Differentiate or consolidation ahead for reinsurance industry: PwC

by Artemis on September 14, 2014

Analysis undertaken by PwC found that as much as 40% of the global reinsurance market by capacity needs to differentiate itself and stop following a ‘me too’ strategy, if reinsurers are to avoid becoming targets for consolidation.

PwC’s latest report, which is published today and titled ‘Reinsurance 2020: Taking control of your destiny’, suggests that reinsurers which fail to differentiate could find themselves at risk. The sector as a whole is ripe for a wave of cost-cutting and consolidation, warns PwC, meaning that standing out through a differentiated strategy has become even more important.

Reinsurance buyers are demanding ever more specialised and targeted solutions from their reinsurance panel, says PwC, which suggests that those reinsurers who cannot live up to expectations will risk being cut from panels or find their capacity simply used as a convenient source of cover to top up programmes.

The combined forces of a continued low-interest rate environment, limited growth in traditional insurance and reinsurance markets, falling margins, competition from the capital markets and insurance-linked securities (ILS), low investment returns and soft market conditions mean that reinsurers need to work harder than ever before to attract new business, PwC explains.

Bryan Joseph, global actuarial leader at PwC, explained further; “Many reinsurers need a radical re-think of where and how to compete. 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.”

PwC forecasts that the mid-sized generalist reinsurers may be the ones who feel the most pressure first, finding it particularly hard to sustain investment and their competitive relevance in the current environment.

PwC says that to perform reinsurers will require a clear strategy and answers to 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?”

“Fighting over the commoditised crumbs or hunkering down in the hope of a more favourable rating environment is not a viable strategy for survival in the current market. Unless the undifferentiated generalists change tack, it’s only a matter of time before they’re absorbed or squeezed out of the market altogether,” Joseph continued.

Arthur Wightman, Bermuda insurance leader at PwC, added; “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.”

This is one of the clear messages of the Monte Carlo Rendez-vous in 2014, the need to stand-out, get noticed and remain relevant in the current environment if reinsurers are to succeed and be anything more than just a following market is vital.

Wightman explained that those who navigate this difficult market successfully will reap the benefits; “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 all together and placing their risks directly with willing capital market risk takers.”

It is vital that both large and small reinsurance firms heed these words. The risk of becoming severely disintermediated by alternative capital from the capital markets and ILS managers is real for any reinsurers who believe they can carry on regardless. ILS itself has changed the playing field and the rules for reinsurers are not the same as they were even a few years ago. With the market environment changing so rapidly, the ability to respond to reinsurance market trends, adapt and innovate become ever more vital.

PwC offers some ideas for success in its report, explaining six business models that it feels will help reinsurers build the foundations necessary to succeed despite the challenging market.

  • 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
  • Go direct: Partnering with clients to provide targeted capital market protection

In essence, PwC advises that the reinsurers that will be successful and outperform in this market are those that differentiate themselves from the competition, source new markets where pricing is at a premium and innovate their reinsurance product outside of the commoditised corners.

You will be able to download the full PwC report from its website here later today.

Read all of our Monte Carlo Rendez-vous coverage, featuring reports and analysis from leading reinsurance market players and service providers.

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