The disruptors are here

The insurance and reinsurance industry worldwide is facing disruption from new InsurTech players and alternative capital. The presence of AI and big data has helped create a huge digital ecosystem that allows companies to access and understand details of their customers.

Industry leaders are constantly looking over their shoulders in anticipation of the disruption that e-commerce tech giants like Amazon and Alibaba are poised to bring in the immediate future in the insurance space.

These tech giants are beginning to tap into their existing platforms as powerful distribution and analytical tools which have the potential to cause massive disruption to traditional insurance markets everywhere. The reinsurance industry cannot take things lying down as it, too, faces the heat from alternative capital providers who are making deep inroads into its domain across the globe.

Alternative capital is here to stay

Alternative capital has emerged the world over as a disruptive force and has the potential to transform the reinsurance market or create a new one. The abundant flow of this alternative capital, along with growing development and innovation in the insurance-linked securities (ILS) space, is transforming the reinsurance industry.

A report from Aon states that the amount of alternative capital, mostly ILS, in the global reinsurance industry reached $95bn in the quarter ending 31 March 2018 and as a result contributes 16% of global reinsurance capital. Alternative capital growth in reinsurance continues to outpace traditional reinsurance capital, which was at $515bn during the same period.

ILS has huge potential in Asia

Industry experts believe that ILS has huge potential for deployment and growth in Asia, especially in markets like India and China where insurance

penetration is low and natural and manmade catastrophes inflict huge economic costs on governments, causing considerable strain on state budgets.

Natural catastrophes can cause considerable economic costs to developing countries, most of which are uninsured or under insured and these losses ultimately fall on local and national governments.

ILS can be deployed in reducing the financial impact of natural disasters, and, together with other risk management solutions, including reinsurance and government pools, have significant scope to play a larger role in reducing the financial impact of natural disasters.

Reinsurers need to innovate or perish

For reinsurers to remain relevant and competitive in the changing environment, keeping abreast of market dynamics and innovation could ensure their survival and growth. Companies will have to develop in-house proprietary solutions to combat increased pressures from new-age companies.

Some of the bigger players have started the process and are acquiring InsurTech start-ups and others are seeking out digital solutions to drive effi- ciencies across all processes and value chains.

Reinsurance 2019

Flat renewals in January, however mid-year renewals could see price rise

Hopes of a decent price rise at the 1 January renewals were dashed as the reinsurance contracts environment wasn’t too encouraging. The industry was expecting a rebound in pricing given that 2018 saw insured losses from catastrophic events at $79m, the fourth highest according to data from Sigma.

According to preliminary Sigma estimates, insured losses in 2018 were higher than the annual average of the previous 10 years. Sigma estimates also put the total economic losses from natural and manmade disasters in 2018 at $155bn. In 2017 this figure was $350bn.

Reinsurance and ILS news website www.artemis.bm reports that according to FT analyses, for reinsurance market contracts that were renewed, the rate environment was flat or, in some cases, even a little down. However, according to Goldman Sachs analysts, rates should see an increase in April and June/July renewals when Japan and US contracts come up for renewal.

Japan and US renewals in mid-year can see price rise

January renewals, which are mainly focused on European contracts, did not see an increase in prices perhaps because Europe did not experience many catastrophic losses in 2018. Japan and the US were battered by catastrophic events in 2018 hence, they should see a modest to decent price rise during 2019 renewals.

Mounting insured catastrophic losses and the continuing trend of a soft market should also initiate a new thought from the industry on CAT modelling.

Goldman Sachs analysts quoted in www.reinsurance.ws said that leading primary insurers are also likely to increase their reinsurance programmes in 2019. This should support pricing for reinsurers with diverse capabilities.

Retro covers can also bring in better prices for reinsurers

According to Goldman Sachs and Credit Suisse analysts, retro pricing should be the driver of higher insurance cost in 2019. Elevated CAT losses during the last two years should lead to improved pricing in property CAT lines, especially in retro covers and also low excess of loss layers.

Reinsurers should pass on the higher retro prices to insurers. Credit Suisse analysis says retro-protection purchases have increased by as much as 40%.

Marketplace Realities 2019 by Willis Towers Watson says that insurers are employing stricter underwriting guidelines to make better use of each market’s available capacity. At Lloyd’s, too, there continues to be a tightening, with an increased focus on book health rather than growth.

Lloyd’s pulling out capacity

Domestic markets and various Lloyd’s syndicates have undergone a complete review of appetites for certain industry classes, with both rate implications and reductions in coverage. This should also help in rates to scale up.

There have also been reports that alternate capital has pulled back from the markets or is demanding better returns, thus pushing for better pricing of casualty lines by reinsurers.

ILS market also faces a comprehensive test

Willis Re, in its views for 2019 reinsurance renewals said that the insurance-linked securities (ILS) market faces a more comprehensive test in the absence of a major pricing uptick following significant loss erosion for some funds in both 2017 and 2018, and some funds are challenged in attracting new investors.

While most of the 2018 losses have emanated from well-known perils such as US hurricane, Japan wind, flood and earthquake, the secondary peril of wildfire has again generated substantial losses.

Long-term interest in ILS remains robust

According to the recent Willis Towers Watson Global ILS sur- vey, the long-term interest in ILS, particularly from pension fund managers seeking diversification, remains robust.