Alternative capital key to success in radically different insurance future: Bain

Global consultancy Bain & Company has highlighted access to alternative sources of capital and the use of insurance-linked securities (ILS) as one of the key factors for insurers to consider as they look for success in what the company calls “a radically different future.”

Bain forecasts global insurance market premiums will reach $10 trillion by 2030 and expects the industry will continue to retool itself, as it looks to tackle issues and opportunities related to climate change, cybercrime and geopolitical tensions.

Recent insights from Bain & Company suggests that risks are flat lining in some mature areas of the insurance market, such as personal auto and mortality, which also suggests lower growth potential.

At the same time, risk and therefore opportunity are expanding in new areas, such as cybercrime and digital assets, the consultancy says, and growing more severe in others, including climate change and infectious disease.

“These changes are propelling the insurance industry to take on a new role, moving from seeking reimbursements for damages to incentivizing behaviors to reduce overall risk,” Bain suggests.

With insurance growth expected to be significant over the coming years, Bain & Company notes that on climate change related risks and impacts, it expects there could be a roughly tenfold increase in economic losses over the next three decades.

However, to-date, highlighting the still expanding global risk protection gap, Bain noted that insurance still does not cover most losses from natural catastrophe events.

Which is where the need for capacity comes in, but also the use of technology, as new insurance business models alongside efficient reinsurance capacity can make a difference.

“The consequences for an underprotected world with low insurance penetration may be severe, particularly in emerging markets,” said Andrew Schwedel, who leads Bain & Company’s Macro Trends group. “Thanks to improved technology and data, insurance companies now have the chance—and perhaps even the duty—to shift the industry’s central purpose from loss reimbursement to loss control over the next decade.”

As the insurance market evolves and innovates, incumbents will face a growing risk from new competition sources, particularly from insurtechs, technology giants and also other industry leading companies in specific segments.

The value chain of many industries are increasingly having finance products embedded into them and insurance is expected to expand through this trend, with protection often embedded and sold alongside core products.

Embedded insurance is nothing new, although it is a current buzz phrase, but it could result in an uplift in uptake, especially if efficiency is kept in mind, in how protection is structured, distributed and reinsured.

Which leads Bain to suggest that alternative reinsurance capital and insurance-linked securities are a key factor that can drive success for insurers in what it sees as this “radically different future” for the global insurance industry.

How aggressively should alternative capital options be explored? Bain asks.

The consultancy believes the reach of alternative capital products will keep expanding, including catastrophe bonds and other insurance-linked securities (ILS), allowing insurers and reinsurers to benefit from capital market investor appetite for insurance risk and providing efficient capacity to fund protection and importantly the growth opportunities that will be available.

Alternative capital is one tool that will “help insurers navigate an uncertain future,” Bain believes.

The company notes that some re/insurers now source a significant proportion of their underwriting capital from third-party capital market investors, citing RenaissanceRe as a prime example given its broad range of joint-venture vehicles and ILS fund structures.

Alternative funding sources can help to improve operating returns, Bain believes, while it also believes as the alternative capital trend continues their may be even greater benefits and efficiencies to be realised.

“A more liquid marketplace for such investments has the potential to open up insurance opportunities to a broader set of investors, some of which will have lower return targets that could ultimately lead to a lower cost of capital,” Bain said.

But, it is important that re/insurers “Consider the packageability and attractiveness of risks in their portfolio, the type of investors and instruments that would suit them, and the potential effect of alternative capital on their cost of capital and business strategy.”