Reinsurance Industry’s Greatest Challenge: Emerging Market DistributionBy Tom Johansmeyer | June 1, 2015
When we launched our new reinsurance initiative at the beginning of the year, we kicked it off with some market research. In addition to the dozens of interviews we’d already conducted, our team sought a broad view of the market from a variety of perspectives. Insights from reinsurance claims professionals, executives, insurance-linked securities (ILS) fund managers … you name it. And my plan was to write up a report on the research – which got around 100 responses – to share with the industry.
Well, I’m not going to do that. I’m going to write about something else instead.
The research results, frankly, were a bit boring. The overwhelming majority of respondents indicated that the high capacity/low rate issue – chicken and egg, of course – is the industry’s greatest problem. Doubtless, there’s some degree of truth to this. Abundant capacity has led to downward pressure on reinsurance rates. Low correlation with the broader financial market continues to attract capacity, despite the downward pressure on rates.
The problem is that there are underlying problems to be addressed. “Excess” capital is really just a solution screaming for a problem. It calls for innovation – access to new risk areas, tools for improving the analysis of difficult lines of business. Excess capital isn’t the problem; it’s the answer to one that hasn’t arisen yet.
So, instead of writing about soft markets and big balance sheets, I’ve decided to take a totally different view. Today’s subject: distribution.
This is one of the more interesting problems I heard about while researching the global reinsurance market, even though it isn’t directly a reinsurance market problem. Distribution should be on the reinsurance industry’s collective mind, though. I’ll get there. Just give me a few paragraphs.
It all starts with developing markets. For years, access to historical data has been cited as the major challenge for emerging market entry. Historical weather and catastrophe data isn’t always sufficient for modeling, and the lack of an established insurance industry means there’s no historical loss data. The result, of course, is effectively blind underwriting, which is hardly a path to profitability.
It turns out that the lack of data isn’t necessarily a deal-breaker. I’ve encountered a number of people who would enter emerging markets. The impression I got is that the first couple of years are really an investment in learning about the market, and that future profitability should more than compensate for any unexpected losses. It’s an enlightened perspective, and one I believe to be correct.
The real problem is distribution. After all, that’s how an insurance market is born. If nobody buys policies, nothing else happens. Thin rates of adoption make all the advanced capabilities that insurers and reinsurers bring to the table unnecessary. On the other hand, rapid growth in insurance buying in a developing market leads to the challenges that insurers and reinsurers are great at addressing. Over time, loss histories accumulate. The volume needed for advanced analytics develops. And capital management becomes a concern, as fledgling programs seek to transfer risk in order to create more capacity to write more business.
Primary insurance distribution is fundamental to the creation of new markets that would ultimately drive increased global demand for reinsurance. With more insurance being written, the need for reinsurance would naturally follow. Right now, it seems, the greatest challenge the reinsurance industry faces – albeit indirectly – is getting more people around the world to buy insurance.
Ostensibly, this seems like the sort of problem that doesn’t come with a solution. Reinsurers aren’t in the business of primary insurance distribution, and it’s something of a stretch to expect them to enter that space.
But, maybe not …
The evolution of the reinsurance intermediary sector may be instructive, here. Intermediaries have morphed into broader professional services organizations focused on helping their clients improve capital management, ultimately to drive increases in shareholder value. They offer a wide range of services beyond traditional broking – generally to drive their core business, of course – that have turned the traditional business of placing reinsurance into something greater.
Reinsurers, it seems, are on the brink of a similar opportunity. The question to ask now is, “Where can I add value? How can I help grow my potential market?” It’s not just a matter of providing capacity to allow insurers to write more business. There’s plenty of capacity. The challenge in writing more business is now about reaching (and educating) potential insurance customers in parts of the world where financial education has never existed.
This provides an opportunity for the reinsurance industry to grow by adding a broad array of value-added services that could transform how primary insurers perceive their reinsurers. It would require attracting new talent and developing new capabilities – investments that would have the potential to drive long-term opportunities around the world. The key is for reinsurers to start to think differently about the business they’re in. This sort of shift isn’t going to be appropriate for every reinsurer. Some have found innovative ways to drive shareholder value growth even in this soft market. However, the days of just waiting for another hurricane appear to be over.
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