Goodbye 2016, hello 2017—year-end analysis and predictions
Kathleen Reardon, CEO of Hamilton Re
What were the three most important developments in the re/insurance industry in 2016?
As far as the Bermuda market is concerned, the most significant development was Solvency II equivalence being officially granted by the European parliament in March 2016. This accomplishment affirmed Bermuda as a market dedicated to meeting international requirements at the highest level and put re/insurance companies with operations in Bermuda on an equal footing with their EU counterparts.
The rise of populism on both sides of the Atlantic resulted in surprising political upsets. The UK referendum’s vote to leave the EU and the election of Donald Trump as US President signalled a desire for dramatic change in political and social policies. This has created an environment of uncertainty that will require flexibility and agility on the part of the re/insurance sector, something that may prove challenging for more traditional carriers and lend an advantage to startups.
There was a rise in the frequency of large, but not catastrophic, claims during 2016. This helped markets maintain a vibrant abundance of capital that supported depressed market conditions. A factor in establishing a ‘new normal’, the challenge and the opportunity now is to create partnerships that enable the innovative and creative use of this capital.
What are the five topics you expect to be prominent in the industry in 2017?
While 2016 was the year when the re/insurance industry collectively embraced the need to incorporate data science and analytics into its strategic and operational planning, 2017 will be the year when the ‘rubber hits the road’. I expect an acceleration of cross-sector pollination as insuretech gains increasing traction. Those carriers who grasp the possibilities and create organisational and operational structures that enable true innovation will thrive in this environment.
With a looming talent gap in the US, and the increasing dominance of the millennial demographic, global markets have an exciting opportunity to truly diversify their workforces. The Insurance Careers Movement, led by Hamilton Insurance Group chairman and CEO Brian Duperreault, and supported by XL Catlin CEO Mike McGavick and Lloyd’s CEO Inga Beale, among other industry leaders, has raised awareness of the pressing need to improve the industry’s image and promote the industry’s many career opportunities. I believe this initiative will hit a tipping point in 2017, creating a momentum that will transform recruiting, hiring and talent development policies.
In the Bermuda market, M&A activity will continue as carriers seek to curb expenses and create efficiency strategies and as investors look for attractive opportunities to maximise their capital. Recent deals such as Sompo’s acquisition of Endurance and Fairfax’s purchase of Allied World are notable for the generally ‘hands-off’ approach new owners are taking with their acquired carriers. It’s too soon to tell whether this signals a trend.
Given the geopolitical upheaval throughout the Middle East, and ongoing political uncertainty in the UK, EU and the US, contingency plans will be the order of the day throughout 2017. In Bermuda, it’s widely expected that President-elect Trump’s planned overhaul of the US tax system will have negative ramifications for Bermuda. However, it’s important to note that the Island’s re/insurance sector isn’t successful because of tax advantages. Rather, it’s the enlightened and disciplined regulatory and legislative system and the sophisticated financial services infrastructure that enables the market to remain competitive.
An upside of the rejection of the political status quo could be the rejection of government involvement in how business is conducted. Restrictive regulations hinder the ability to move responsively to market needs. This has been an area of advocacy that I expect will attract increasing attention in 2017.
Julia Henderson, senior vice president at Brit Insurance
What were the three most important developments in the re/insurance industry in 2016?
Beyond the global sociopolitical paradigm shifts, the biggest development in 2016 which specifically impacts re/insurance is the comfort level that has taken hold in the depressed return environment. As has been widely reported, once pension funds decide on an allocation to an asset class, permanently depressed returns follow and our industry has become an asset class to these behemoth pension funds. The yardstick of yesteryear has (finally) been shed, and the reality of this, along with the realisation of the ease of recapitalisation, is that portfolio managers across the board are now comfortable with 400 to 500 bps spread returns.
‘Convergence’ is another theme which has been very clearly evidenced this year. With over $2 billion in net redemptions (the largest seen in many years) in the cat bond market, this money is finding its way to the traditional market via established underwriters. These underwriters, for whom the critical success factor is risk selection, are linking cheaper forms of capital to risk. Virtually all ‘traditional’ reinsurance underwriters have a third party capital strategy, and the majority have grown in 2016—and are likely to continue growth into 2017.
Last, M&A left its mark in 2016, with depressed returns and the well of reserve releases drying. This (and expense management in general) is to be expected. As the beneficiary of Solvency II equivalence (and a global best in class regulator) and the home to many of the largest third party capital plays, Bermuda has both the regulatory and technical expertise to weather the depressed and uncertain global re/insurance market.
What are the five topics you expect to be prominent in the industry in 2017?
On a macro level we are following how the global political seismic shifts will impact re/insurance, Bermuda and financial markets generally. On a micro level, underwriters will continue to source non-traditional risks, the seeds of which are finally sprouting. They include flood, terror, cyber and other ‘coverage gaps’ which have long been overlooked by our industry. Acknowledging that even the well-developed insurance markets in the world cover around half of all economic loss in catastrophes is long overdue.
We will continue to see the expansion of consolidation, expense reduction and third party capital strategies. The growth of startups and new entrants is slowing and I believe this is likely to continue as well, since using established underwriters with established relationships, in this low return environment, is the most efficient deployment of this capital.
Efficiently deploying capital, staying disciplined and honing risk selection expertise, as we have done at Brit, will prepare our industry for the long hard road ahead.
Leila Madeiros, senior vice president, deputy director and corporate secretary at ABIR
What were the three most important developments in the re/insurance industry in 2016?
Solvency II implementation: while it may have seemed a very long-winded process of more than seven years, the actual start date of implementation on January 1, 2016 is a testament to a dedicated project that involved thousands of man hours and pages of rules and regulations and millions more in financial resources. The fact that it launched despite the numerous stops and starts is monumental!
The critics may point to the continued lack of convergence of the regulatory framework across all of Europe but this is the first year and it was the expected norm to anticipate teething problems and issues with national jurisdictions still trying to implement within their sovereign context. In the coming months and years as the Solvency II regime comes under review, we can expect further tweaking of a regulatory system that will have had the benefit of a couple of years of full implementation.
Populism revolution: No matter which side of the Atlantic you find yourself, 2016 was marked by a resurgence of populist politics clearly demonstrated by the outcomes of the UK referendum on membership of the EU and the US presidential election. While the results of both were always within the realm of possibility, they were not the expected results. What this will mean for the re/insurance industry is still unfolding and will continue to do so for the next couple of years but the lesson learned is that this trend has now changed from being the ‘long shot’ to a new norm. Its application to how we develop our products and services to meet the needs of our customers will have to be fine-tuned to ensure we have our ears ever closer to the ground at all times.
No change: 2016 saw the continuing trend of M&A activity and the sustained effort in our industry to reduce expense ratios and grow business in a tough environment. By all reports, 2016 was more of the same and it seems that the lack of any significant change is the catalyst for the surge of interest in technology and how it will shape our industry going forward.
Bradley Kading, president of ABIR
What are the five topics you expect to be prominent in the industry in 2017?
The five big issues for 2017 are: 1) closing the protection gap; 2) tax policy; 3) trade policy; 4) technology; and 5) international capital standards.
The industry continues to have record amounts of capital to put to work; and the formation of the Insurance Development Forum provides a good opportunity for insurers to partner with the World Bank and the UN to demonstrate the value of insurance protection in building economic resilience. The industry will try to push to meet the G7 goal of 400 million more policyholders by 2020.
With the growing success of populist movements, governments will move more towards economic nationalist agendas on tax and trade policy. The focus will be on growing domestic jobs and protecting local industry. Populism gets intrinsically linked to tax and trade policies that are protectionist in nature: not a good outcome for businesses with global footprints. The stage is set to move away from the post-war consensus that global trade would lead to global peace.
Technology will continue to drive disruption in the insurance business as executives focus on ways to cut out expenses. Technology—not trade—has been the key driver of unemployment. Disruption will grow in the insurance business.
The IAIS will continue to push for international capital standards but global standards will run into headwinds as the US says ‘no’ and economic nationalist sentiments undercut the foundation of the standard-setters. The standard will be created, adoption of the standard is in question.
Damien Smith, director of underwriting at Hiscox Re
What were the three most important developments in the re/insurance industry in 2016?
Market results deteriorated significantly over the first half of the year despite continuing benign cat activity suggesting we are at a tipping point. Property cat rates dropped below technical adequacy in several international territories. The last is continuing M&A activity plus new entrants, notably Chinese reinsurer startups.
What are the five topics you expect to be prominent in the industry in 2017?
With continuing softening in 2016 year-end, results for some could deteriorate and several re/insurers are likely to make a loss.
The imperative for reinsurers to bring additional value and differentiate in the eyes of their clients will continue in a tough trading environment.
Macroeconomic trends such as rising interest rates could distract from the adequacy of pure underwriting returns and impact ILS strategies, while currency fluctuations will impact re/insurer valuations and the potential for M+A, as well as reinsurer appetite for locally denominated overseas exposures.
Brokers will continue to push facilities and electronic trading to address margin, and the movement of insured US flood peril from the public into the private market is likely to be significant.
Craig Swan, managing director, supervision, Bermuda Monetary Authority
What were the three most important developments in the re/insurance industry in 2016?
The shock Brexit result in June led to speculation about London’s importance as a business centre diminishing and whether the relationship between London and Bermuda would remain strong. Bermuda’s investment in London has been significant, with our insurance industry supplying some 35 percent of Lloyds’ capital and creating a number of jobs within that city. Should there be a ‘hard’ Brexit with the loss of passporting rights then it will likely increase the important of other financial centres in Europe, but London will likely remain an important market for Bermuda, and the investment there by Bermuda insurance groups will probably continue to be significant.
After the largely unexpected win for US President-elect Donald Trump in November, the reinsurance industry (and the rest of the world) is now waiting to see what his actual economic policies will be. For Bermuda, some very US-centric campaign promises may lead to attempts to pull jobs back to the mainland and address arrangements that, on a net basis, have not been perceived to be favourable for the US. However, once again, I do not think that this will impact Bermuda much because over the years we have evolved into our own property/catastrophe specialised reinsurance market. As the world’s third largest reinsurance centre, our value to the US in supplying property catastrophe, agriculture and professional liability capacity is unquestioned. There remains enormous uncertainty, particularly as the Trump administration looks to reduce corporate taxes and then eventually seeks to address the gap.
The growth of fintech has a potentially major impact on the global reinsurance market. I have not seen anything this potentially market-altering since the initial growth of insurance-linked securities (ILS) a few years ago. However, it remains to be seen what the actual impact of startup insuretech companies will be. Like ILS and the Bermuda Special Purpose Insurers (SPIs) that followed, insuretech companies may represent only a small piece of the global reinsurance market, but they have the potential to be disruptive to insurers that do not keep pace.
What are the five topics you expect to be prominent in the industry in 2017?
Despite initial optimism in the global financial markets, the reinsurance industry (and the rest of the world) is waiting with bated breath to see what the final Brexit deal will look like and what US President-elect Trump will actually do. Following the recent resignation of Italian PM Renzi, it remains to be seen what political casualties will be claimed in 2017 as an apparent revolt against the traditional political establishment unfolds. The French presidential election in May, German elections in October and Japanese election in 2018 will also be watched very closely.
Increased global regulation will remain a key focus in 2017. I expect the development of International Capital Standards will remain a key focus for the International Association of Insurance Supervisors (IAIS). With Solvency II now in force, the dialogue between US and EU regulators has never been more vital. The NAIC’s Qualified Jurisdiction (QJ) position for Europe (Bermuda received full QJ status on January 1, 2015) will remain a key topic in 2017.
Closing the ‘protection gap’—the BMA fully supports the important work of the Insurance Development Forum. The global reinsurance industry takes its social responsibility efforts very seriously, not the least of which is helping to tackle education about climate change, increased occurrences of serious catastrophic natural events and the non- or underinsurance of some of the world’s most vulnerable populations.
The soft market will continue to be a factor in the global reinsurance market in 2017. After a rush of M&A activity in 2015, 2016 was a quieter year with the US election purportedly leading to a drop-off in volume in deals for the first six months of 2016. However, in December Ironshore was sold to Liberty Mutual in a $3 billion deal. As Bermuda’s reinsurance regulator we pay close attention to such deals, keeping policyholder protection foremost in mind at all times.
Arthur Wightman, insurance leader at PwC Bermuda, and Matthew Britten, insurance partner at the firm
What were the three most important developments in the re/insurance industry in 2016?
2015/16 has been one of the busiest and most exciting periods in the insurance, reinsurance and global risk sector’s history for M&A. This is not only due to the volume of announced deals, but also because of the scale and high profile of the companies involved, such as: Ace/Chubb ($28 billion), Tokio Marine/HCC ($8 billion), Exor/Partner Re ($5 billion+), Mitsui/Amlin ($$5 billion), XL/Catlin ($4 billion) Fairfax/Brit ($2 billion), and Willis/Towers Watson ($8 billion)
Also significant were the underlying drivers and pricing of transactions (parallel increase in market and execution multiples, non-traditional capital ‘behind the scenes’, public company deals, the prevalence of Japan, the breadth of Chinese capital, and hedge fund re activity).
PwC expects the scale of transactions to fall heading into 2017, but still expects M&A activity in the sector to continue—and evolve in nature—shifting from ‘mega deals’ towards revenue enhancement, non-traditional capital and structuring opportunities.
Transformative technology is beginning to challenge some of the most established practices in financial services. Insuretech’s use of game-changing technology and data innovation is quickly transforming the landscape of both what needs to be insured, and how risk transfer can be delivered.
For example, new research commissioned by PwC (Blockchain: The $5 billion opportunity for reinsurers) highlights the extent to which blockchain could reduce the processing time and cost of placement, claims settlement and key processes such as compliance checks in reinsurance.
Bermuda’s regulatory leadership was underscored in 2016, when Bermuda became one of just two non-EU jurisdictions to win full equivalence under Europe’s Solvency II Directive regulating re/insurers.
Bermuda’s Solvency II equivalence is expected to boost market share even further. And because of the Island’s foresight, our leading captives sector remains exempt from Solvency II regulation.
The designation helps Bermuda to continue to stand apart from its rivals and maintain its competitiveness as a domicile. Bermuda’s commercial insurers conduct significant business with Europe and the designation ensures that Bermuda’s insurers and reinsurers continue to retain access to EU markets and provides them with a significant competitive advantage.
What are the five topics you expect to be prominent in the industry in 2017?
Insuretech presents a huge opportunity for the insurance industry. Incumbent insurers who are currently focused on catching up with their competitors around customer-centricity and other current trends are missing the opportunity to become proactive. They need to create a clear and consistent message that will demonstrate their willingness to play in the new insuretech space and act accordingly—only such an approach will position incumbents to be frontrunners in the new insurance era.
To embrace insuretech, incumbents should take concrete steps such as exploration, strategic partnerships, insuretech involvement, and new product development.
Behind all the hype surrounding blockchain is a straightforward opportunity to cut costs and improve client satisfaction within reinsurance.
While blockchain technology is still a new and uncertain area for reinsurers, it has the potential to deliver millions in operational savings, improve efficiency and accuracy and improve client satisfaction within reinsurance. Proactive reinsurers are looking at front end underwriting and market potential where the technology could be most disruptive. Those who are able to quickly build, assess and refine their applications will differentiate themselves and raise the bar for the rest of the industry.
Potential wins include:
1. Processing—using blockchain to remove multiple rekeying of data and task duplication;
2. New business—using blockchain to allow entry into new markets or products. Examples include pilots in the catastrophe swap market; and
3. ‘Full transparency’—the potential ‘big win’. If all underlying risks are on a blockchain, these could be aggregated onto a reinsurance blockchain so all information, documents and transactions flow into the reinsurance contract.
Underinsurance represents a gap between the current state and the full potential of the insurance industry in serving the economy. The gap is currently significant. As an example, Swiss Re uses its sigma catastrophe database to track the non-life insurance gap over time.
During the past 40 years, the shortfall has widened continuously, from about 0.02 per cent to more than 0.13 per cent of global GDP, as total losses have grown significantly faster than insured losses. Ban Ki-moon, the United Nations secretary general, said that economic losses from disasters are out of control and can only be reduced in partnership with the private sector.
This is a role where the value of insurance to society is critical. The challenge is how the industry collaborates, invests, innovates and perseveres for long-term good. On the other hand, in creating a positive outcome for society, the outcome for the industry could be transformational from a commercial standpoint.
PwC research has shown that 70 percent of global insurance CEOs see limited availability of key skills as a real threat to their growth prospects. The pool of people from which insurers can recruit talent needs to be expanded, and promoting diversity is crucial. Executives are clear that they want greater diversity. Clients and employees expect it.
While progress is being made, there’s still a big gulf between management’s intentions and the reality for many people working within insurance. The industry is doing reasonably well in attracting high-quality female talent, but our research points to insurance as being one of the least popular industries for female millennials looking for work—13 percent said they wouldn’t work in insurance because of its image. The primary challenge appears to be that while many talented women enter the industry, the industry is not compelling them to stay.
The global cyber insurance market could grow to $5 billion in annual premiums by 2018 and at least $7.5 billion by the end of the decade, according to research by PwC. There is no doubt that cyber insurance offers considerable opportunities for revenue growth—and for reinsurers to demonstrate their ability to provide innovative solutions as awareness and demand for insurance coverage grow
Businesses across all sectors are beginning to recognise the importance of cyber insurance in today’s increasingly complex and high risk digital landscape. In turn, many insurers and reinsurers are looking to take advantage of what they see as a rare opportunity to secure high margins in an otherwise soft market.
Cyber insurance could soon become a client expectation and insurers that are unwilling to embrace it risk losing out on other business opportunities if cyber products don’t form part of their offering.
In the meantime, many insurers face considerable cyber exposures within their technology, errors & omissions, general liability and other existing business lines.
