Reinsurers: Addressing Low Returns With the Aid of Technology


Reinsurers: Addressing Low Returns With the Aid of TechnologyThe reinsurance business continues to face multiple challenges. Years of soft market conditions followed by sudden, sharp hardening periods; tremendous losses from man-made and natural catastrophes; and open-ended liabilities (e.g., asbestos, terrorism) are still putting intense pressure on reinsurers. A newer development is capital constraints, with investors reluctant to invest in insurance-linked securities (ILS) and other alternative risk transfer solutions while existing capital is trapped.

Reinsurance negotiations have been prolonged and have generally resulted in reinsurers not obtaining the coverage modifications they sought according to Guy Carpenter.

These difficult conditions challenge reinsurers to adapt and come up with creative solutions. Reinsurers control their risk through sophisticated risk analysis, careful pricing and setting of terms and conditions, and capital management—including retrocessions, where needed. There is not pressure for modern systems, rather for stable, robust systems that can support current business. Below are some of the specifics challenges reinsurers are addressing and how they are dealing with these aspects of the market.

Macroeconomic Impacts

Inflation, labor shortages, and supply chain disruptions are driving up potential losses for reinsurers—the same as they are for primary insurers. Cat losses, rising interest rates, and their impacts on investment returns are additional factors limiting the influx of new capital, although reinsurers are still well-capitalized.

Some reinsurers are responding by reducing their property reinsurance business or diversifying into other lines so that property reinsurance is a small component of their overall book going forward. More reinsurers are avoiding lower layers of reinsurance (which tend to be affected by losses beyond the loss amounts retained by primary insurers) or specific geographic regions such as coastal Florida and the Gulf Coast. Reinsurers may require larger retentions by primary insurers in future deals.

Climate Change

One of the most significant emerging hazards that reinsurers face is climate change and the related increase in natural catastrophes. Secondary perils such as floods, storms, and wildfires are increasing in frequency and severity, and reinsurers may be underestimating their exposure to climate change.

Some reinsurers are already shifting investments from industries that contribute significantly to CO2 emissions and are investing in green technologies. They are also partnering with academic institutions, governments, and other organizations to take on some risks and promote efforts toward resilience.


COVID-19 loss development remains slow and difficult to quantify, a potential opportunity for modelers. The impact on reinsurers depends in part on their exposure to lines of business (e.g., event cancellation) and long-tail liability business (e.g., D&O, workers’ compensation). To date, claims have been lower than anticipated, and reserves and solvency do not present issues.

Greater concerns for reinsurers are the increase in loss costs due to labor shortages and supply chain disruptions. Life reinsurance saw more of an impact from COVID-19 but one that was still manageable. Some reinsurers have proposed ILS and related instruments to address pandemic risks going forward.

Life Reinsurance

Life reinsurance has changed from being the province of a select few companies focused on specific solutions, often around mortality risk, to include smaller players and newer entrants. These small players and new entrants are reinsuring non-core blocks of business and capital support for acquisition costs and reserving related to new business. Newer capital providers include capital markets firms, hedge and pension funds, and family offices.

Reinsurance Financial Trends

Reinsurers’ capital is more than adequate, though the return on that capital is cause for concern. As with primary insurers, finding high-growth niches and appropriate pricing and underwriting are the keys to long-term profitability for reinsurers. Existing market players and new entrants are pursuing a range of strategies to boost growth and profitability, including increasing pricing, diversifying to new geographies or into primary insurance, offering alternative capital solutions, and shifting focus toward high-growth, niche business.

Other challenges come from the impact of social inflation on loss costs and the spread of loss cost inflation from casualty lines to property lines due to COVID-related economic disruptions.

Alternative Capital

High property catastrophe activity, combined with ongoing low interest rates and high stock market activity, has led some third-party providers to deploy less alternative capital and seek better returns on capital through other avenues.

Technology Capabilities

Reinsurers are investing in core capabilities in marketing, underwriting, billing, and claims. Other investments include data and analytics for distribution and for finance as well as digital capabilities in marketing and claims. The relative lack of investment in distribution is due to primary insurers’ handling of broker commissions and low transaction frequency. Similarly, the concentration of the broker and reinsurance landscape makes marketing less of a priority.

Technology Priorities

New options for third-party data are becoming available that aggregate public and semi-public data from social media sites and government records; some reinsurers are piloting these services alongside more traditional third-party data players. Reinsurers are demonstrating their value to cession partners by acting as data aggregators to pass along underwriting insights. Reinsurers are also adopting AI and machine learning internally and on behalf of primary insurer clients.

In general, reinsurers look at core system replacement to centralize from spreadsheets and gain better access to their data. They are focusing on moving to modern technology while improving user experiences. Reinsurers continue to monitor developments around blockchain. Some are exploring robotic process automation to automate processes, freeing up resources for value-added work while improving cycle time and process consistency.

Increased regulatory scrutiny is likely. Improving data collection and control over that data are key initiatives for most reinsurers to meet regulatory standards. Reinsurer IT executives are collaborating with risk management and finance departments to prepare for more frequent data calls as well as seeking more detailed levels of data to comply with new, risk-based capital requirements.

If you’d like to discuss our key findings in the reinsurance space, please read our new report Business and Technology Trends 2023: Reinsurance or contact Carey Geaglone ([email protected]), Martin Higgins ([email protected]), or me ([email protected]) to continue the conversation.