Unless it’s long enough (perish the thought!), there’s little you can do during a soft market to protect your company from it. The only reliable strategy reinsurers have at their disposal is to commit to an agenda of ongoing innovation. When soft markets occur, the results of that approach will protect them. And when the market hardens, reinsurers may benefit from outsized returns — to fuel further investment in innovation to provide some degree of protection against future soft markets.
There’s no substitute for market-growing innovation. Devising new ways to access risk areas, improving capital allocation to historically difficult lines of business, and figuring out how to penetrate uninsured (or underinsured) segments of mature markets have the potential to drive significant shareholder wealth creation and provide a steadying hand in the softer parts of the cycle. So, what should the industry be thinking about?
1. Microinsurance: Too often, insurers and reinsurers look at potential microinsurance markets separately. For execution, this makes sense. You have to understand the specific perils, regulations, and coverage needs to enter a market effectively. Unfortunately, this market-by-market approach obscures the total global potential of microinsurance. According to Willis, 4 billion people around the world could benefit from microinsurance cover — a substantial potential premium base that could generate plenty of risk-transfer opportunity.
2. Cyber: When speaking with clients, cyber always comes up. The need is palpable, but effective solutions are hard to come by. Cracking the code could result in a vast, robust market with implications at every link in the global risk and capital supply chain. But innovation won’t be enough to solve the cyber problem. This is the sort of challenge that begs for a coordinated industrywide response.
3. Disaster gap: Under-penetration in mature, catastrophe-prone areas could yield plenty of growth fodder for the reinsurance market. Florida and California come to mind as rich with opportunity. Think of last year’s earthquake in Napa. Due to low homeowners insurance penetration, the PCS estimate for the event came to only $150 million, despite the fact that early estimates from elsewhere in the industry forecasted an insured loss of as high as $2 billion. With the amount of capital currently sitting on the sidelines, it seems that fresh thinking could lead to new types of cover to help address this gap in penetration — and protection.
4. Specialty lines loss aggregation: For some specialty lines, it’s difficult to ascertain global loss experience and trends — energy and marine come to mind. An improved view of loss history can support better capital allocation and the development of more effective reinsurance and risk transfer tools. The current exploration of energy and marine by PCS could be an effective first step in this direction. Other lines warrant a look as well, particularly aviation.
5. Exchange-traded risk: A faster and simpler approach to risk transfer could also help grow the overall market. An environment to facilitate risk trading could attract a broader base of insureds through a new approach to live cat cover, for example. An exchange-traded index solution could engage supply chain, energy, and hospitality companies to help them manage their risk when an event is imminent. While the development of an exchange-traded index solution isn’t easy — and has been attempted several times — it remains on the collective mind of the insurance and reinsurance industry. We just need to find the right approach.