Dynamic financial analysis (DFA) will drive change in the insurance industry and insurers will begin demanding far more information before they provide cover, warns Rick Hudson, Royal & Sunalliance group underwriting and claims director.
Speaking at the Association of Insurance and Risk Managers (Airmic) conference, he said the influx of banking staff into the insurance sector in the late 1990s had brought DFA to the fore, resulting in traditional business segments being dropped.
“Gone were the days where the general management had 35 years with the group, would defend unprofitable business segments or subsidiaries on the basis of heritage and the intuitively pleasing concept that markets self-correct,” Hudson said.
“The new generation of executives are somewhat more financially astute, they know that only efficient markets self-correct.”
Hudson added that DFA was pioneered by the banking industry in the 1990s and, as an economic model, said that investors shunned volatility of earnings.
Thus, the more volatile the earnings, the more capital a business requires to support it.
Hudson said it was a more rigorous, objective framework, based on risk-adjusted capital techniques and that the regulators would start looking to all insurers to adopt the same DFA and portfolio control techniques that are used in banking.
As well as exiting traditional markets, Hudson said insurers would be examining risks more carefully.
“I think it won't be so long off until my group, for insurance, won't underwrite or renew a risk unless it has all the information to deal with the decision prior to risk inception,” Hudson said.
“That will include all relevant underwriting information, down to such apparent trivia as premium allocations.
“It's trivia, but I know the industry wastes inordinate amounts of time in overseeing the cash flows and managing the paperwork due to poor administration and information.
“This needs to be re-engineered down or out.”
Finally, Hudson also said that further consolidation of capital providers was inevitable.
“My industry will become more economically and administratively efficient,” he said.