It’s not just the traditional reinsurers who face disruption and disintermediation in the currently challenging and structurally changing insurance and reinsurance market. Brokers too face challenges and need to be prepared to adapt and innovate, suggests PwC.
We’ve written a lot about the structural change facing traditional reinsurance firms and the need for them to innovate and adapt if they are to successfully face the threat of disruption from new forms of capital such as insurance-linked securities (ILS), new business models such as asset manager backed reinsurers and a potentially changed-for-good reinsurance underwriting cycle.
In a report published today, PwC highlights that it is not just reinsurers that need to be prepared to be flexible and to take new opportunities, insurance and reinsurance brokers too are facing a market which wants and will demand more from them, meaning they have to be prepared to be adaptable.
Brokers will need to take on a wider role as risk advisors in the market, or risk losing business to specialist risk advisory firms, forecasts PwC’s new report, titled ‘Broking 2020: Leading from the front in a new era of risk.’
The report is based on responses to a survey of risk and insurance buyers from multinational organisations and shows that organisations believe that the evolving risk environment cannot be managed through traditional approaches alone and expect to engage much wider panels of specialist advisors to get the advice and access to products they need.
The research shows that while risk managers continue to rely on their brokers as their key information source when placing risk, they do not always view their brokers as the ones to develop actual solutions for their risk concerns.
Less than half of those surveyed identified brokers as a solutions provider. This is particularly true for emerging risk such as cyber security, data and supply chain risks, where risk managers said they would look primarily to industry groups and carriers to develop the solutions for these risks.
This is a worrying trend for brokers, notes PwC, as some of these risks are also the ones that they, and the organisations they serve, place highest on the risk agenda at this time.
Nearly three-quarters of risk managers said they want access to analytics to help in their risk decision-making process, due to concerns over new and emerging risks. But many brokers are said to fall short in this area. Under a third of those answering the survey said they were happy with brokers analytics and modelling offerings, a worryingly low number for the broking sector.
Rich Mayock, global insurance brokerage leader at PwC, commented; “This is crunch time for some in the broking industry. Brokers’ clients’ expectations are changing faster than ever, with risk managers looking for consultative partners who have the skills to both identify and develop solutions for the changing risk landscape.”
As we wrote the other day, there are increasing concerns that other sectors of well-funded, high technology businesses may see insurance and reinsurance as an opportunity, particularly if they notice the sometimes slow to innovate habits of some in re/insurance.
Maycock continued; “Brokers may be first choice to take on this expanded risk facilitation role, but they are not the only choice in all cases. Given the rising demand for risk advice, other specialty advisors are vying to take on this risk partnership role. If some market players don’t adapt their businesses to provide the services and expertise their clients now want they could face increased competition for this valuable new business.
“For some brokers this will require a shift in mindset from hindsight to foresight as they evolve from being simply placers of coverage to preventative risk advisors and managers.”
PwC’s report shows that developing advanced risk and loss analytics and capitalising on big data analysis will be key for brokers seeking to strengthen their position in the market. Finding new sources of business increases in importance all the time for brokers, particularly in a challenging environment like the reinsurance market, where lower margins mean cedents are looking to shave expenses off their protection buys.
The smaller reinsurance brokers of this world should take heed. With some markets, such as large global reinsurers and specialist insurance-linked securities (ILS) managers, increasingly blurring the lines between origination and underwriting the risks of being left out are clear.
The growth of alternative capital has led to a need for sophisticated skills sets, structuring ability, an understanding of investor needs and capital markets knowledge, something that is not always evident at smaller brokerages.
ILS managers thus provide some of these skills to clients themselves, leaving brokers disintermediated to a degree, aside from the large ones with a dedicated capital market unit. The alternative capital trend is resulting in disruption throughout the industry and PwC’s report shows that brokers have much more to fear than purely new capital, as technology and services are going to bring competition to them.
Arthur Wightman, insurance leader for PwC Bermuda, said; “In certain segments of the market there are signs that buyers are comfortable to seek protection directly from the capital markets, although reports of full scale disintermediation are overstated. Notwithstanding, brokers and reinsurers alike are being challenged to ensure the relevancy and attractiveness of their value proposition.”
Mayock concluded; “Broking is at a once in a generation crossroads. Brokers have a choice – they can either compete for increasingly commoditised standard risks, or lead risk facilitation which will open up both commercial opportunities and a crucially important role with society and the global economy. This will provide a powerful boost for a sector facing disruptive competitive pressures and shifts in market expectations.”
PwC advises that brokers:
- Adapt their business models to simultaneously support cost-efficient standard risk management and be seen as knowledge-intensive risk consultants
- Expand their information gathering network to better anticipate and understand the new and emerging risks facing their clients
- Improve their ability to collect, integrate and analyse data to create new solutions – shifting to more of an analytical/consultative broker
You can download the full PwC report via its website here.