Hamilton Re CEO On 21st Century Cyber Risks

Good afternoon, and many thanks, Dawnelle, for that kind introduction.

Before I begin my formal comments, I want to acknowledge the important work that the Bermuda Insurance Institute does to keep Bermudians at the top of their game.

The educational opportunities provided by the BII mean that all of us in the insurance and reinsurance industry have every chance to gain or enhance the qualifications we need to be competitive.

This is good for us professionally, and it’s good for the Bermuda market.

Providing an expert workforce to companies doing business on the Island is part of what keeps us top of mind as a preferred jurisdiction.

So, thank you to Dawnelle, your staff and your Board of Directors.

Well, this has been quite a year for our industry, hasn’t it?

We’ve had another relatively benign cat year – even though it may not feel that way in Bermuda, with Fay and Gonzalo storming through in October.

Interest rates are as low in December as they were in January.

The influx of alternative capital, and the ripple effects it’s having on reinsurers, hasn’t slowed. If anything, it’s increased.

We’re facing catastrophic new risks. Cyber hacking, Ebola, super storms – for an industry that sets prices based on past history, how do we assess the unknown risks of the future?

All of this puts incredible pressure on our underwriters to maintain underwriting discipline, our CFOs to figure out ways to improve portfolio returns, and our executive management to achieve profitable growth.

In Bermuda, we also have the overlay of a struggling economy, unprecedented unemployment and complex social issues.

If you look at the state of our industry through a traditional lens, you could be forgiven for thinking that things are pretty dire.

But I’ve always been a glass-half-full kind of person. And I do believe that we’re at an exciting moment in the development of our industry – one that offers real opportunity for growth.

But it’s not going to be easy.

We’re going to have to rethink some of the ways we do business. And we’re going to have to be quick to respond to changing market dynamics.

But Bermuda’s reputation as a major insurance and reinsurance hub was forged on the back of creativity and innovation, so I have every confidence that we’ll rise to the occasion.

So what do I mean when I say we’re going to have to rethink how we do business?

Well, let me start with an unsettling statistic. 35% of premiums written is used to fund the distribution of insurance products and services.

Clearly, the cost of doing business in our industry is far too high. We have to find ways to be more efficient.

We’re ending this year with a consensus that if our industry doesn’t figure out how to do this, other industries will do it for us.

My colleague, Bob Deutsch, told an audience attending a panel last week that we’re laggards when it comes to technology.

Bob feels there’s every likelihood that our competitors aren’t going to be other insurance companies. They’re going to be companies like Google.

I agree. And I see this as a real opportunity for our industry to shift the insurance paradigm.

This applies to insurers, reinsurers and brokers. In the 21st century, the relationship between technology and added value is clear: it’s symbiotic. We live in a digital world, and data is currency.

Those of us who figure out how to leverage technology for our respective clients’ benefits are going to be the ones who succeed.

We should know our clients better than they know themselves. Telematics and predictive analytics will help us do this.

Those of us who harness technology will revolutionize the way we do business.

Those of us who don’t risk becoming irrelevant in today’s market.

Relevance has been the subject of a lot of the conversations I’ve had this year with clients, brokers and the media.

It’s been the main word used when discussions have turned to alternative capital.

When we started 2014, alternative capital was called an existential threat to the reinsurance sector.

That’s pretty dramatic. The implication was that this wave of new capital threatened our very existence.

Actually, it might be more accurate to call it a tsunami.

A few months ago, Aon Benfield reported that the amount of alternative capital in the reinsurance marketplace was $59 billion. That’s an increase of 18% in the first six months of this year.

In contrast, traditional capital increased just 6% over the same time period.

So alternative capital providers are far outpacing traditional reinsurers in producing excess capital.

This has prompted some industry soul searching, but as we end 2014, there’s general agreement that alternative capital is here to stay, and that it’s an important component of responding nimbly to the needs of our clients.

In fact, in recent weeks, there have been several calls to drop the terms “traditional” and “alternative”.

Because in the final analysis, the issue is relevance.

In order for reinsurers to be relevant, their capital has to be as least as effective as the capital that cedants can get from other sources.

I mentioned cyber attacks and pandemics at the beginning of my speech.

Let’s take a look at the risks we’re facing in the 21st century.

A day doesn’t go by when we don’t hear of an event that seemed unimaginable just a few years ago.

I’m sure many of you have read about how hackers have infiltrated Sony Corporation to download new movies that haven’t been released and to access private emails and employment information for a wide variety of stars, including Tom Hanks, Angelina Jolie and Tom Cruise.

Early estimates say the costs to Sony could be as high as $100 million.

Ten years ago, could we have imagined a risk like that?

Could we have imagined driverless cars?

Could we have imagined Uber?

10 years ago, there was no Twitter. No Instagram.

Facebook was just 10 months old. Not even a toddler.

The exponential advances in technology have far outpaced the industry’s ability to respond with knowledge and discipline.

But you what? Maybe there are risks that we just can’t write.

My boss, Brian Duperreault, says that cyber risk has all the hallmarks of a war. Brian says the industry has never been able to cover war as a risk, and perhaps cyber falls into that category.

This has significant implications for insureds who may have to figure out how to manage this type of risk themselves.

I did say at the start of my speech that I feel optimistic about the future of our industry. In spite of the horror stories I’ve just trotted out, I really do feel there’s tremendous upside to being a part of today’s insurance and reinsurance sector.

We’re in a horrible market cycle, but this is nothing new. We’ll get through this like we always do.

The insurance industry is like a roller coaster. There will always be highs and lows, and the main thing is to hold on and enjoy the ride.

And there are signs that many of us in the industry are doing just that.

In spite of continued pressure on terms and conditions, and in spite of shrinking margins, companies are maintaining their underwriting discipline. They’re thinking through their exposures, and rejecting unreasonable requests. They’re being very conscientious about expanding coverage.

The threat of alternative capital is fostering all sorts of innovation.

Companies are examining the products they write and the markets in which they’re doing business.

Throughout the fall, differentiation and creativity were at the forefront of discussions my team had with clients and brokers.

We’re all being pushed to refresh our mindset, and for an industry that’s conservative by nature, that’s a good thing.

These are scary, but exhilarating, times. We don’t know what next year will bring, but I know we have the talent, strength and vision in the Bermuda market to face whatever comes our way head on.

In closing, let me share a few quotes about challenges with you. I couldn’t decide which one to use by itself, so I thought you’d enjoy all three. Here’s the first one:

“Life is either a daring adventure, or nothing at all.”

That’s Helen Keller, who most of you know was blind, deaf and unable to speak, but lived a full, rewarding, productive life.

Here’s the second:

“If you aren’t in over your head, how do you know how tall you are?”

That’s from poet T.S. Eliot.

And finally – my favourite:

“Let’s do this.”

That’s from the comic strip Peanuts, where all good advice can be found.

Thank you for the chance to share some of my thoughts with you, and may I wish all of you the happiest of holidays and an excellent new year.

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