SECTOR TRENDS
are highly exposed to catastrophes and other events such as terrorism or political risks. This fragmentation makes it difficult to apply a one size fits all approach to doing business in emerging markets and increases the risk of making unwise decisions. In addition, reinsurers must be able to take a long-term view on the profitability of emerging markets. In the early stages of developing an insurance market, it has fewer reinsurable risks and those are typically easy to insure and produce tighter margins. For example, in China over 70% of non-life premiums are for auto insurance, which generates much thinner margins than commercial property or other specialty lines. As the range of insurable risks expands and more-sophisticated products become available, margins are likely to increase. But in many of the key developing economies this process will take decades, not years. Reinsurance purchasing trends indicate that buyers value reinsurers that can offer significant capacity and a wide variety of protection products. Therefore, small and midsize reinsurers are likely to consider merging or forming consortia to gain size. In our view, consolidation could level the playing field, because the combined entities could offer larger capacity. It could also remove some of the excess capital from the market, particularly if the parties involved choose cash buyouts, rather than share swaps. However, this seems unlikely because any large transaction will likely occur to gain scale.
However, we do not view consolidation as a simple answer to the capacity conundrum. We see little potential for transformational deals that add genuine value in the reinsurance market. Many of the small and midsize players have quite similar business profiles, so mergers could create more overlap than diversification. Management teams could end up with more excess capital to deploy, but lack the skill sets to diversify into new lines or regions easily. Were they to succumb to the temptation to deploy capital by simply following the lead of others, pressure on pricing would increase, rather than decrease.
New Uses Could Offer New Opportunities In our view, external competition threatens the traditional reinsurance business model over the longer term. We do not consider it inconceivable that corporations could arrange their own alternative risk transfer mechanisms, sidestepping the insurance
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“In our view, external competition threatens the traditional reinsurance business model over the longer term.”
industry, or that Internet companies that have access to almost unlimited data could begin to use it to underwrite insurance risks. To meet this challenge, the industry will need to demonstrate its relevance and value by building on its expertise in risk assessment and protection to help develop and support long-term global economic and business trends.
Big data is a buzzword that can be seen and heard in any business news outlet these days. Can reinsurers exploit this to benefit clients? They could certainly use data to help improve their underwriting capability and risk aggregation tools. Improved satellite imagery and mapping resources can help insurers and reinsurers to check that the building data that feeds the property treaties they underwrite makes sense. Information on consumers’ spending habits can also indicate potential risks to health, such as smoking or overconsumption of fast food.
While this information can help life insurers and reinsurers improve their selection of the risks they underwrite, or charge appropriate premiums, the industry must be aware of the reputational and regulatory risk associated with the use, or misuse of big data. Regulators are increasingly focusing on conduct and consumer protection. For example, the prohibition of gender-based pricing in Europe demonstrates that regulators are very focused on discriminatory practices.
Reinsurers can also play a role in building disaster risk resilience for entities that are looking to protect themselves from the increasing trend in extreme weather losses. Reinsurers can help governments build greater disaster resilience to protect consumer and budgetary stability following a large event (see “Working With Governments To Increase Disaster Resilience Can Open New Doors For Reinsurers”). Reinsurers can also work to raise awareness in corporations regarding their exposure to extreme events, either via losses to property and equipment or to potential disruptions to their supply chain in the wake of a large event. There is a push for corporations to disclose their exposure to risks stemming from extreme events to investors—we see this as an opportunity for reinsurers to help companies assess and quantify their exposure and potentially to provide solutions to reduce that exposure. Reinsurers have other opportunities to play a larger role in developing nascent marketplaces for future growth. These include: • Exploring new distribution channels, such as mobile phones in developing markets;
• Developing new products such as cyber- risk protection or microinsurance; or
• Providing more fee-based services, such as educating stakeholders, underwriting on behalf of capital markets, or providing capacity or data.
In our view, many of these trends offer insight into the future of the insurance
Global Reinsurance Highlights 2014
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