3 Tips for Thriving in a Soft Reinsurance Market

December 21, 2017 / 4 min read

A lack of major catastrophes in recent years (aside from this year), increased competition brought on by the inflow of alternative capital from investors, and the need to spend more time and resources processing increasing volumes of data are several of the key forces that have created today’s soft reinsurance market conditions. With combined ratios increasing and global property reinsurance rates online (ROLs) having declined for 11 straight years, describing the underwriting environment as “challenging” would be an understatement. As January 1 renewals complete, many in the industry have speculated that the market may finally begin to harden—at least in the affected regions, such as areas struck by hurricanes Harvey, Irma, and Maria and the earthquakes in Mexico.

But complete restoration of those long-awaited higher reinsurance rates might take more than just this renewal season to materialize, which affects profitability. A big driver of profitability is the denominator of your combined ratio equation ([Combined Ratio] = [Incurred Losses + Expenses]/[Earned Premiums] and earned premiums is perhaps not yet guaranteed to become more favorable. Thus, reinsurers still need to continue searching for other ways to improve profitability. That being said, here are three tips for ways more sophisticated analytics and leveraging technology can act as a guide to not just surviving, but for thriving in a soft reinsurance market.

1) Use Advanced Analytics to Understand How to Decrease the Potential for Incurred Losses

Given the soft market conditions, the main part of the combined ratio equation you can improve on is the incurred losses, or loss ratio portion. You’ve likely been using catastrophe models for years to arrive at loss output metrics such as AAL, EPs, and TVaR, but what else can be done post-modeling to uncover hidden profits, and reduce your tail risk and diversify your portfolio? There are, of course, additional reinsurance portfolio metrics (such as WinVAR and CENTVAR) you might already be looking at. The good news is that these metrics, as well as the ability to quickly adjust shares, limits, and deductibles, and so forth, can now all be re-computed in real-time! In fielding submission inquiries, speed is crucial—you need to be able to re-model your contracts and synchronize them with your internal pricing system on the fly to snatch the best deals on the street before your competitors do.

2) Leverage Optimization to Select Better Outward Reinsurance

In a soft market, you may not necessarily be able to increase the premiums you bring in; however, you still have many—perhaps too many choices. Between indemnity-based solutions to parametric coverages, there may be several potential outward reinsurance programs for you to choose from, and the number of potential combinations and strategies may be staggering. This is where portfolio optimization can be used to help you sift through the noise and provide guidance on the most effective ways to make your retrocession selections. Making an informed decision on what combination of these retros to place will help you retain more premium and minimize the combined ratio on your net position.

Portfolio optimization is all about reaching the “efficient frontier” that maximizes return while minimizing risk. It’s an approach we’ve seen several of our clients use to significantly improve their outward re because it allows them to quickly iterate through various combinations of share participation in retro contracts. Optimization isn’t about giving you the “perfect answer”, but about giving you recommended possibilities that you can select, depending on your risk appetite.

It is also worth noting that by optimizing your inward reinsurance, you’ll be improving the combined ratio on your gross portfolio. This will, in turn, lead to improving your outward re, as you’ll be spending less on the same coverage because it is now less risk for another company to cover your portfolios. We’ll touch on the optimization of your inward re more in a future post, but the key here is being able to view all the additional paths for diversification.

Read our case study to learn how one global reinsurer used our portfolio optimization engine to improve expected returns by more than 10%.

3) Reduce Expenses and Uncertainties of Building New Reinsurance Analytics Technologies

Are you attempting to connect catastrophe model loss output to your internal tools and/or build a new internal pricing system? Building your system from scratch is tough—not just for reinsurers, but for many types of organizations also. In fact, 56% of IT projects deliver less value than predicted, and a staggering 71% of large IT projects face cost overruns.

Resource constraints are not an uncommon challenge to have, and a way around that is to leverage tools that have already been built for scaling and performance, and to plug into them. Are there APIs that can easily be integrated into your system? Does your organization have a customized way of defining and pricing the most complex contract structures? Of course, leveraging existing tools will have a cost to it, but the benefits can be realized in significant long-run cost savings and improve the expenses part of the combined ratio equation.

Winning in a Soft Reinsurance Market

Using advanced analytics to decrease your loss ratios, optimizing your outward reinsurance to retain more premium, and reducing technology expenses are three ways reinsurers can overcome today’s soft market conditions. And when rates do go up (which may be on the near horizon) you’ll be even better positioned to take advantage of those hard market conditions, and use that additional capital you’ve saved toward other critical projects your organization is considering undertaking.

3 Tips thriving soft reinsurance market

1) Use Advanced Analytics to Understand How to Decrease the Potential for Incurred Losses

2) Leverage Optimization to Select Better Outward Reinsurance

3) Reduce Expenses and Uncertainties of Building New Reinsurance Analytics Technologies

Winning in a Soft Reinsurance Market