If you’re going to successfully operate a relatively new reinsurance company in these troubled times, you better know what you’re doing. Fortunately Bermuda-based Hamilton Re would seem to pass muster.
Firstly, it’s not a start-up. Hamilton Re is the successor company to SAC Re Ltd., the reinsurer established by SAC Capital hedge fund baron Stephen Cohen, which was acquired by tech firm Two Sigma and Brian Duperreault in December 2013.
Secondly, with the exception of Hank Greenberg, you probably won’t find anybody in the re/insurance industry with more knowledge and a better track record that Duperreault. Starting as an actuary with AIG, he subsequently built ACE into a large and profitable company. He then revamped MarshMac, assuring that it maintains its place as the world’s biggest re/insurance broker.
One of the real virtues of the annual Reinsurance Rendezvous in Monte Carlo is being able to meet and talk with people like Duperreault, Hamilton Re’s CEO, Kathleen Reardon, and its Chief Strategy Officer, Bob Deutsch, as the company approaches its first anniversary under their leadership.
Duperreault made it clear that the Hamilton Group operates as a separate organization from Hamilton Re, which is Reardon’s responsibility, although they are linked. “I think the mission and culture will go all the way up to the limited company, Hamilton Insurance Group” Reardon said. “But it’s really having a successful leadership, experienced management, teaming that up with our Two Sigma’s technology in asset management that’s unique,” as she explained how the reinsurer differs from other companies
“In this marketplace, we need to differentiate ourselves, and I think that combination will give us a really good start,” she continued, explaining that the combination of classical reinsurance underwriting with Two Sigma’s technology expertise would certainly result in “a lot of enhancements we can make to the traditional reinsurance underwriting capabilities.”
The Group has chosen Hamilton USA, headquartered in Princeton New Jersey, to initiate its business plan. It is an “insurance platform,” Reardon said, which “will lend itself to analytics. We’ll be allowed to do a lot of big data crunching on the insurance platform. On the reinsurance side, we will benefit, as well. But we’re still a new company and we’re still growing and maturing, so it will take some time.”
In achieving that growth Hamilton Re will initially play to its strength, and will concentrate on “lines that lend themselves well to data analytics,” Reardon said. “It would normally be frequency over severity, because you have more data, tighter around the mean, a little bit easier to analyze,” Duperreault added.
“It doesn’t necessarily limit us to that,” he continued. “Technology isn’t just decision-making around the risk. It’s how you move that risk through the system, front to back. Technology also means having a very efficient processing structure.
“Again, that would be probably more important in the frequency area, where you’ve got a smaller premium, and so there’s a smaller amount of money to pay for the process. Where the process is more important, sometimes, even more than the risk price of the premium. So for that business would be logically the ones we would do, but we don’t want to limit ourselves. We say that anything that technology would be the edge would be the business that we would look at, and we’re building our team up, and we hope we’ll be operational, writing business, by the end of the year.”
Turning to the more general topic, the reinsurance industry, Reardon said: “It’s been a benign loss year. I don’t envision a hard market being created at the 1/1 renewal season. I expect the soft conditions to continue. But, as far as the reinsurance industry being on negative outlook, we’ve been there before a few years back.
“The industry stepped forward and proved itself, and I think that’s what will happen now. All the rating agencies have cited ways to step up and outperform during this negative outlook — geographic distribution, implementing your strategy successfully. We have the right team to implement our business strategy. We’re going to differentiate ourselves from others. We have a different proposition to offer people.”
The reinsurance industry’s current situation has produced renewed interest in the casualty side of P&C. Duperreault, who began his career in casualty, said: “It’s created more interest,” adding that it has “always been a very interesting line of business in the United States.” He indicated, however, that it “was much less so, outside the US, where first-party business was always a dominant business, auto aside. I was a casualty guy in the international. I was back burner then. Is it more interesting today that it has been? I don’t know if that’s the case. I’m not sure that’s true.”
The real advance in P&C has come in the property sector. “Modeling has been really well developed. It’s an amazing change in the 20 years that the models have really been around, an amazing change in the way property is done, Duperreault. Casualty on the other hand is “not as catastrophic a business and, therefore, there wasn’t this moment in time, when you’d say, “Oh, man, it was so bad, we better try a different way. It’s more evolutionary, as opposed to [being] based on some big event that’s caused modeling to be moving into the casualty side.”
Addressing the increase in alternative capital in reinsurance, Duperreault said: “You have external forces coming in to look at the business, saying, ‘This should be logically looked at in a more in-depth way.’ I think it’s probably a combination of the two subjects we talked about earlier, this question of analytics, data.”
Asked about Aon’s conclusion that about 20 percent of capital in the reinsurance market is now, more or less, from alternative capital sources, Reardon explained that the industry has “always had alternative options — cat bonds, in general — but now they’re thinking about it more seriously.” Although Hamilton Re doesn’t currently have any alternative capital product offerings, “it’s something we can look at in the future,” she said. “But if I look at what the clients are asking for, they’re asking for alternative options, traditional options.
“Both alternative and traditional can operate together and provide the optimal solution to the client. I think that will work well. Ultimately, Hamilton Re is well-positioned to go to lean on either side. So, it will be interesting.”
Although some Rendezvous participants speculated that a major catastrophe might trigger rate rise, the general consensus, mostly based on the major catastrophes that occurred in 2011, was that if such an even occurred, its effects would be limited to certain lines.
Asked about that possibility, Reardon said: “I think the same market conditions exist now. For example, aviation has had an increased frequency of events this year, so we’re expecting some hardening within that class of business – last year, the same thing with the Canadian and European floods. There were some rates maintained or hardened in those regions. After 9/11, what happened, which was interesting; it helped the terrorism market take off. It created demand and people with solutions. That could be an interesting outcome, after the next catastrophe.”
I think the industry never hardens, particularly now, because it’s so geographically spread,” Duperreault added. “When the US was the dominant player, even there, when we had the hard market in the ’80s, it was a casualty hardening. The property sector didn’t really harden.
“9/11 was interesting, because it touched almost every line. I’ve never seen anything like it. It was first party, third party, it was aviation, it was terrorism, it was everything all rolled into one. But markets are always isolated hardening. It [a catastrophic event] could be in a country or it could be a line of business, but it never happens across the whole board. It just doesn’t, probably never will.”
Reardon also confirmed that Hamilton Re is “exploring emerging markets,” however, “we take a tempered approach. It’s just that much more due diligence, that much more visiting the clients, getting to know the clients, and really supporting who has the right management, the right culture that fits well with our company, and try to support them.
“You can’t ignore China. They will be a big force to reckon with in the future, so tread carefully. Realize the shortcomings. Perhaps the data quality might not be where the Western world is, for example. Know the deficiencies, measure them, and support who you think is the leader in that community.”
In order to analyze the data you want to use, you need to make sure it’s reliable, and that requires a working knowledge of how that data is produced. “I think you need to really visit the countries, know the culture,” Reardon said. “Premiums are generally published figures, and relatively reliable. It’s the aggregates that you might struggle to get.
“It’s really doing a little bit of benchmarking, comparing one Peruvian company to another, their attachment level, the non-exposure on the books. Does it make sense? Are their average premiums different? Maybe a bit more of a comparison exercise.”
As the head of a major insurer, and then a major broker, Duperreault can speak on both sides. “Certainly, the brokerage industry loves to create markets for its business. It helps its clients that way.” He added that not only did you have to be understanding of the trends, but you also had to “help promote those trends and work with these new markets to see if they could provide the kind of capabilities that the existing markets were doing. It’s something that the brokers have to keep their eye on.
“The changes in the way business is done, it’s much more sophisticated. The broker has to increase their level of sophistication to match the sophistication of the buyer and the seller. You’re in between the two. I think the modeling, all of these things that has occurred, have made the broking business — I don’t want to use the word professional — it’s changed the profession to some degree.
“It can’t just be an interpersonal relationship that wins the day. You have to have that, but you better know a lot about what you do. You have to become very professional in analytics, in your knowledge of new capital sources. It raises the level again.”
Duperreault thinks that overall reinsurance brokers are doing a good job,” but he also pointed out that “there’s been a narrowing, a reduction in the numbers because of that requirement that I just described. You get fewer larger players, because you need to have the capabilities within the company to deliver the product.” Larger brokers are in a comparatively better position to invest in the people, and technology to meet those needs.
“I’d say the broker’s doing a nice job offering the clients a bouquet of options,” Reardon said. “Is it alternative? Is it traditional? They’re thinking outside the box. Then they’re supplementing that a lot more now with, perhaps, if there’s a vendor model that’s not available for a particular region of peril. They’re doing a lot of supplementing of those models. They’re offering the clients now a much better package. It seems like they’re doing a good job.”
She also indicated that – with the exception of the prices [too low] – writing reinsurance coverage is being done well between brokers and reinsurers. “The brokers are always going to push for the best, for the most, for the least, and that’s their job,” Duperreault said. “They should do that job, and they’re pretty good at it. We have to do ours.”
Reardon added that the reinsurance brokers have “done a nice job of seeing what reinsurers can do – what are the pricing terms and conditions. They’ve done a nice job of fielding the reinsurance market.”
Deutsch explained that the “mainly help their clients with actuarial services, leading agency analyses, with modeling, so I think the brokers are doing a good job for the clients.”
In general the reinsurance brokers have become more knowledgeable about what their clients, the primary insurers actually need. “I think it’s some of the requirements that we put forward,” Duperreault said. For example primary carriers can tell their reinsurance brokers that they’re “only going to do it based on the following.
We want that,” he said. “They go further. They’re in [with their] clients all the time, acting much more like a strategic consultant than a broker. They’re spending a lot more time with the client on a much higher level, analysis of the activities of that insurance company. They come with that to us. They force us to raise the level of our game. Then we force them to raise the level of their game. It’s an interesting “Star Wars” process going on.”
It seems to be working. “Look at the 20 years of particularly cat insurance, what’s happened in the 20 years. It’s an incredible story of increased sophistication,” Duperreault said. “Remember, we still don’t exactly know what’s going to happen tomorrow. Nobody can predict the next storm, where it’s going to land, or a seismic event. So, let’s not pat ourselves too much on the back.”
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