A bright and accessible future


A bright and accessible future

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Technology, diversity and disintermediation are all notions that if embraced, will sustain and prosper the insurance industry, says Arthur Wightman, PwC Bermuda leader and insurance leader.

Much is spoken about the headwinds in reinsurance. Indeed, what works today will not work tomorrow. If, however, the lens is focused towards opportunity, the future, while different, is brighter and accessible for those who choose to lead. Reinsurance can catalyse the reduction of the protection gap. Technology can radically eliminate waste and enhance underwriting. Diversity will improve returns. Disintermediation benefits customer and investor alike. If these, and other notions are embraced, the industry will sustain and prosper.

Amazon and Uber have enhanced the experiences of both customers and investors. Notwithstanding, they both sent shockwaves through their respective industries. Transformative technology is beginning to challenge some of the most established practices in financial services. The highest profile application of blockchain (tamper-proof ‘blocks’ of records that can be shared among multiple users) has been the cryptocurrency, bitcoin. While currently small in scale, it has the potential to revolutionise banking. Even bigger possibilities could come from the transformation of business transactions and information exchange on one side and removal of costly layers of overhead dedicated to verification on the other. The potential benefits include one mutually trusted version of the truth, with no more costly or error-prone manual rekeying of data.

"There is an opportunity for those that adopt a leadership position, articulate an attractive value proposition, and embrace the inevitable." 

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. The research also showed that blockchain solutions can provide a better view of identity and risk. And given the amount of data flowing between client, broker, reinsurer and outsource service providers, all of which requires multiple data entry and reconciliation, the transformational potential within reinsurance is even greater. The trepidation that exists today around the integrity of the technology will be addressed and those that don’t integrate technologists as part of their strategies will be left behind.


For many risks, especially those that are commercial, the supply chain for risk transfer is incredibly inefficient. By the time a risk has been passed from the customer ultimately to the capital markets that risk may have passed through many intermediaries be they brokers, insurers, reinsurers, retrocessionaires, bonds or funds. Compared to any other industry, this is overly duplicative.

Inevitably the impact of technology on evaluating and transferring risk as well as the insourcing of that activity will disintermediate the industry over time, however, there is an opportunity for those that adopt a leadership position, articulate an attractive value proposition, and embrace the inevitable.

Balance sheet efficiency

The industry has changed over the last five or so years as the impact of alternative capital has bitten. Rated capital can be inefficient and alternative solutions that transform risk but don’t tie up capital have allowed reinsurers to improve return ratios. Furthermore, sidecars and other capital markets facilities have allowed reinsurers to benefit rather than be eroded by the large-scale capital inflows into the industry. The retro markets have also proved to be an efficient tool in the context of managing capital carefully in this prolonged down-cycle.

Investors are looking for more flexibility with their capital while seeking return and diversification credit. The capital deployed in reinsurance is increasingly proactive and sophisticated and reinsurers will be progressively taken to task in terms of delivering against those objectives.

Strategic cost reduction

Related to capital efficiency, expense ratios are under significant scrutiny. Leaders within the industry are applying strategies to materially transform their businesses rather than tackle a few percentage points. These companies are focused on two areas: how to target investment more precisely to maximise strategic advantage (‘good costs’) and how to cut out the low performing business and inefficient operations (‘bad costs’) that waste resources and hold back returns.

The key priority in strategic cost reduction is targeting resources where they can earn the best return, rather than just cutting costs in itself. The starting point is differentiating the capabilities needed to fuel profitable growth from low-performing business and inefficient operations. Specifically, good costs are capabilities that differentiate the business, move it closer to customers, and enable it to develop new value propositions. Determining and focusing on what really matters to customers in today’s market.

Forerunners in this area are seeking a ‘10x’ advantage from strategic cost reduction. 10x, as we define in our recently released paper More for less: Five steps to strategic cost reduction, is a concept pioneered in the digital and insuretech sectors that looks beyond marginal efficiency savings at how to achieve a game-changing boost in capabilities. Improving efficiency by a few percentage points means that you’re probably doing what you’ve always done, just a little better, and all your peers are likely to be doing much the same. A 10x improvement enables you to reshape customer expectations and set the competitive bar for others to follow.


Compared to others the industry remains very fragmented. Indeed, the merger and acquisition frenzy of the last 12 to 18 months highlights a trend to move away from the middle ground towards diversification and scale. While ‘mega-deals’ may be less obvious we observe that interest remains high from non-sector capital—eg, private equity, pension funds, overseas capital, an increasingly diverse Chinese investor base and start-up funding—with insurance and reinsurance being an under-represented, uncorrelated risk within portfolios.

The key for any deal is the confidence that it will achieve the objectives set out—scale, while generally compelling, will not be fruitful if the benefits cannot be realized. A fragmented industry does not mean that there isn’t a value proposition for niche players. Quite the opposite: a fragmented industry, however, does mean that for those playing in the middle ground, the threat of consolidation is elevated.

Protection gap

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.


Structural innovation within risk transfer has been impressive particularly in terms of alternative capital. The pace of change has been rapid and has been embraced and catalysed by the industry. Genuine innovation in respect of accessing uninsured or underinsured risk on the other hand has been very slow. With such untapped commercial potential the question has to be asked as to why deeper investment in talent and research is not being made.

Arguably the perpetuating position in the cycle coupled with poor investment returns is dampening appetite to find ways to tackle this challenge. Whilst there are some bright spots eg, cyber, flood and terror, the industry is not tackling a protection gap that continues to grow and which offers huge commercial possibilities for reinsurance. The industry is hunkering. This is understandable, however, as we consider that pace of macro change in terms of urbanisation, technology and populations, it would be easy to see stakeholders finding alternative solutions to the problems of the insurance gap. And this should be the incentive for the industry to find ways to more convincingly innovate from within.

Talent management and diversity

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—expanding the pool of people from which insurers can recruit talent by promoting diversity is crucial. As a result, executives are clear that they want greater diversity. Clients and employees expect it. But 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, albeit 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 females enter the industry, the industry is not compelling them to stay.

The single biggest issue relates to equity: 80 percent of female millennials believe that insurers talk about diversity, but in reality opportunities are not equal for all. Organisational talent pools need to be shaken up to foster the innovation that is required to drive growth. Talent pools which lack diversity and are not inclusive will ensure that companies do not change at the pace that is required to sustain themselves.

Diversity is clearly moving past social responsibility and into core strategies—it is falling short in application, however. It needs genuine will and the hardest thing to change in an organisation is its culture.

Arthur Wightman is PwC Bermuda leader and insurance leader. He can be contacted: arthur.wightman@bm.pwc.com

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