What do London, Paris, and New York have in common? Increasingly, the answer is Turkey. As reinsurance hubs around the world face soft market conditions brought on by abundant capital and quiet catastrophe years, underwriters are hungry for opportunities to drive profitable growth. And while a wide range of mature market strategies may offer incremental returns, they can't provide the near-term gains that the market craves. The real solution is to bring more "original risk" to market — new risks transferred into the global insurance and reinsurance community. And that's where Turkey serves as a model for the future of the market.
Two ways to grow
Innovation tends to be reflective of the markets it serves. In the global insurance and reinsurance industry right now, this is evident at both ends of the innovation spectrum. For mature markets, participants continue to develop new ways to make protection more cost-efficient, measuring success in fractions of a basis point. At the other end of the spectrum, innovation is focused on delivering an overall larger market — identifying new risks that can benefit from risk transfer and providing the analytical capabilities to make them viable for capital providers at every step of the risk and capital supply chain.
Innovation to drive efficiency tends to get the most attention these days. Familiarity helps, of course: Insurers and reinsurers can apply their deep knowledge of existing risks and attendant data assets to improve what they already do well. But the benefits are limited. Every improvement results in less waste to strip out of future transactions, and the overall opportunity is capped by the total frictional costs in the process. You just can't cut more than 100 percent.
While efficiency is important, the global reinsurance market really needs new risks to support sustained profitable growth. Efficiency deals with risks already in the global insurance and reinsurance supply chain, but we need original risk - the transfer of risks not yet covered into the global system. Original risk consumes capital that's not yet productive, provides fodder for subsequent risk-transfer transactions (such as reinsurance and retrocession), and generates new premium at every step in the global capital supply chain.
And that is what we need. After all, the estimated target allocation of the global pension fund sector to insurance-linked securities (ILS) is approximately USD 900 billion. ILS capacity (notwithstanding the target allocation) could reach USD 150 billion by 2018. The market needs more risk to consume.
Potential ILS Capacity
Turkey as the model
Even with the capital overhang in the market right now, discipline remains. Fortunately, some regional markets provide the conditions necessary for prudent risk transfer. In fact, that is why PCS chose to focus on Turkey with the Istanbul Underwriting Centre (IUC) and is looking to grow further in the region.
To deliver the opportunity for sustained, profitable top-line reinsurance market growth, a regional market should have sufficient natural catastrophe exposure and a sufficiently robust and sophisticated local primary insurance industry. Turkey has both.
PCS and IUC have identified approximately five events (three earthquakes and two floods) in the past ten years that would have qualified for catastrophe designation according to our methodology. Despite the low frequency, though, the exposure is sufficiently significant to have supported the evolution of the market's risk-transfer capabilities.
The Turkish insurance market's sophistication in addressing catastrophe exposure has led to annual reinsurance spend of more than USD 4 billion, not to mention two catastrophe bonds and industry loss warranty activity. The entry of Turkey's original risk into the global reinsurance industry has created opportunities for a variety of capital providers. Together, PCS and IUC are working to help increase appropriate risk-transfer and capital management activity to support profitable growth from the primary insurer through to the retrocessional market.
Turkey is a valuable case study on how to unlock original risk for the benefit of insureds and capital providers worldwide. A market with great growth potential, Turkey has shown initial steps that can quickly become a platform for accelerated risk-transfer sophistication and results. To bring more original risk to market - and support the profitable growth that the industry seeks - the market now has a useful example to follow.
Tom JOHANSMEYER runs the new reinsurance services unit of ISO and has oversight of the Verisk Insurance Solutions - Claims and Crime Analytics marketing department. Launched in early 2015, the group engages with stakeholders all along the risk supply chain to identify and implement new tools and services focused on the needs of reinsurers and the insurance-linked securities community.
Previously, Tom was director of marketing for Verisk Insurance Solutions - Claims and Crime Analytics. Among his responsibilities were the launch and management of PCS ILS marketing campaigns and reinsurance new business development. Prior reinsurance experience includes stints in marketing at GUY Carpenter and consulting at DELOITTE.