The reinsurance industry has been slow to respond to new risks because of its tendency to look to the past to predict the future, according to Brian Duperreault.

The Hamilton Insurance Group chief executive officer, speaking yesterday at the opening of the Baden-Baden Reinsurance Symposium in Germany, added that reinsurers had new roles to play in a “new world of risk” — and opportunities existed for those prepared to take bold steps.

The future of traditional reinsurers is frequently being questioned as the role of “alternative capital” — in the form of insurance-linked securities such as catastrophe bonds — seizes an increasing share of the market.

But Mr Duperreault argued that the industry’s existence was not under siege and that in fact, this was a great time to be a reinsurer. However, those who did not adapt would fail.

“Yes, the industry is at a critical inflection point,” Mr Duperreault told an estimated 500-plus delegates at the Kongresshaus in Baden-Baden. “But we’ve been at points of inflection before, and it’s usually the place where real opportunity lies.”

The Hamilton CEO was the last of three keynote speakers at the event’s opening ceremony, following Hannover Re chairman Ulrich Wallin and Allianz Re CEO Amer Ahmed, following an official opening by Baden-Baden mayor Margret Mergen.

Mr Duperreault characterised reinsurance as being essentially capital, and that the industry had to be as effective as capital that cedants could obtain the other sources. While that had always been true, he spelt out several factors behind the changing face of the industry today, including the broad array of capital markets and excess capacity in reinsurance.

“As insurers get bigger and bigger — and they have been getting bigger and bigger — they can handle more risk,” Mr Duperreault said. “They don’t need to lay it off the way they did when they were smaller. The biggest issue for the reinsurer becomes whether the cedant will continue to cede their risk.

“Insert into that dynamic a brash upstart — alternative capital. Now, bookend that upstart with risks we don’t fully understand, and markets that are still emerging.

“It’s a cliché to tell you that we’re facing a dramatically changing industry in a dramatically changing world. Just watching healthcare systems in the developed world struggle to contain the Ebola epidemic is proof of the tenuous grasp we have on 21st century risks.”

The conservative nature of the industry was part of the reason why it had been slow to respond to the challenges and opportunities of new risks, Mr Duperreault said, adding that vast legacy systems established through mergers and acquisitions was another key factor. “Being nimble and innovative can be difficult when your organisation is carrying decades of administrative weight,” he said.

“For those carriers who want to take big, bold steps, this is where things can get interesting. We’ve done a very good job as an industry in developing a business model that supports traditional risks. For the most part, we have risk assessment, modelling, underwriting guidelines and claims handling down pat.

“But here’s where the real threat lies. And it’s not existential. It’s quite pragmatic.

“Our industry looks at the past to predict the future. We use trends and patterns to develop the framework for our pricing, terms and conditions.

“But there is no ‘past is prologue’ in the world of cyber threats, climate change, global pandemics and terrorism. This is a new world of risk. Again, a cliché — but true. We have new roles to play. Capital is the fulcrum upon which new risk and new roles pivot.”

Alternative capital was disruptive and had forced reinsurers to become more innovative, he said.

“This is where traditional capital can call on its inherent strengths,” Mr Duperreault said. “High quality underwriting and an enhanced asset strategy still make a traditional reinsurer an attractive partner to cedants.

“And reinsurers who respond to changing market dynamics know how to stay relevant with their capital: in some lines of business, they can provide solutions that alternative capital can’t, like multi-year coverage and reinstatements.”

There were few “pure” reinsurers around, as many had diversified into direct insurance — and diversification gave carriers a better chance of long-term success, said the Hamilton CEO.

“Within a diversified company, capital is allocated to insurance, and it’s allocated to reinsurance,” he said. “You move it back and forth as you navigate market fluctuations and catastrophic events.”

He expected to see more consolidation in the industry.

“The confluence of less purchasing will naturally force more M&A activity in our business,” Mr Duperreault said. “There will be — there already are — less pure cedants and less pure reinsurers.

“In the end, we’ll all be doing the same thing: we’ll cede risk, we’ll assume risk, we’ll directly access capital markets. This dynamic doesn’t represent an existential threat to the reinsurance market, although it may signal the demise of some carriers. This is the natural evolution to a blending, a great convergence in our industry.”

He added: “How well we match risk and capital will be driven by how well insurer, reinsurer and broker adapt to the winds of change.”