of cost] to the consumer in our insurance product.”
Fellow panel guest Kathleen Faries, head of Bermuda, at Tokio Millenium Re, said there had to be an entrepreneurial mentality to find ways for the industry to disrupt itself.
“We have to ask great questions and be willing to change. Disrupting your own organisation is very hard to do, but it is something that we have to do,” she said.
The panel was moderated by David Brown, senior partner for EY Bermuda, and regional insurance leader. When he asked for final thoughts on ways the insurance industry can control expenses, Ms Reardon reiterated the need for streamlining rather than passing extra expense onto customers.
“And learn how the microinsurance initiatives in the developing world are working; how are they able to sell policies in Zimbabwe for pennies of expense on the dollar. How they are they making it work,” she said.
“These are relevant policies for farmers who need it just for that crop season. How do we reverse-engineer that back to the developed world and embed those into our product offerings?”
Hamilton Insurance Group, the parent of Hamilton Re, is a founding member of Blue Marble Microinsurance, a consortium of eight insurance companies working to close the protection gap in developing countries. Its first venture was in Zimbabwe.
The fourth member of the panel, Lixin Zeng, CEO of AlphaCat Managers, said the marketplace would force the industry to cut expenses.
While Mr Millette said: “The most expensive thing about the industry is not that it uses too much paper in the copier [machine]. The most expensive thing is that the industry is so segmented. People fall into very narrow specialities, and then vigorously maintain the necessity of those narrow specialities.
“Other parts of finance are more athletic than insurance, and it’s exciting. It’s a better job if you wake up and you think about different things over the course of your year and the course of your career.”
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