As I wrote yesterday, some of the reinsurance industry’s greatest challenges seem to have little to do with the reinsurance industry itself. Instead, you need to move further down the risk and capital supply chain to see the most significant barriers to reinsurance market growth. As service providers to large numbers of primary insurers in different local markets around the world, reinsurers are uniquely positioned to discuss with their clients’ senior leaders the business problems they face and marshal resources to provide solutions – even if those solutions are outside what currently constitutes their core business.
If you didn’t read yesterday’s installment yet (and I hope you will), let me catch you up. We kicked off our new reinsurance initiative at the beginning of the year with some market research. Around 100 people responded to the online survey, and we’ve also conducted dozens of one-on-one interviews. While many responses were extremely insightful, the number of respondents citing the soft market (abundant capacity, low reinsurance rates, or both) as the reinsurance industry’s greatest challenge was incredible, if unsurprising. We’d planned to recap the research in a report, but didn’t want to write yet another piece on “excess” capital and low rates. There are plenty of people doing that already. So instead, we’ve decided to look a layer deeper at the underlying issues that prevent reinsurers from finding new ways to absorb the market’s capacity and drive unique growth opportunities. Yesterday, it was distribution. Today, it’s central data aggregation.
Reinsurers play a central role in the local markets they support. Like all professional services organizations, they have an industrywide view by virtue of this role, enabling them to learn about the most difficult business problems their clients face. The nature of a reinsurer’s mission, though, may seem to preclude them from delivering a solution. After all, they provide protection rather than broad advisory services. Yet, the relationships that reinsurers have around the world position them to gather the right partners to help address their clients’ challenges.
And that’s what brings me to centralized data aggregation.
In many markets, there’s no central source of claims data. This makes it virtually impossible to benchmark one insurer’s performance to its peers, evaluate historical loss activity, and make prudent capital management decisions for the future – not to mention structuring cover that uses industry loss estimates. Of course, reinsurer efforts to develop such central data aggregation solutions on their own would be of limited value at best. While there are some instances of this happening, mostly in the reinsurance intermediary sector, it’s hard to overcome the inherent conflict of interest. Ultimately, one reinsurer would be hard-pressed to use another reinsurer’s industrywide solution.
The real opportunity is one of influence. Working with the right independent partner (somewhat selfishly, I’d say Verisk/ISO), reinsurers have the opportunity to collaborate on industrywide solutions by helping their clients understand the need to participate in industrywide data aggregation programs and communicating to them the benefits of doing so. By shepherding their clients to appropriate partners, reinsurers can help their clients contribute to the types of solution that provide benefits along the entire risk and capital supply chain.
Loss aggregation is the first thought that comes to mind. Primary insurers can use industry loss estimates to benchmark their average claims paid, improve pricing and new product development, and make better assumptions around reserving. For reinsurers, loss aggregation solutions in more regions can open more opportunities to write reinsurance – and do so based on more effective analysis.
The solution starts with education. Reinsurers should consider the markets where such services as loss aggregation would be helpful – particularly in driving more reinsurance demand – and open ongoing dialogues with their clients. They should communicate the value of industrywide loss data, both for daily operations and risk transfer, encouraging their clients to contribute to a centralized service (such as PCS). That’s where we’d come in and, with the help of local reinsurers, work with their cedents to bring the effort to fruition.
Reinsurers have a unique opportunity to help themselves by helping their clients, and doing so could help address the capital overhang and reinsurance rate pressure they are currently experiencing. The key is to bring new opportunities to market by helping their clients grow and mature. Encouraging primary insurers in new markets to participate in centralized historical loss data projects – and bringing the right partner to the process – could create new opportunities for reinsurers for years to come. We all know that reinsurance is a relationship business, and has been for decades upon decades. It’s time for reinsurers to tap into those relationships for the benefit of the primary insurance industries around the world – to grow the global reinsurance market.