Thoughts on a long plane ride

On a recent trip from New York to Tokyo, I had time to reflect on where we have been as an industry, the rapid pace of change we have seen over the past decade, and where we are going.

Some of the basics of our business have changed very little. At our core, we continue to be in the 'risk' business, which by nature is unpredictable with regard to cost of claims year on year. Still, the goal of business leaders is to maximise the return on capital within this environment. Spreading risk remains the most effective way for companies and economies to plan for growth in a more stable environment surrounded by spikes or catastrophic loss potential.

The means by which we measure risk have certainly changed over the years, and have had a significant impact on the amount of capital needed to support the businesses we are in. Better data and technology has made modelling potential outcomes more accurate, though we may, on occasion, be surprised by catastrophe losses caused by Mother Nature, as in the summer's record-setting floods in the UK.

Raising the bar

With improved means of modelling risk, regulators and rating agencies have raised the bar on capital adequacy. We appear to be settling in on these new requirements and managing capital allocations in this new environment is essential.

Enterprise Risk Management (ERM), once perceived to be utopia from a risk management perspective, is now becoming part of every firm's risk management strategy. Evidence of ERM practices is, in fact, being included as part of the criteria for judgment by regulators and rating agencies.

The convergence of the investment and (re)insurance communities is also picking up speed. We see it in the improved methods of quantifying the risk within an insurance portfolio and the relative comfort of investors with these measures of risk. We observe it in the increased capital allocation now required by regulators and rating agencies driving demand, and therefore supply, of capital. And we notice it in the opportunist capital investor recognising the prospects for a favourable return.

Indeed, much has changed.

It is said that "it takes money to make money". That said, we see the need to free up capital for investment as a major objective for insurers looking to grow in the future. Reinsurance has been one of the tried and true ways to accomplish this. The increased utilisation of Cat bonds and other financial tools to raise capital only makes the decision more complex.

What is the right mix of risk transfer into the traditional reinsurance marketplace versus the capital markets?

The need for an intermediary

Herein lies the future, particularly for reinsurance intermediaries. It will test the full service broker model that some, including Guy Carpenter, have invested in over the years - from the assessment and modelling of risk data, to the development of more integrated capital management/reinsurance structures, to the presentation and execution of transactions that create capital value for our clients.

It certainly makes sense. Our clients need an intermediary more than ever. As our industry refines its ability to quantify risk, we will continue to attract the interest of hungry capital. Presenting these opportunities, indeed bringing the parties together to enact these transactions, is simply a natural extension of the role of the broker.

At its core, our industry will continue to be centred on the transfer of risk. For the most part, the changes we have seen in the past decade or so have been in terms of the 'who', the 'what' and the 'how' of this transfer. For those who connect the dots and manage their capital most effectively, the opportunities are extraordinary.

David Spiller is president and chief executive of Guy Carpenter.