What re/insurance executives expect for 2017

Robert DeRose, senior director, AM Best

Reinsurers need to stay relevant through the continued low interest rate environment and pressure from alternative market providers. AM Best is projecting a return on equity (ROE) in the 7 to 9 percent range for 2017, which is fairly anaemic growth. This doesn’t drive financial strength in the way we’d like to see it. Of course, if there’s a major catastrophe event, that projection is off the table. It would take near perfect conditions to drive a double-digit ROE.

New growth approaches are taking on many forms. Reinsurers have seen their business mix shift in recent years. All are virtually in some other business niche(s) through organic growth or acquisition of specialty carriers. While these classes of business are not without their competitive pressures, this expansion, if tightly controlled, can bring diversifying risks to the balance sheet and help alleviate the pressures of tight reinsurance pricing.

Innovation has also been demonstrated by the traditional market embracing capital market capacity as a partner, rather than just as a competitor. Sidecars facilities have been formed or existing ones have increased capacity. The capability to transfer risk to capital market facilities in exchange for fees and profit-sharing is a good alternative to have for customers when risk-adjusted pricing prohibits the use of traditional on balance sheet capacity.

Other examples of reinsurer evolution will continue into 2017 and beyond. Following the mantra of being closer to the risk and the customer, reinsurers are acquiring managing general agents and managing general underwriters. Others have moved into mortgage reinsurance as US government-sponsored enterprises look to downsize their exposure. Other areas being entered or considered include underserved or underinsured classes, such as cyber, flood or terror.

The reinsurance sector has not stood idly by and watched the parade go by in the past, nor will it in 2017 and beyond. The race to remain relevant will continue.


Mark Watson, CEO, Argo Group

As we head into 2017, much remains unchanged in a challenging marketplace. While last year’s financial results benefited from prior year development and the absence of significant catastrophic activity, in 2016 we have seen these tailwinds dissipate for some and shift 180 degrees for others. Underwriters must now stand on their own two feet knowing they will be judged tomorrow by what they put on the books today.

Although market forces on ILS capital remain a challenge, we are not seeing as many hedge fund re/insurance startups as we expected a year ago. It turns out that finding out how to source profitable business has proved more challenging than just managing assets.

The most talked-about market force right now is insuretech startups—which look a lot like their dotcom predecessors of the late 1990s. With all the enthusiasm for insuretech startups, and most companies starting their own insuretech or digital startup businesses, we will see how these end up over the next year or two than the dotcom era ended. There is reason to believe this time will be different.

For 2017, I expect there to be a shift back towards cedants buying more reinsurance, as reinsurance pricing continues to decline. This does not mean the pace of transformation from reinsurer to insurer will slow down, only that players will increasingly arbitrage the reinsurance marketplace. No-one should expect pricing to improve any time soon—there is still too much capacity in the marketplace.

Having said that, I believe there are still opportunities to grow for those who can differentiate themselves. As the industry unravels the complexities of cyber re/insurance, I expect this to be the biggest opportunity in our space as a specialty re/insurer.


Iain Bremner, managing director, Barbican Managing Agency

The ongoing modernisation of Lloyd’s and the London Market will continue to be a key theme in 2017. The Target Operating Model forms a central component of this drive and, over the next 12 months, we should see further enhancements in efficiency and overall market responsiveness. The aim is to allow underwriters to focus more on the core aspects of their role by facilitating advances such as one-touch data capture to help reduce duplication inefficiencies and bringing about greater centralisation of administration capabilities. We are already seeing the benefits of the new PPL electronic platform, and as this is rolled out further across other lines of business, we would expect this to further boost the transactional capabilities of the market.

This modernisation drive is intrinsically linked to the ability of the market to continue to attract new business. Brexit has of course raised concerns over whether London can maintain its international appeal, but it should be acknowledged that at a time of EU-wide uncertainty, the stability of the London brand could actually make it a beacon for international insurers.

2017 will see the Lloyd’s market move closer to its Vision 2025, as it seeks to strengthen its presence in established territories, while expanding into new territories. At Barbican, we have looked to expand our global footprint into new markets through establishing strategic partnerships with experienced practitioners in our target territories.

Other mechanisms such as broker facilities may also play a part in opening up the potential of emerging markets or new lines of business to a broader spectrum of the market—although the viability of such structures will always be dependent on the quality of the data which underpins them. A further factor that will potentially influence the city’s appeal on the international stage will be the success of the UK government-backed drive to establish London as a hub for insurance-linked securities. There is concerted effort to make this happen, and 2017 will certainly be a formative year.

Effective data management will be another central theme. Data is playing an increasingly prominent role in the underwriting process, but the Holy Grail is making that data work in real time. By enabling instant access to key data sets, this will significantly speed up the underwriter’s decision-making process. This is an area which Barbican has invested heavily in through the implementation of initiatives such as RuleBook; our focus is on improving operational efficiencies and analytical capabilities across all stages of the underwriting cycle. On this front, the potential afforded by blockchain technology to facilitate greater market efficiency through creating a standardised data playing field will also certainly be part of the data discussions in 2017.

Expense management will continue to be a prominent focus for many organisations over the next 12 months. Current market conditions are driving a much more concerted effort to embed greater efficiency from the underwriting coalface through to the administrative back office. This drive however should not be simply about cost-cutting, but rather looking at measures which will serve to streamline processes, introduce leaner operating platforms and ultimately provide a more effective service to the end client or broker.

2017 will also see insurers continue to look at opportunities to expand their risk remit into emerging business lines. In recent years, the evolution of the cyber insurance market has served to demonstrate the industry’s ability to capitalise on its expanding analytical and modelling capabilities to enter areas where historic data is in short supply.

The industry is also playing a central role in building the market’s potential—for example, Barbican is working with RMS, Cambridge University and other insurance practitioners to help develop cyber models and standards. In support of this push, we are also seeing much greater diversity of specialisms entering the insurance industry’s talent pool. New skillsets and subject matter experts from a broad spectrum of external sectors are serving to open up the potential of previously untested risk areas.


Jon Sullivan, portfolio director, short tail treaty, Brit

In 2017 we will see the further evolution of the cyber product. Its opportunities as a new premium growth area will continue to be of huge interest. Its pricing, accumulation and wording construction will evolve with the product presenting challenges on the way which will favour those investing more heavily in researching the sector. Talent will be cherished and challenged for as teams grow and new entrants join with associated staff movement in the sector.

The insurance sector will also be able to observe the evolution of the UK government draft ILS regulations. The draft regulations offer a compelling reason for ILS entities to develop a base in London to build out their portfolios. How the regulations evolve and how they are adopted by investors could prove a significant addition to London’s risk-taking capabilities.

As attrition moves up and expenses grow, a ‘lucky’ cat year is becoming essential to create an ‘average’ year. Maybe 2017 is when cat frequency reverts to mean (or worse) and we start to see companies really struggle with the associated consequences for pricing and risk-taking.

With thin results, more focus will be brought to bear on expenses with reorganisations, facilities and electronic platforms growing further. Merger & acquisition (M&A) digestion and promised savings will need to be delivered.


Andy Wallin, group commercial director, Ed

For London’s re/insurance broking market, 2017 will begin to see changes which are long overdue. Our clients have told us loudly and clearly that their requirements have evolved. They want partners who have a comprehensive understanding of their region and culture, who can speak their language and are located proximate to them. To date, we have been slow to meet these requirements. Outdated practices have stymied change. However, in the coming year, we will begin to see some brokers at least evolving their practices to meet these needs.

Brokers will also place greater emphasis on empowering retail brokers globally with specialist intellectual property. They will also afford them access to the world’s marketplace. London will remain essential, but a proposition which only places risks through London is no longer sufficient. In 2017, these local brokers will gain increasing access to the major re/insurance hubs and will be able to call upon the requisite expertise to enable them to provide the best possible service for their client’s evolving needs.

Historically our industry has been slow to embrace new technologies, but at least for some, this is beginning to change and we will see a growing recognition that technology can act as a differentiator. This does not mean simply looking to update already obsolete systems. Rather there will be a greater acknowledgement of the benefits which disruptive technologies can have on our market.

All of these will be positive developments which will improve our market. However, the trend towards facilitation will also likely continue. This is an effective and efficient solution for homogenous books of business, but not for specialist risks which require a bespoke solution. Customers whose risks require greater underwriting rigour are being done a disservice when they are bundled into facilities. This is in the broker’s interest, not the customer’s.


Chris Waterman, EMEA head of insurance, Fitch

Brexit will continue to be a prominent topic for the insurance industry during 2017. Not only will insurers be subject to ongoing bond and equity market volatility, but several UK commercial non-life insurers that currently conduct cross-border business with the EU through passporting provisions are likely to look to set up subsidiaries in the EU during 2017 before passporting is phased out.

The Irish insurance regulator has already confirmed that it has increased employee numbers by more than 25 percent in 2016 and expects a further increase as a result of a rise in the number of applications from insurers to establish operations in Ireland following Brexit. Any restructuring will inevitably incur additional costs for UK insurers.

Solvency II equivalence following Brexit will be an important target for UK reinsurers. Without Solvency II equivalence they would be required to post collateral to support business they source from the EU, and we would expect them to look to set up subsidiaries in the EU to avoid the need to meet collateral requirements.

Although Solvency II came into effect on January 1, 2016, the associated public disclosure requirements of Quantitative Report Templates (QRTs) and Solvency & Financial Condition Report (SFCR) will be published only with insurers’ 2016 year-end results and are expected to be available by May 2017. The increase in transparency provided by these new public disclosures including Solvency II balance sheets, premiums, claims and expenses by business line and Solvency II technical provisions, will be a key development for the European insurance market in 2017. We expect fuller Solvency II disclosure in 2017 to include insurers’ solvency coverage without the benefit of transitional measures.

The European insurance industry faces many risks, but Fitch sees persistently low interest rates as the biggest challenge. Low interest rates will continue to suppress insurers’ investment returns and constrain overall levels of profitability. Given the low interest rate environment, we expect European insurers to continue the trend of searching for increased yield on their investments during 2017. This includes an increase in appetite for illiquid assets such as infrastructure and real estate, as well as an increase in allocation to equities and alternatives such as hedge funds and private equity.

Due to relatively low yields on government bonds, we also expect a continued movement by insurers away from these assets towards corporate bonds in an attempt to improve overall levels of investment return, despite the higher capital charges for this asset class under Solvency II.

Notwithstanding the expectation of an increase in the investment risk appetite of many insurers, we believe that this will remain limited relative to the large size of insurers’ investment portfolios.

One of the big fintech opportunities that will present itself in 2017 is realising the potential of big data. Big data could transform pricing across most insurance lines. Data on policyholder behaviour and circumstances is continually being created, often tagged in detail at an individual risk exposure level. This creates an opportunity for insurers to price risk more frequently, accurately and on a more individual level. However, the challenge for insurers is whether they can access, process, interpret and utilise this new data quickly and accurately to price more profitably and competitively.

Fitch expects M&A activity in the insurance market to continue in 2017, but not at the relatively high levels seen in 2015/16. Key factors driving insurance M&A remain unchanged such as the need for scale, capital optimisation, expense management, constrained profitability and limited growth opportunities. At the same time there is continued demand from investors from within the industry to consolidate, and from outside looking for uncorrelated income streams.

We expect to see continued interest in developed insurance sectors from investors in Asia Pacific, particularly China and Japan looking to develop international platforms, as well as from alternative capital such as pension funds and private equity.


Jeremy Brazil, director of underwriting, Markel International

Brexit will continue to be a potentially major source of uncertainty and disruption. There’s going to be a lot of hard work and management time involved in tracking the process and planning our responses to the possible outcomes. And when the outcomes for the insurance industry crystallise there will be a lot to do to make the right things happen.

The cost and efficiency of doing business at Lloyd’s remains a major issue for the London Market, which has been thrown into higher relief by worsening loss ratios. Market modernisation and the Lloyd’s Target Operating Model including PPL, the electronic placing platform, are serious efforts to address this issue. In the short term, of course, these have cost implications but come with the promise of continued savings in the longer term.

It seems unlikely that the high level of M&A activity we have seen in the last couple of years is going cease. Over that period, exit book values have continued to rise and international acquirers seem able and happy to acquire businesses at over twice book value whereas, even two years ago, the multiple was between 1.0 and 1.5 times.

While these valuations seem pretty hairy to those of us who have been around the industry for some time, some buyers still seem to think that as long as they can grow their top line, they will be able to create efficiencies and take out cost. The history of M&A doesn’t always support that approach.

The number of reinsurers which are targeting insurance platforms continues to cause concern as it adds an additional capacity drag on the primary market. Cyber will continue to be an important developing focus for the market. As breaches, including those which expose consumers to loss, continue to be reported on a regular basis, cyber protection and cover against breach should be on every board’s agenda. Major breaches, such as the ‘internet of things’-enabled denial of service which crashed sites for Twitter, The Guardian, Netflix and CNN earlier in the year, raise important insurance issues for the manufacturers of internet-enabled domestic devices.


Julian Enoizi, chief executive, Pool Re

Events, both in the UK and internationally, have markedly changed the geopolitical landscape in 2016. The world is now a less certain place and the UK’s position on the global stage is now less defined.

For the insurance industry the path is also less clear. It stands at a crossroads, with its very existence, at least in its current form, threatened by newer, more dynamic business models. Technology has altered many of the traditional risks which have been the London Market’s staple and new threats have not yet been met with a comprehensive response. Increasingly, many insurance products do not reflect the full extent of the threat or provide cover for the risks which concern risk managers.

The nature of the risks which insurers have traditionally been asked to underwrite has shifted and evolved in line with the threats faced by today’s businesses. The terrorism insurance marketplace is a case in point. Over two decades we have developed a robust response to property damage caused by acts of terrorism. We have been tested several times on this front and have shaped and honed our proposition. However, the horrific acts committed by Daesh (so-called Islamic State) and other like-minded groups have laid bare the gaps in the coverage offered by the market. Attacks on cities across the globe have resulted in large scale economic loss, significant loss of life, but very limited insured losses. This is unsustainable. This is an area in which we can do more to safeguard our economies and will be a key focus for Pool Re in 2017.

However, there are others, which will become increasingly apparent in the coming years and for which our industry may be ill-prepared. Some have already been identified and underwriters and broker have begun to incorporate the potential impact of climate change into the modelling for some risk classes. The rapid pace of technological advancement, with the development of virtual reality and alternative reality type products will also lead to new risks. Historically our industry has been slow to adapt to new technologies and tailor our products accordingly.

Cyber terrorism will undoubtedly be employed as a means of attack by terrorists. By including cyber in our property terrorism policies our market can set the standard for terrorism insurance across the globe. In 2017 Pool Re will expand its property damage cover to include damage resulting from a cyber trigger. Efforts such as this can make businesses in the UK safer and the insurance industry has a vital role to play in ensuring that Britain remains an attractive place to do business.


Johannes Bender, Taoufik Gharib, and David Masters, credit analysts, S&P Global Ratings

For 2017, we believe the following topics could be among the most significant.

Pricing/terms and conditions: the evergreen topic of development of pricing and terms and conditions remains on top of the agenda for 2017. The high absolute level of traditional capital and alternative capital coupled with a relatively benign large loss development in 2016 and strong expected bottom line profits for the sector are dampening expectations for a significant turnaround in pricing (to a hardening market) in 2017.

However, the slowdown in price declines to about 0 to 5 percent[O1] in 2016 and the slowdown in influx of alternative capital and a stabilised level of traditional capital in 2016 indicates a levelling out of price declines. Moreover larger reinsurers, in particular, appear to have pushed back on clients demanding looser terms and conditions, with only limited loosening experienced in 2016, but in areas that can be priced for. The question is if 2017 will be the bottom of the soft cycle and if the market starts the turnaround into a hardening market from 2018 onwards.

Earnings outlook/cost of capital: although 2016 will likely be a strong earnings year, the underlying normalised level of profitability is shrinking. 2016 will benefit from lower than budgeted large losses, albeit not the extent seen in 2015. Beside the potential development of large losses in 2017, the development of normalised earnings is expected to continue to be under pressure in view of the expectation that rates are levelling out (at best), together with declining investment returns. It will be also important to see if the sector is still earning its cost of capital in 2017 and if large losses are equal to the average large loss burden of previous years. The expected cost of capital in 2016/2017 will likely be around 6 percent and the return on capital could, in a normalised large loss environment, in 2017 could be below the cost of capital.

M&A: we have seen a wave of M&A transactions in 2015 that partly paused in the first half of 2016 before gaining momentum again in the third and fourth quarter in 2016 in the re/insurance space. It seems that the M&A activity is back and is likely to continue in 2017 as organic growth remains hard to achieve in view of the high capacity and shrinking margins. We believe consolidation will remain a potential solution for reinsurers looking to strengthen their competitive positions, smooth concentrations and to bolster balance sheets.

Cost synergies become increasingly relevant in the soft cycle and M&A can be an effective measure to achieve that goal. However, although it is difficult to assess the success of M&A deals in the industry, the long-term track record across the board has yet to be proven since not all observed deals have led to stronger companies, increased shareholder value and/or higher credit ratings.

Large losses/events: as usual the development of large losses/events remains an important factor for the industry in 2017 for both earnings and capital. We assume that the industry’s capital can withstand a number of shocks but the largest sensitivity for capital volatility resides in natural catastrophe risks and reserve risk. Reserve margins appear to be adequate in 2016 for the sector in aggregate, but some selective reserve strengthening measures of certain lines of business and by some primary writers coupled with some visible reserve releases in the last years could raise some questions around reserve adequacy in 2017.

Relevance: as mentioned, the industry’s relevance has been a key topic for 2016. Strategies to respond to long-term opportunities such as filling the protection gap in developed and, in particular, emerging markets, and leveraging new trends in emerging risks remain on the agenda in 2017.


Ivo Hux, head France, Benelux & Switzerland, Swiss Re

We will operate in a new political landscape in 2017 with the UK Brexit developments, a new president in the US, and several important elections in Europe, namely Germany and France. There is a risk of further fragmentation and national protectionism, which goes against the diversification idea of globally active reinsurers.

We are also likely to see continued price pressure in re/insurance due to low interest environment, which goes hand in hand with greater volatility in financial markets as it is likely to affect credit risk spreads and foreign exchange rates.

Re/insurers will also need to work on keeping access to risk pools, which includes goals such as getting access to new distribution channels as digital disruptors engage in changing the way the insurance business operates.


Jens-Ulrich Peter, head property underwriting EMEA, Swiss Re

After a historically low interest rate environment in 2016, the coming year may deliver some change. The US Federal Reserve has suggested several interest rate hikes in the next 12 months.

In order to succeed in the current operating environment and remain relevant to customers, re/insurers may need to at least amend their business models, and potentially even implement disruptive changes. It will be interesting to see who moves first and in what direction. 2017 is also likely to show where the trend towards disintermediation is heading. Is it just a tempest in a teapot or a real game-changer?


Nicola Rautmann, market executive Austria & CEE, Swiss Re

In 2017 we will see the industry further splitting the business, commoditising parts of it and differentiating other parts of the reinsurance business. A critical question will be if expectations of buyers and reinsurance markets will be balanced and brought in line. An important driver for the re/insurance industry will be the influence of new technology on the sector’s value chain.

The industry needs to address new risks emerging through the introduction of new technologies. The industry will also require more capital-driven reinsurance solutions due to the introduction of Solvency II rules and specific circumstances of clients. We are also likely to see strong competition among brokers which will push into new topics to explore additional revenue streams.


Frank Reichelt, market executive Germany & Nordic, Swiss Re

The further spread and implementation of new technologies will continue to change our lives at a higher speed than ever—insurers who cannot adapt to the new risk landscape will be in deep trouble, and first fallouts can be expected.

It doesn’t need much to start a serious consolidation process in the reinsurance segment. Large losses in 2017 particularly in nat cat could trigger such a development. Extended regulation and a tougher Solvency II regime is likely to burden insurers further in 2017—an increasing number of insurance companies will struggle to fulfil all requirements and deliver on time what is necessary.

Insurers are likely to continue to increase investments in riskier assets in order to achieve grow their income.


Paddy Jago, global chairman, Willis Re

There is a high possibility that the underwriting community will look to get closer to distribution in 2017. Those that have been historically engaged in distribution look to have stronger relationships with underwriting, and perhaps have greater control of the capital that takes on the risk. I believe that the blueprint for success will include being closest to the customer, being able to mine and manipulate all the relevant data, and having the best and most efficient access to capital. Achieving that in today’s market usually involves a myriad of vendors but the frictional cost is simply too high. As a consequence, I suspect that there are many parts of the traditional value chain that will simply become redundant.

Insuretech has become the buzzword for progress and innovation as companies seek to appear cutting-edge in their grasp of tomorrow’s world. Boards will take investment and modest equity positions in startups but it will be some time before they realise that they have to kiss an awful lot of frogs before coming across something that might be even partially related to royalty.

Peer-to-peer and shared economy platforms will attract attention as the ‘new way of doing insurance’, but it’s worth pointing out to them that the first mutual insurance company was established in about 1680.

M&A activity will continue but probably less than we saw in 2015, simply because there are now fewer targets. However, many financial services companies have traded up significantly over the last 12 months and therefore may feel in a better position to transact (from both buyer’s and seller’s points of view). US President-elect Donald Trump’s enthusiasm for deregulation may encourage some acquirers to become more active opportunistically.

Re/insurers will continue to need advice on capital optimisation, capital preservation, capital efficiency, earnings volatility, return on equity, legacy issues, all aspects of underwriting optimisation, risk appetite and risk mitigation. However, whereas this is where most relationships between cedants and reinsurance brokers have historically started, today’s insurance company CEO needs a lot more than that.

My final prediction is less of an ‘expected development’ and more an ‘outlook for if and when the next big loss happens’. The rating agencies and regulators are trusted with ensuring the wellbeing of our industry so that policyholders are paid after a loss and that insurance carriers are in a position to continue trading. However, although these checks are firmly in place, they are akin to a fire drill and frankly, there is no substitute for the real thing.

We are well overdue a major loss that has really tested the fabric of our industry. Rates have been falling as a result but their consequential impact on combined ratios is perhaps the easiest to measure. What is not so easy to measure is the creeping expansion of terms and conditions that has taken place over recent years as brokers seek greater reparation for clients during a benign loss period. Consolidation of reinsurance programmes and bigger net retentions brought about by the perception of being overcapitalised (‘well that’s what the model said’) will be tested.

Cyber, a hot topic that many talk about but few understand, could bring an insidious disease into the balance sheet and many underwriters may be caught out when it appears as a loss if not properly excluded from wordings (which for the most part, as industry veteran Tom Bolt has most recently warned, it has not been).

Trapped capital might prove to be a far bigger issue than the loss of principal for the alternative markets and the ‘willingness to pay’ question will be put to the test.