ILS & evolving market forces reinsurance business model rethink: Bernstein

The persistent influx of alternative capital in the global reinsurance landscape, as well as a change in tack from intermediaries and primary players has challenged the value proposition of reinsurers, forcing them to rethink business models, according to analysts at Bernstein.

Alternative, or third-party reinsurance capital now contributes approximately $70 billion of the overall reinsurance market, and is predicted to expand further in the coming months as collateralized reinsurance, cat bonds, and other insurance-linked securities (ILS) transactions continue to gain momentum.

Owing to its increased market share and the resulting influence on rates and competition across the insurance and reinsurance sector, analysts at Bernstein note that reinsurers recognise “that the business model is changing due to influx of alternative capital.”

“Additionally, better data and analytics at brokers and primary companies are eroding part of the value proposition that reinsurers offered cedants. Forcing reinsurers to rethink business models,” said Bernstein.

Bernstein’s comments come following discussions with global insurers and reinsurers at the annual AIFA insurance conference held in Florida recently, which saw market participants discuss continued pressure on rates as pricing continues to search for a floor, further consolidation activity and the need for reinsurers to asses their business models.

Increased competition, ample capacity and a benign loss environment created a supply/demand imbalance in the international reinsurance sector that is persisting, driving down rates and leaving insurers and reinsurers looking for ways to reduce costs and increase efficiency, with limited room for organic growth.

As a result market participants showed a desire to reduce costs and increase efficiency throughout the re/insurance value chain, ultimately looking to get the capital as close to the risk as possible, a trend that posed a threat to the role of the insurance and reinsurance broker community.

However, and as highlighted by Bernstein, in order to remain relevant to the industry that it serves brokers have had to adapt and innovate to the changing market dynamics in order to remain valuable, and mitigate any disintermediation that threatens their position in the chain.

This includes the utilisation of enhanced data, modelling and analytics capabilities, as the broker community realised that in order to remain relevant it needed to provide more, and improved services that are of value to insurers and reinsurers, or perhaps risk being left behind.

Bernstein highlights that primary insurers have also sought to increase and enhance their capabilities and understanding of the global reinsurance landscape, which, along with changes to the role of the re/insurance broker, is diminishing the value proposition that a reinsurer provides cedants.

The fall-out from all of this, says Bernstein, has seen global reinsurance companies faced with a growing need to rethink their business models, in order to ensure they continue to offer cedants value in a rapidly evolving sector.

The changing risk landscape, which includes the rapid rise of alternative reinsurance capital, has created a need for reinsurers to be more than just providers of capacity, and sustainability could mean utilising the wealth of efficient ILS capital to add diversification and reduce costs.

Speakers at SIFMA IRLS 2016 noted that the future of reinsurance is with a hybrid balance-sheet approach to capital sources, management and funding, as the evolution of the reinsurance business model has developed a need to embrace equity and third-party capital.

While rates remain pressured and losses benign, apart from perhaps embarking on some form of successful merger and acquisition (M&A) activity reinsurers will increasingly be under pressure to meet cost-of-capital requirements, and remain relevant to the market.

It’s possible that more firms will rethink and reshape their business models in the coming months to attempt to navigate the testing landscape and increase efficiency, reach and relevance.

Alternative capital continues to have an influence on the overall reinsurance market and is clearly part of the reason that reinsurers are being forced to change, however, the glut of capacity in the capital markets also provides the market with an opportunity to utilise its structures and features to enhance their business models and improve growth potential.