The reinsurance business faces 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 putting intense pressure on reinsurers.
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.
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 to 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 insurance-linked securities (ILS) and related instruments to address pandemic risks going forward.
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, and interest rates are still low. As with primary insurers, finding high-growth niches and appropriate 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 diversifying to new geographies or into primary insurance, participating in mergers and acquisitions, 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.
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.
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 RPA to automate processes, freeing up resources for value-added work while improving cycle time and process consistency.
Increased regulatory scrutiny is likely, regardless of whether Solvency II directly impacts a reinsurer. 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 and seeking more detailed levels of data to comply with new, risk-based capital requirements.
For more details on business and technology trends in reinsurance, read Aite-Novarica Group’s latest report on the market segment here.