From September 10-14, a group of young (ages 30-50) business and financial leaders gathered in Montreaux, Switzerland at the fifth annual meeting of the G-20Y summit. The mission? To discuss sustainable prosperity in the face of a world increasingly at risk.
The summit covered ten issues specifically in a series of structured discussions from which attendees then developed sets of recommendations for the G-20 heads of state and leading international financial organizations. The topics ranged from energy markets, to food security, to global financial reform and other topics.
This year’s summit was an especially important one, as it featured for the first time an insurance committee. This group discussed the role insurance plays in the global economy and how best to ensure that globally important insurance companies do not fail, endangering other sectors of the economy, as AIG’s meltdown in 2008 did.
Zurich North America CFO Dalynn Hoch co-chaired the insurance committee, and spoke with National Underwriter on how the group developed a compelling set of suggestions not just for how the insurance industry can be better at what it does, but how it can better synch with the efforts of every industry that insurance touches. The G-20Y Summit is nothing if not ambitious, but it’s already producing the kind of thought the insurance industry could use, and in so doing, has identified what might just be the four most important issues facing the insurance world now, and in the future.
Let’s take a look.
1. Better insurance regulation
In the wake of the global financial crisis, kicked off in large part by AIG’s astonishing collapse, insurers across the board have been subject to additional regulatory scrutiny. Systemically important companies (whatever that means — the federal government is having a hard time deciding who is systemically significant and who is not) are under even stricter oversight to ensure that they don’t fail, and if they do, they won’t cause a domino effect across the economy.
The problem, of course, is that insurance is a global business, with lots of companies selling across multiple regulatory jurisdictions. This gets even more complicated if they are active in the United States, which has a separate jurisdiction for every state.
What insurers and the public need, the committee suggested, is better regulation. It recommends global group supervisory colleges (regular meetings of regulators to discuss issues that affect them all) with recognition of a lead supervisor. Zurich’s Dalynn Hoch noted that layer cakes are great when they’re made from Swiss chocolate, but not so much when they’re made from duplicative regulatory efforts. So the point here is for regulators to harmonize their efforts — to make how they do things work well in conjunction, while still preserving the local or regional nature of the regulations themselves. It is far easier said than done, but it is the kind of thing that, until it is achieved, will simply hold back insurers in terms of efficiency. Cumbersome regulation simply increases costs that get passed along.
When it comes to systemic risk, Hoch noted that regulators often focus on the size of the insurer rather than the nature of their business. AIG was big, indeed, but its size isn’t what made it problematic. Its credit default swap business was. Systemic risk, then, should be determined by the level of participation in risk behavior, nothing more. And systemic risk regulation should focus on systemic risk management, nothing more.
One area where regulatory disharmony really gets in the way is capital standards, or how much money insurers need to keep on hand to cover their risks. The insurance committee suggested that insurance capital standards apply at the group consolidated level and recognize the specific risks in the insurer’s business model and organization. Regulators should be allowed to be flexible and to exercise sound judgment when it comes to evaluating capital standards, which should be risk-sensitive and comparable across jurisdictions.
2. Big data
Last week’s KPMG Insurance Conference mentioned big data and data analytics more than a few times as one of the most important developments in the modern insurance industry, noting that insurers had to take advantage of it immediately. While this is true, it would help if rules on data governance and privacy were optimized.
To that end, Koch said, the committee recommended that governments support the digitization of records and of open data platforms. The more insurers can engage big data, the better it can analyze that data and understand the risks it is covering. This, in turn, can make it easier for insurers to develop new products to address emerging risks, and at a pace far faster than today’s data environment will allow.
The communique also called for a global data governance and control framework that would provide a swift regulatory approval process across jurisdictions. Think a big data equivalent to the regulatory harmonization called for earlier.