Maintaining the pace
How significant is pressure on reinsurers from alternative vehicles, and is it set to continue?
Reinsurers are experiencing unprecedented pressure on the viability of their business models. As more efficient capital continues to absorb a greater proportion of risk, reinsurers need to ensure they remain relevant through a clear focus on cost, risk insight and innovation.
The rewards for the reinsurers that get this right are potentially huge, especially if we expect the global commercial insurance market to be worth north of $2 trillion by 2025. Failure to do so will increasingly result in organisations bypassing the industry altogether and placing their risks directly with willing capital market risk-takers.
The combination of the low interest rate environment, limited growth in the traditional insurance markets, declining margins, the influx of insurance-linked securities (ILS), low investment returns and soft market conditions, mean that reinsurers are working harder than ever before to attract new business.
The pressure to build scale is already being reflected in growing moves towards consolidation within the less specialised mid-market segment.
“In a highly competitive market for ‘standard’ business this provides some room for sophisticated risk carriers to differentiate their market position.”
How is ILS changing the playing field?
The surge in new ILS capacity coming into the property catastrophe segment is not only holding down prices now, but is also likely to temper any hardening of rates in the future. ILS now makes up around 15 percent of the reinsurance limit in property catastrophe. Here in Bermuda, ILS issuance reached a record in the first quarter of 2014, double the comparable period in 2013. PwC expects to see a flurry of new companies or funds coming into the market over the next six months.
With prices low and direct competition from ILS, clients can afford to gravitate to a select panel of higher-rated, often larger, reinsurers. This is leaving some of the smaller and less well-rated counterparts in the margins.
Who is most vulnerable in this rapidly evolving marketplace?
The mid-sized generalists could find it particularly hard to sustain investment and competitive relevance in this new environment as customers demand more specialised, creative and finely targeted solutions from their reinsurers, and brokers respond by placing business with reinsurers with the highest rating or greatest expertise.
How can some of this pressure be relieved?
Reinsurers will need to have a clear strategy on the following questions: where am I going to compete, what is our distinct proposition, what are we in business to do, and what does our resulting operating model look like?
Competition now goes beyond price and even underwriting expertise as clients look for scale, specialist expertise, deep territorial knowledge and advanced analytics. Many are now prepared to pay a premium for more innovative solutions for their less well understood or newer types of risks.
A survey of corporate risk managers carried out for the new PwC study, Broking 2020: Leading from the front in a new era of risk, found that emerging risks are by far the biggest priority for corporate clients. These range from cyber attacks to breakdowns in today’s global supply chains. In a highly competitive market for ‘standard’ business this provides some room for sophisticated risk carriers to differentiate their market position and access new and potentially profitable lines by extending their value chain into newer and more complex risk offerings. The challenge is how to underwrite business where there is little experience.
Are any new models for success for reinsurers being developed at the moment?
There is no one model for the future. Some models build on existing strengths, such as advanced analytics, access to key customer data or exceptional reach, scale and capital efficiency. But even if companies have these capabilities, they will need to broaden their business horizons as they strive to keep pace with changing customer demands and take advantage of new and untapped opportunities.
The key questions for your business may be: ‘which of these models best reflects your current strengths and strategic ambitions?’ and ‘how can you bring your current capabilities up to speed with the key attributes for success?’.
We believe six models offer the foundations for success in the new market landscape:
• Superior scale: big and knowledgeable on either a global or regional level;
• Nimble innovators: using analytics and specialist expertise to punch above their weight;
• Lloyd’s: combining depth and breadth with smaller company agility and expertise;
• Float accumulators: delivering superior investment returns;
• Risk transformers: specialist capital market funds; and
• Go direct: partnering with clients to provide targeted capital market protection.
Arthur Wightman is PwC Bermuda’s insurance leader. He can be contacted at: firstname.lastname@example.org