Reinsurers yet to exploit opportunities & innovation in relevance fight: S&P

by Artemis on October 13, 2016

International insurance and reinsurance industry ratings agency, Standard & Poor’s (S&P), has highlighted the need for reinsurers to innovative solutions and develop strategies to exploit the range of business opportunities across the sector.

After holding discussions with all participants in the risk value chain at the 2016 Monte Carlo Reinsurance Rendezvous event held earlier this year, S&P has noted a continued need among the industry to innovate in order to remain relevant.

The ratings agency has said that reserves, rate movements, and relevance were key takeaways from the discussions it held, but does note that reinsurers’ desire and willingness to close the protection gap in all markets was a positive note expressed by many.

“While we believe that reinsurers could help economic development in less developed countries, we remain skeptical about whether decision-makers in emerging markets will prioritize the purchase of insurance and reinsurance coverage against catastrophes over infrastructure development or the provision of basic requirements for the population such as food, water, or housing,” said S&P, in a recent report on its key takeaways from the 60th meeting of the reinsurance industry, in Monte Carlo.

As a result of this, S&P feels that it will be difficult to change the mindset of the relevant people or organisations in emerging regions and will require substantial time and resources from the reinsurance industry.

“As with the issue of closing the protection gap, the industry has yet to find strategies to exploit the business potential that new and evolving risks, such as cyber risk, offer. The ability to adapt to the changing risk landscape remains important for the reinsurance industry in order to retain its relevance to cedants,” continued S&P.

Cyber, as with terror risks and the broad range of opportunities that remain in the natural catastrophe space, in both emerging and developed markets, are seen as both challenges and opportunities for the reinsurance industry. While there’s clearly a need to create solutions for such risks, modeling inabilities and a lack of understanding/awareness has hindered any meaningful progress, but it seems the industry is aware of the value and need of changing this.

With the market cycle remaining in its softening phase, reserves reportedly running low and interest rates seriously dampening investment returns, growth opportunities and desirable profits are proving increasingly difficult to come by, although the profitability of the sector in recent times has been aided by reserves, and the relatively benign loss experience.

Away from this, reinsurers have been seen to increasingly utilize the features and capital of the alternative reinsurance space, a trend that was also highlighted by S&P.

“A number of market participants also mentioned that reinsurers will increasingly use insurance-linked securities (ILS) to lower their cost of capital and broaden their product offerings to clients. This is something that cedants expect.

“We believe that reinsurers currently remain reactive in their product offerings to cedants, rather than proactive in creating innovative products to sell to the primary market, and that this is another long-term opportunity that the industry has yet to exploit,” said S&P.

The ILS marketplace continues to expand, and its been reported that the majority of reinsurers now utilize the space in some form or another, whether this be the catastrophe bond space, or the expanding collateralized reinsurance segment, for example.

The use of diversified and abundant capital markets backed capacity can increase the efficiency of reinsurers, and as noted by S&P, cedants now expect reinsurers to use all tools available to them in order to offer a bespoke, and efficient offering, which can be greatly supported by the ILS space.

The reinsurance industry remains challenging, and there is little to suggest that the softening landscape will turn anytime soon, absent an unprecedented loss event or a combination of several factors that result in a substantial volume of capital leaving the sector.

But at the same time there are plenty of opportunities out there that reinsurers can exploit, along with the support and influence of the willing ILS market and its investor base. Innovation will be needed across the board if the industry is serious about closing the protection gap in all markets, and to provide adequate and affordable solutions that protect against growing, emerging risks such as cyber.

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