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Convex CEO: Insurance industry's capital structure is causing 'huge problems'

Short-term thinking associated with quarterly reporting by publicly listed insurers is causing "huge problems," according to Stephen Catlin, co-founder of specialty insurer Convex.

Speaking on a panel Oct. 3 at an insurance technology conference in London, Catlin recalled that when the Lloyd's of London insurer he founded, Catlin Group, went public, he was "deeply shocked" by the amount of time that went into comparing one quarter's earnings with other periods. He dismissed this as "irrelevant," noting that it was not possible to judge criteria such as reserving and pricing adequacy by analyzing individual quarters.

"To watch people taking quarterly decisions on a medium-to-long-term business is frankly insane," he said. He questioned what the role of the public equity markets would be in the future, and whether the "smart CEOs of the future" would be working at public companies or places where they could take a longer-term strategic view.

"It is a capital structural issue, which is giving the industry huge problems," he said.

Catlin's latest venture, the privately owned Convex, launched in April 2019 with $1.8 billion of committed capital. Catlin Group was sold in 2015 to XL Group, later acquired by Axa.

Speaking on the same panel, Vicky Carter, chairman of global capital solutions at reinsurance broker Guy Carpenter, noted that it was a "real challenge" trying to get investors to renew their provision of capital to Lloyd's syndicates, given recent losses.

"Trying to persuade them to continue with it is not easy. They are saying,'why should we roll the dice?'" she said. While noting that industry commentators frequently say the insurance industry is awash with money, she cautioned, "I think there is a real challenge over capital."

Cyber failings

Catlin also told the conference that the insurance industry is failing its clients in providing protection for cyberrisk. He described cyber as the insurance industry's "biggest challenge" because of the size of the potential losses.

As an insurer, cyberrisk "terrifies" him, he said, but added that if the industry could not provide solutions for its clients' biggest potential exposure, "we are actually failing. As we sit here today, I would say we are failing."

Another failing of the insurance industry, Catlin said, is its ability to explain its value to outsiders. He blamed the gap between economic and insured losses — the so-called protection gap — in part on this, noting: "We are terrible at selling our value proposition to the outside world. Absolutely terrible at it."

He also bemoaned the struggle of explaining the utility of insurance to politicians, joking that if one tried to engage a politician on an event with a one-in-25-year return period, "not only is he asleep, but snoring."

He added: "We have to get politicians to understand that we actually do something of benefit to their voters."