One of the side-effects of the disruptive Insurtech wave, that is rippling through insurance and reinsurance markets, is an expectation that it will help to boost the importance of reinsurance capital, as it supports new business models and backs technology start-ups.
Access to reinsurance capital is proving to be key for many insurance technology (Insurtech) start-ups as they seek to launch new and unproven business models into a market that has operated in much the same way for decades.
Those Insurtech start-ups that are looking to disrupt the risk to capital value-chain in insurance are finding that, as they cut out primary carriers or brokers, the risk is destined to flow increasingly directly to reinsurance capital.
Other models are more focused on enhancing and improving the insurance customer experience, through the use of technology such as big data analytics, machine learning, artificial intelligence and apps. Or doing one thing particularly well and selling a dedicated product to a target audience.
But for these new ways of selling insurance and engaging with customers to scale at a rate that makes them sustainable they typically need strong backing and ample reinsurance capital is one of the key requirements.
Equity analysts at Deutsche Bank highlight this trend in a recent report, where they reflect on meetings with Insurtech start-ups and discuss an expectation that reinsurance capital will increasingly be the backer of Insurtech business models, ultimately helping to boost its importance.
“We expect new insurance models to break up the value chain, with reinsurers acting as risk carriers behind many of the new direct models,” the analysts explain.
A trend that will mean that reinsurance capital gains in importance, both as necessary support for Insurtech start-ups as they grow, but also as its proximity to the source of risk increases and efficiency is enhanced in how it is being utilised, solidifying it as the ultimate risk capital source.
The question is then whether it is the traditional reinsurance balance-sheet or capital market and ILS-backed reinsurance capital which is most effective and efficient, when put to use by and alongside insurance technology start-ups?
A number of Insurtech start-ups are acting similarly to a fronting insurer, providing distribution but retaining little of the ultimate risk, instead passing it onto reinsurance capital. With this model having been embraced by ILS managers and funds, we’re likely to see some ILS backing of Insurtech start-up’s before too long.
It’s an opportunity for efficient capital to be put more directly to work in insurance risk, by becoming a reinsurance capacity provider to an effective, technology-led sales and distribution platform.
We’ve seen this happening across the MGA and fronting sphere for catastrophe exposed property insurance risks, so why not for shorter-tail lines sold by technology start-ups and apps?
As Insurtech start-ups seek to own their customers, putting customer experience and design high on the agenda, it would be prudent for ILS capacity providers to watch the sector for opportunities that may emerge to support Insurtech ambitions.
Any opportunity to provide capacity to back a growing start-up could secure an ILS player a new way to get its capital closer to the source of risk, while securing a risk pool from an engaged and (hopefully) more satisfied customer base.
For the Insurtech start-up, being able to secure its own distribution, while forgoing the need to become a full-on primary insurer bearing the risk, means its efficiency is much greater.
Deutsche Bank’s analysts highlight that primary insurers and intermediaries are typically “burdened by higher cost bases” so if Insurtech’s embrace the lowest cost and most efficient source of reinsurance capacity they could ultimately make their own product offering even more efficient.
Of course one of the effects of using a more efficient model for selling insurance products, with the risk capital being brought increasingly closer to the source of premiums and reinsurance becoming an increasingly important backer, is that insurance pricing is likely to decline.
“Insurance coverage should become cheaper as the digital players should be able to operate on a lower cost base and the emerging shared economy will additionally affect premium volume with on-demand products,” write the Deutsche Bank analysts.
The use of reinsurance capital will add to this pricing pressure, with efficient ways of structuring the flow of risk to capital destined to cut out some of the middle-men, while capital markets participation will also help to reduce the cost of risk capital.
Interestingly though, the analysts say that some European markets could see broker platforms coming to the fore, as the distribution channels of choice, leaving direct primary carriers with less direct distribution capabilities and their role being transformed to “product manufacturers.”
Insurtech start-ups positioning themselves as brokers of insurance could stand to benefit here, as carriers become compelled to offer the products their client distribution base wants.
It would be interesting if this also affected reinsurance and risk transfer, in lines such as catastrophe and weather risk, as it could suggest that technology platforms that can sell the product effectively may be able to dictate terms to much larger capacity providers in years to come and drive further pricing efficiency.
The analysts see these trends as reinsurance backing new insurance business models, as well as reinsurance capital seeking to ensure it maintains its importance in the value-chain.
It does raise the question whether in years to come we are going to simply see risk capital (rather than insurance or reinsurance capital) backing companies with distribution reach, product design skills, the ability to analyse or price risk and the effectiveness to build strong customer relationships.
If the distinction between insurance and reinsurance blurs and it becomes a story of risk capital being put to work at different points in the value-chain that exists in the future, the highly efficient capital markets will surely stand a good chance of becoming one of the key providers of this capacity.
The lean Insurtech business model of providing specific products extremely efficiently to an engaged customer base will fit well with capital markets or ILS capacity. With some start-ups also focusing on the securitisation and transfer of insurance risks directly to capital market investors, the business models of the future could find ways to make this seamless as the risk pool expands and contracts.
Deutsche Bank’s analysts highlight that the efficiency of the reinsurance capacity backing Insurtech start-ups could be key, as the expect “part of the cost advantage to be eaten up by significant marketing campaigns.”
Given the need for efficiency here it is no surprise that large, global reinsurance players are seeking to bring Insurtech’s into their own domain, by partnering, investing in, incubating and mentoring them, while becoming the provider of reinsurance capital.
They’ve clearly noted this trend, that reinsurance (or just risk) capital is set to become the capacity backing many Insurtech start-ups and getting in early to cherry pick some of the best prospects is a shrewd and forward-looking move by some of the large, diversified players.
As reinsurance capital has its importance boosted, the capital markets and ILS players have a good chance to ride this wave as well.
If Insurtech start-ups want to maximise their efficiency, to give them the best chance of success, attaining sustainable scale and fighting off incumbent competition, partnering with ILS and the capital markets may be the option offering the greatest efficiency benefits.