Alternative Products Changing P/C Landscape

“Convergence products,” or alternative insurance products such as catastrophe bonds and finite reinsurance products, will play a critical part in the competitive landscape of the P/C industry in coming years, said Clint Harris, vice president of research and publication at Conning Research & Consulting.

“We did find these alternative products were evolving and some where growing in terms of how much they were used,” Harris said of a recent study his firm conducted. “We also found in some areas there were decreases in some of the products of alternative products. What we found that was interesting was a movement to a technically supported integrated approach to risk and capital management.”

Harris said the study found a good portion of alternative products combine insurance risks with those that typically have been addressed by other industries. “They (alternative products) do combine some portion of what is typically referred to as traditional insurance and reinsurance, but these convergence products go one more step,” he said.

One major constraint to the use of alternative insurance products is overlapping regulatory issues in both geography and industry, Harris said. “But if the goal is increased capital efficiency that can exploit improved risk management techniques that are being developed and integration capabilities then the regulatory entities have to find a way to do their job without suppressing innovation,” he said.

Harris added that Hurricane Katrina has revived questions about the ability of the insurance industry in general to handle huge catastrophes and their financial impact. “Do you really want the government to handle this?” he asked. “Well, the first answer is if the insurance industry doesn’t have the capital to do that, then maybe the government should.”

Harris said there are other alternatives, including being able to securitize risk and to move the capital marketplace. “If we move that arena to the capital markets and securitization to finance these extreme issues, then we have access to huge amounts of money, and also have a mechanism that may be better able to have those who are at risk pay for the risk,” he said.

Harris added that the bigger detriment to getting capital into the industry isn’t the flow of capital so much as it is the flow of talent to be able to funnel that into a profitable venture.

“The real trick, of course, is to have the value proposition,” he said. “Can you cover the exposure and ultimately make money at it.”