It used to be relatively straightforward to predict future trends in the reinsurance market. There was a well defined reinsurance cycle, conforming to the laws of economics: companies with excess capital would enter the market and provide increased capacity as they saw that prices were rising. Eventually the market would turn as supply began to outpace demand from insurers and prices would fall. Companies would then leave the market and find more lucrative places to invest their capital. This, perhaps coupled with a large loss or two, would force prices up and the cycle would start again. But this has all changed now.
More capital entering the market
The reinsurance industry is awash with capital seeking a decent return, affording companies an easy diversification away from other financial services risks. We have reached that point of the traditional cycle where normally one would expect players to leave the market as returns begin to subside. The inevitable next large loss would normally signal a rush to the exit for those who had not seen the warning signs. But instead we see more capital entering the market – facilitated by innovative capital market structures, and influenced by a desperate search for yield. Prices may well stay low for the long term, even after the storm comes.
Who will be the winners and losers in this market?
Those reinsurers who remain customer-centric and agile will be able to prosper in this market. The best will show the following characteristics:
- They will have built deep relationships with their clients allowing them to understand and respond to their needs with tailor-made solutions. Those needs have evolved over the last few years – more focused on the capital requirements of Solvency II, more responsive to new loss types such as cyber risks, and with a greater emphasis on emerging markets in Asia and Africa.
- Successful players of the future will have a distinctive business model with very clear value propositions to their customers and these very clear value propositions will come with a price. The days of the generalist reinsurance company simply offering capacity to unsophisticated cedants are behind us.
- Companies will need an efficient and integrated operating model which will run on a low cost base.
- And, finally, all of this needs a different type of management talent – underwriters who build relationships with cedants and brokers, pricing specialists who understand risks in the digital age, and – perhaps most crucially – executives prepared to innovate, to take a risk with their business models, and patient enough to accept some things will not work.
We covered many of these and other topics in our latest Clarity on Reinsurance report, where we carried out interviews with three leading reinsurance company executives operating in the eye of the approaching storm. We hope you enjoy the read.
- Full report: Clarity on Reinsurance: An industry in transition
- Services for insurance companies at KPMG