Innovation a benefit to reinsurance buyers: Johnston, The Co-operators

The imbalance between supply and demand in the overcapitalised reinsurance marketplace has helped drive innovation in space, which has ultimately benefitted buyers of reinsurance protection, according to Steve Johnston, director of corporate reinsurance at The Co-operators.

The abundance of capital from both traditional and alternative reinsurance sources is one of the drivers of persistent rate declines across the majority of reinsurance business lines, with the steepest dips occurring in the property catastrophe space.

The resulting softening landscape, that in some instances is resulting in ill-disciplined underwriting practices, aggressive reserve releasing, and loosening of terms and conditions (T&C) as a means of bolstering return potential, is a challenge for all in the industry.

In an effort to offset the impacts of the soft reinsurance marketplace, some have embarked on some form of merger and acquisition (M&A) activity, while others have sought restructure and adopted varying, innovative approaches to increase demand and improve profitability.

“When we think about specific pieces of the reinsurance market, there’s a lot of innovation going on. So given that the top line is decreasing, there’s a recognised need to add additional value and many of our reinsurance partners are doing that,” said Johnston, speaking with A.M. Best at the 2016 Meeting of Reinsurance Officials.

“Whether it be becoming more involved in emerging risks, and offering information or models, or whether it be reaching out to us with a particular product offering, it’s that innovation that also exists within the market today,” continued Johnston.

With reinsurers fighting for market share at recent renewals, a trend exacerbated by the persistent influx of alternative reinsurance capital and other market headwinds, more efficient reinsurance capital has created a buyers market.

Cedents have reportedly been able to purchase their reinsurance protection at more desirable rates, seeking additional coverages and relaxed T&Cs in some cases.

However, reinsurers can only go so far and rate stabilisation in more recent times suggests a pricing floor is edging ever closer as firms start to push back and walk away from business that’s priced too low.

And while M&A might be one way to offset the negative impacts of the current re/insurance marketplace, although some have noted the difficulties with this approach, innovation is key to reinsurers remaining relevant to the industry.

The need for innovation and the drive of reinsurers to remain relevant is changing the market landscape, with features from the insurance-linked securities (ILS) space converging with more traditional approaches in order to add efficiency and diversification to cedents, for example.

For the buyer, Johnston explains that this innovation, whether it is in relation to the source of capital, modelling advances, technological progress, or innovative ways of entering new peril regions, is very beneficial.

“There’s a need to be innovative and creative in developing new products, and with that it can be busy, quite frankly. It can be very busy in managing and communicating with our reinsurance partners exactly what our needs are, because our needs are many,” said Johnston.

Johnston notes that one of the key areas of innovation is with models, for emerging large-scale risks like cyber, and also uninsured exposures in parts of the world, like flood.

With reinsurers striving to add value and efficiency to their offerings, there’s a real desire for reinsurers to be more than just providers of capital. Many reinsurers now have their own in-house modelling for certain risks and locations, something that cedents can use alongside third-party vendors to obtain a greater view of their risks.

Furthermore, reinsurers are increasingly utilising innovative ILS structures and capacity, such as collateralised reinsurance and cat bonds, and other risk transfer mechanisms in order to increase efficiency and diversification.

As Johnston notes, the exposures faced by insurers around the globe are vast, and in order for the sector to continue to offer the right products at the right price, and increase insurance penetration in underserved parts of the world, reinsurers, and also ILS players need to continue to innovate and expand the capabilities of the sector.

Models, features and tools of the global risk transfer market continue to evolve all the time, and as technology continues to advance at such a rapid pace insurers, reinsurers, and ILS players need to utilise all of this to create solutions that ultimately benefit the end consumer.