Challenges prompt London Market rethink, efficient capital & tech key: PwC

by Artemis on August 19, 2016

The abundance of capital in the global reinsurance industry and the increased prevalence of insurance-linked securities (ILS) continue to add to the challenges faced by the London insurance and reinsurance market, making efficiency increasingly important, according to Paul Delbridge of PwC.

“With flatter underwriting cycles, propagated by the superabundance of capital and the increasing prevalence of insurance-linked securities, there is good reason to believe that the London Market is a sector in which at least some old certainties may need to be rethought,” said Delbridge, Partner at PwC London.

Competition in the global insurance and reinsurance landscape remains intense and the market soft, and with underwriting profits being squeezed and investment returns hard to come by in a low interest rate environment, the London market’s global position is somewhat under threat.

The rise of ILS capital and structures within the global re/insurance industry is seen as both a challenge and an opportunity for both the London market and broader risk transfer world.

But while its persistent and expanding influence on the marketplace has contributed to rate declines and high levels of competition, those that embrace the features and capabilities of third-party capital have benefitted from increased efficiency and diversification.

In a recent article examining how insurers and reinsurers in the London market are responding to a range of sector challenges, Delbridge notes that insurers and reinsurers are looking to “evolve their business strategies,” in response to threats posed by competition and capital abundance, and looking to “utilise innovative new technologies at an increasing pace.”

We’ve discussed previously at Artemis how the influx of ILS and the changing market landscape has challenged the value proposition of re/insurers, and as a result market participants have had to rethink their business models in order to remain relevant and better accommodate the wealth of ILS capacity, which seems to be here for the long run.

Many insurers and reinsurers now work with ILS capital in some form but it’s likely that most will also increase their utilisation, ultimately using the capital markets to supplement and diversify their capital base and better integrate its structures within their business models to increase efficiency.

And alongside efficient capital, the natural partner that could help the London market up its game is insurance technology (or insurtech), which if implemented with efficiency in mind could help to make London’s insurance and reinsurance sector more competitive again.

“We note that although start-ups are able to begin with a clean slate and embrace the latest technology, and newly acquired firms are generally more inclined (or forced) to embrace change, an increasing number of established (re)insurers are reassessing the sustainability of their current business models,” said Delbridge.

Away from the influence of ILS Delbridge identifies four key areas in which London insurers and reinsurers are reacting to market developments, to improve efficiency and remain as profitable as possible during the evolution of the industry.

Delbridge explains that some re/insurers are looking to enter new markets and business lines in order to generate growth and move away from the overly competitive sections of the market, such as property catastrophe.

The exploration of new revenue streams has also seen some in the London market partake in merger and acquisition (M&A) activity, but as with entering new business lines Delbridge explains that such approaches do not come without their risks.

Assessing distribution avenues and also product innovation are two other elements of their operations that Delbridge explains London re/insurers are reassessing.

“As customer needs and expectations evolve, the market demands more specialised and targeted solutions from their (re)insurers,” said Delbridge.

This is an interesting point and also highlights the potential for re/insurers to utilise traditional and alternative reinsurance capital features to develop innovative solutions that meet client needs and increase profits.

Reducing costs and increasing capital efficiency, which again could be achieved through the utilisation of ILS capital alongside insurtech, are increasingly being looked at by re/insurers.

“We are increasingly seeing the adoption of new technologies such as the Cloud, AI, digitisation, drones, sensors and robotics to increase efficiency and improve the use of data in decision making, ultimately reducing cost,” said Delbridge.

Managing underwriting performance as rating agencies and regulators increase their focus on how re/insurers manage the market cycle, is another area that companies are looking at improving in the London market, says Delbridge.

And finally, the use of advanced and valuable data analytics and technology, which if properly understood and utilised could help with many of the above-mentioned challenges, is an increasingly prominent focus of re/insurers.

“There are now a wide range of sophisticated analytical tools available to insurers to ‘see’ a more holistic picture of risks presented, and to evaluate them quickly. It is therefore vital that companies bring their data capabilities and technical expertise up to speed so they may better understand which data solutions and analytical tools are available to them, and how these may be exploited to deliver a competitive advantage,” said Delbridge.

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