Fundamental changes to the requirements and abilities of reinsurers has created an industry that’s unrecognizable from previous years, and with rapid change expected to continue and additional re/insurance consolidation predicted, reinsurance brokers have suggested further sector transformation.
At the Bernstein fourth annual thematic insurance conference, players from the insurance and reinsurance industry presented insightful and thought-provoking ideas and views on various aspects of the risk transfer landscape.
Catastrophe reinsurance broker and risk/capital management advisor TigerRisk Partners LLC, and reinsurance brokerage JLT Re both highlighted changes within the reinsurance sector in years gone by, while underlining the potential for further transformation in the sector, driven by the changing risk landscape and market headwinds.
“The reinsurance market is changing rapidly, and is unrecognizable from even a few years ago,” said JLT Re, stressing the increasing importance of reinsurance carriers and intermediaries to be able to offer more value to their service.
“Reinsurers that can’t demonstrate their value with innovative risk-transfer solutions get relegated to simple price-only discussions with risk managers,” continued JLT Re.
Essentially, JLT Re explains that the role of the reinsurer has gone from purely transactional in the 1990s, to a role in today’s market that incorporates a greater responsibility to provide strategic advisory services, as well.
Structuring a deal, the placement, claims administration and processing of a deal might have been the majority of the leg work for reinsurers 20 to 30 years ago, says JLT Re, but today; “Huge pressure on both intermediaries and carriers to provide a value added service, helping their customers understand their risk better, and provide innovative solutions that enhance the primary company’s franchise value,” is required in order to remain relevant maintain market share.
It’s an interesting and valid point that demonstrates the evolution of the reinsurance marketplace, where a need for reinsurers and intermediaries to offer greater value to clients has peaked in more recent times owing to a strong need for relevance and efficiency.
The reinsurance marketplace continues to endure a softening cycle, which, unlike previous soft cycles is in part being driven by an abundance of capital from both traditional and alternative sources.
This, combined with other market headwinds that includes a lack of large loss events, has resulted in a supply/demand imbalance that’s benefited reinsurance buyers, and led to a competitive landscape that sees reinsurers fight for market share, relevance, and efficiency.
Reinsurance buyers now expect much more from both carriers and intermediaries alike, including risk modelling, access to efficient insurance-linked securities (ILS) capital and features, portfolio optimisation, sector research, to name just a few. And, with competition so intense in the reinsurance industry companies need to adapt towards value added services or risk being left behind, suggests JLT Re.
Bernstein notes that JLT Re “pointed to the low cost of reinsurance versus other forms of capital to primary insurers and argued that reinsurance is economically attractive at this point in the cycle…and likely to stay so due to demand and supply imbalances and secular changes to the industry.”
In response to the changing marketplace and lack of revenue potential on both the underwriting and investment side of the balance sheet in 2015, consolidation was one of the key trends of the insurance and reinsurance industry.
And this is where catastrophe reinsurance broker TigerRisk predicts further market disruption will come from in the coming months.
The firm stressed that consolidation will be a result of intense and brutal operating conditions that will ultimately separate the weak from the strong.
“Challenges include: Low to no growth, too much capital, prolonged interest rates, volatility from alternative investments, inadequate pricing, increases in regulatory and rating agency scrutiny, investments in tech, increased globalization of customer base, and consolidation among distributors,” said TigerRisk.
As predicted by other industry analysts and observers, TigerRisk feels interest from Asian firms will spike, with the majority of future insurance and reinsurance market merger and acquisition (M&A) activity occurring in the small to midcap space.
“With 50 names becoming 25 well capitalized companies that can service the entire market partnering with alternative capital,” said TigerRisk.
Only time will tell which firms partake in some form of M&A activity as the range of market pressures persist and possibly intensify, as absent a record-breaking catastrophe event it’s widely expected that the market won’t turn anytime soon.
But as highlighted by JLT Re, those that can provide a platform that incorporates the efficient and sophisticated ILS space, along with modelling and other strategic, value added services will stand a better chance of securing business and successfully navigating the testing re/insurance market environment.