As the convergence space continues to evolve and traditional and alternative reinsurance capital and structures become more integrated, along with the rise of technology in the sector, market leaders have questioned what this could mean for intermediaries and their role in the value chain.
A panel of reinsurance and insurance-linked securities (ILS) industry experts speaking on a panel at the 2016 meeting of the reinsurance industry in Bermuda, sponsored by Standard & Poor’s (S&P) and PwC Bermuda, discussed the evolving role of the broker community in the convergence space.
Some industry observers and analysts have said that as much as 20% of the premium is lost in the distribution chain, explains S&P, and with reinsurers and ILS players increasingly searching for efficiency in a challenging environment, the role of intermediaries has come into focus.
Certain market players feel that the distribution chain is inefficient, with an unnecessary number of players, including reinsurers, brokers, insurers, retrocession players, and also ILS funds/managers, explained S&P.
In response to inefficiencies and a desire for greater yield in a highly competitive landscape, certain players, such as Nephila Capital, for example, have sought to jump the value chain and get closer to the original source of risk.
“The industry is so much different from the way it was when we did the first securitization,” explained Michael Millette, Managing Partner at Hudson Structured Capital Management, speaking on the panel.
“The relationship has always been complementary. The capabilities of the formats are different, and they work together,” he said.
Continuing to note that as the convergence space evolves and the symbiotic relationship between the capital markets and the traditional space deepens information will be able to flow with greater ease, which will result in opportunities for intermediaries to add value in new and innovative ways.
Historically, the risk transfer industry has at times been hesitant to adopt and integrate technology to benefit itself, however, technological advances in the space, such as Blockchain and other innovations have the ability to make the transfer of information more efficient, explained Dirk Lohman, Chairman and Managing Partner at Secquaero Advisors.
“I don’t think the intermediary is going to disappear. The intermediary serves a valid function, but there’s going to be a discussion about how the intermediary is compensated for what he does,” Lohman told the audience.
The rise of alternative reinsurance capital, advances with technology and the search for efficiency has seen insurers and reinsurers adjust their business models in an effort to navigate the testing marketplace and remain relevant to the industry they serve.
But the same is also true for intermediaries. With ILS players and reinsurers increasingly looking to get closer to the primary source of risk, essentially jumping the distribution chain and cutting out the middle man, the broker community has had to, and will need to continue to find ways at adding value and remaining a relevant component of the risk transfer value chain.
As highlighted by the panel at the S&P and PwC Bermuda event in Bermuda recently, and discussed by Artemis previously, while brokers are under heightened pressure and finding organic growth difficult in the softening landscape, alternative reinsurance capital and technology could actually provide the broker community with opportunities.
The issue of where they will fit in the value chain in years to come, faces more than just the broker as well. Underwriters, ILS investment managers, risk modellers and brokers, will all face changes to how they extract profit from the intellectual capital they expend in the insurance and reinsurance value-chain.
Establishing how best to capitalise on the expense of intellectual capital is something the entire industry needs to come to terms with and understand.