With the disruption of the market and the way insurance and reinsurance are being bought, reinsurers need to have the courage to face these challenges and find a way to deliver what their customers want. Mr Chris Kershaw of Peak Re elaborates.
The global economy continues to face a long period of uncertainty. Europe remains in an uncomfortable situation with uncertainties over its composition and direction, while the US economy shows weak signs of improvement. China continues to see a slowing down of the rapid growth of the past two decades.
There are no clear signs of sustained growth in any of the global major economies right now. Where does this leave the reinsurance sector?
Reinsurance markets track economic growth
Expanding reinsurance markets have traditionally tracked growth in the global economy. As long as economies grew, so too did reinsurance as a business. It has been seen as a given that this would continue to be the case.
This has been true in parts of Asia Pacific over the past 30 years, such as Japan, Korea, Taiwan, and China – growing economies linked with greater insurance penetration backed by increasingly strong reinsurance support.
This phenomenon appears to have stalled in the last two years as China slows and transforms from an export led economy into a consumer led one, and other major regional economies struggle to create conditions for growth.
Not only because of the above, but also because of structural changes to the capital base that supports the reinsurance industry, we seem to have settled into a semi-stable part of the reinsurance cycle, if indeed such a cycle still exists.
Days of high returns are over
What does this mean for expectations among reinsurers going forward of the future? Is it realistic to believe that there will be a market turning event that will bring back the “halcyon days” of high returns – super normal profits on catastrophe business, and steady positive margins on other lines?
We suspect not, as the world has changed. With the development of ILS markets and capacity over the last 20 years (yes, it has been that long), the issue of a shortage of catastrophe capacity in the world’s developed insurance markets has largely been solved.
Reinsurers would like to sell more if the market could create higher returns, but perhaps the invisible hand of Adam Smith has helped bring this into an equilibrium where low cost suppliers will win, and high cost producers will adapt or die.
This is not to suggest that growth in the need for and demand for catastrophe reinsurance will cease. As major economies such as China develop, there will be a growing demand for catastrophe protection, and an adequacy of supply will meet that demand. However, this demand will not just be met by traditional capitalised reinsurers, but as knowledge gains ground, we expect the ILS markets to be active here too.
Looking at risk challenges
So if the landscape has changed in the way we believe it has, our expectations have to move on. As an industry we cannot expect customers to pay a distress price for a problem that has been stabilised and solved. We have to adapt to a new environment of stability, not volatility.
This is not to say volatility has left the building – it has not, but we are better equipped to manage it. There will still be the major event which will cost reinsurers earnings, and in all likelihood, capital.
But if we are to continue to be an elite industry, and we believe that many reinsurers like to see themselves in this way, we need to face some of the challenges inherent in risks we either have not yet addressed, or risks we felt in the past were too big, too complex. As we have grown and learnt, we need to put these risks back on the table and to work with insurers and their customers to create responses which keep us relevant.
Convergence of corporations, manufacturers, insurers and reinsurers
One word that seems to have disappeared from articles, which was common a while ago is convergence. That may be because some feel it has happened, and hence is old news. Perhaps it is about to return, but in a different fashion?
If we are to address some of the more complex challenges that will come back to the table, or come on to the table for the first time, we will see a new kind of convergence in the major risk business.
This will bring corporations and manufacturers, their insurers and in turn reinsurers, into new partnerships to address the concerns of risk managers and to once again bring innovation and capital together to deliver answers to some of these problems. It would not happen overnight, and we do not expect a total and comprehensive solution to be ready in one go, but it needs to happen at the top end of the scale for reinsurers to remain relevant.
There is also great concern expressed with regard to the replacement, or rather displacement of traditional personal lines insurers by new, massively capitalised entities that would not need reinsurance. This could, and possibly will, happen but if there is no space in this value chain for us (actually there probably will be but it will just look different to what has been done in the past) then reinsurance needs to evolve and adapt to deliver returns to shareholders.
Portray the value of reinsurance credibly
It is going to take courage to deliver what has been outlined above. However, we expect reinsurers which support their customers with market and product expertise and serve them with speed, reliability and authority acting as real business partners will prosper. Settling legitimate claims swiftly will increasingly be a metric used to underpin trust with their clients.
To deliver responses to the challenges insurance buyers face, we will need to be close to their insurers – the convergence outlined above. We will need to have greater understanding of industry and production, of society and of change.
To portray the value of reinsurance credibly for facilitating and protecting economic and social progress, this will require a discussion with clients, insurers, governments or corporations which extends beyond price negotiations and opens up new business and the potential for value creation and protection.
There are some tough challenges ahead and facing those will require the combination of capital from old and new sources, new approaches to risk, an agility which is not something our business has been famous for in recent years and some ambitious thinking.
The thinking needs to generate dialogue, and in turn the dialogue needs to generate value for all parties. Our expectation is that the future is exciting for those with the courage to deliver.
• The “halcyon days” of high returns; super normal profits on catastrophe business, and steady positive margins on other lines are gone;
• Reinsurers need to face the challenges inherent in risks that are either not yet addressed, or risks which were felt in the past to be too big, too complex; and
• The convergence of corporations and manufacturers, their insurers and in turn reinsurers, is needed to address the concerns of risk managers.
Mr Chris Kershaw is Managing Director, Global Markets, at Peak Re.