Buyers demanding bespoke products
A significant transition has taken place in the approach to reinsurance buying strategies, as the focus has evolved from one geared almost exclusively towards capital protection to one which is increasingly encompassing the broader requirements of volatility management and earnings control.
That is the view of James Nash, president, International, Guy Carpenter, who argues that, while the centralisation of reinsurance purchasing remains a primary driver, the reinsurance product is also becoming a more prominent component in the ability of purchasers to achieve consistent quarterly or annual earnings and maintain overall levels of profitability.
“This expanding remit necessitates a more complex and comprehensive reinsurance solution, and we are seeing a strong push towards increasingly bespoke solutions and away from more commoditised products in order to deliver solutions more closely map the specific risk and capital requirements of the client,” Nash said.
“In turn, this is pushing up demand for reinsurance as buyers seek to capitalise on the full range of available products to cater for the expanding demands being placed upon reinsurance.
“This is fostering an increasingly vibrant reinsurance market in which the full potential of the product is being more effectively realised. At Guy Carpenter, we are seeing a gradual uptick in the amount of reinsurance being purchased, with 2016 showing a reasonable increase and 2017 looking likely to produce a similar rise.”
He added that there is no doubt that this is also influencing the level of innovation in the construction of the underlying product. These innovative developments are often in the form of special coverage features developed for specific industries or risks unique to the particular client, he said.
“However, perhaps more important is the fact that we are seeing the willingness on the part of the reinsurer to apply that level of innovation. A few years ago, there would have only been a very small number of reinsurers that would have had the capabilities and the desire to take on the types of structures that are being proposed in the current market.
“Today, we are seeing an increasing number of practitioners that are stepping up to the plate to deliver the often pioneering products that are required to address the complexity of these evolving client requirements.”
He added that, in part, the creation of additional competition as a direct result of expanding presence of the alternative capital markets in the more commoditised reinsurance space has also served to push traditional reinsurers for focus more targeted solutions that extend into new areas of client interest and demand.
Nash also explained that regulatory developments such as Solvency II are also having an impact on capital strategies. Companies impacted by the directive, as well as other capital-related regulatory developments, continue to use reinsurance as a means to optimise the structuring of programmes in order to minimise regulatory capital requirements.
“This has resulted in an increase in the number of loss portfolio transfer transactions that we have seen. There have also been signs of the types of deals used in the non-life market to free up capital becoming more prevalent in the life sector, as insurers look to release capital by distributing significant blocks of life business into the reinsurance market,” Nash said.
“We are also seeing greater interest in the use of targeted run-off strategies, as companies are more willing to divest themselves of unprofitable books of business and to free up the associated capital.”
Another trend he identifies is of efforts by some reinsurers to move closer to the primary insurance market. There have been a number of instances where reinsurers have taken advantage of opportunities to support new product developments in the primary insurance sector, with companies seeking to effectively partner with their insurance counterparts in an effort to facilitate growth initiatives, he notes.
“However, a more significant development which has the potential to bring the insurance and reinsurance markets closer together is the ongoing assessment of capital allocation by some segments of the primary sector.
“We are seeing some carriers looking at the potential to operate a more capital-light structure as they re-evaluate the rationale for holding large amounts of capital to support risk, and explore how they can capitalise on reinsurance to support these new lighter models. This trend is just starting to manifest itself now, but as disruption in the primary market continues, we may see this approach become more prominent opening up opportunities for a more strategic-based interaction between the primary and reinsurance sectors.”
All this is set against a backdrop of rapid change which Nash acknowledges has the potential to significantly advance the capabilities and scope of the industry, whether that is as a result of improved efficiency, product innovation, more effective distribution channels or better claims handling practices.
“If these advances are embraced and embedded effectively then at a fundamental level we have the chance to capitalise on more accurate data analysis and improved risk selection to create a more robust industry that is better able to serve the needs of clients.”
Get the latest re/insurance news sent to your inbox every day - Sign up to our free email newsletters
Today’s Monte Carlo stories
Hurricane losses may stop softening, says Wallin as he mulls new Lloyd’s launch
Traditional reinsurers have the edge over ILS Down Under
‘Pre-emptive finance’ deals in pipeline
Funds unaware of onshore US tax breaks
Alternative thinking: the historic rise of ILS
Insurtech revolution will live up to the hype as companies invest
Cyber offering must evolve into new risks: Guy Carpenter
Discipline illustrates tight margins
Governments are key in emerging markets
Brexit logistics ‘almost unachievable’
Hard times for global reinsurance sector
Hardships faced by many put industry’s problems into perspective
