Position of Strength

The reinsurance industry is under a lot of pressure, be it from the seemingly relentless influx of insurance-linked securities (ILS), consolidations or the relatively benign catastophe environment.

But are the changing conditions necessarily a bad thing? Or just a bad thing right now?

Can reinsurers’ expertise and relationships – built on a solid understanding of how things work in both good and bad times, as well as over the long term – coupled with some updating, sustain the traditional reinsurance industry as a relevant player?

This will likely depend on how the industry responds and prepares, as well as how open it is to changes that enhance, but not threaten, its foundations.

Consider what is happening in the insurance industry. A new report from A.M. Best states merger and acquisition (M&A) activity has increased in recent months as a result of factors such as evolving client needs, new risks, regulatory demands and dwindling investment returns.

Central to many of these deals has been a coming together of equals, “where the two companies arrive with strong underwriting acumen, acknowledged brands and the ability to innovate through changing client needs,” A.M. Best reports.

“Strong stand-alone organizations are combining with other strong organizations to become even stronger.”

This size and scale allows stronger entities “to significantly influence reinsurance terms and conditions, or in many cases, enhance the firm’s ability to access alternative capital for reinsurance solutions through sidecars or other special purpose vehicles,” states the report.

And with fewer premiums often ceded to the traditional reinsurance market, this clearly has an influence.

Guy Carpenter reports that “increased demand for reinsurance and expansion of tailored coverage persisted through the July renewal period from previous seasons.” Why? This is “primarily due to new entities purchasing coverage and companies using a portion of their savings to enhance coverage, fill in gaps or to provide additional coverage as they expand their business.”

Total alternative capital “remains impactful to the overall market for risk transfer, as more traditional reinsurers incorporate into their capital structures and enhance offerings to their primary insurer customers,” Aon Benfield notes in a market outlook for June and July.

Reinsurers have responded to pressures – sometimes with M&A activity of their own; sometimes by expanding their focus beyond catastrophe – but also by employing their expertise and experience to enhance customer service.

Whether broker, insurer or reinsurer, Greg Belton, executive chairman of HKMB Hub International, said during a recent panel discussion in Toronto that he does not necessarily think consolidation is a bad thing.

“Through the consolidation, people become more efficient and they have resources that allow them to operate in a more sophisticated way with larger scale, and I think we’re better able to withstand market-moving events such as natural catastrophes or stock market calamities.”

But John Cavanagh, global chief executive officer of Willis Re, notes a caution in the recent 1st View report, regarding M&A activity among reinsurers. “It is important for those driving M&A deals to articulate a clear message about the value they can deliver to their clients, as opposed to the current focus on the value to each company’s own shareholders and management.”

Using technology more fully may be one way to demonstrate value, notes a new Xuber survey of reinsurance executives around the world.

While more than half of companies plan to make a major IT investment over the next year or so, “in its never-ending quest to leverage present-day technologies, the reinsurance sector must not be afraid to consider ‘next-generation innovations.'”

Maintaining a client focus – enhanced by taking a broader view, employing technology effectively and exploring different partnerships – may help reinsurers weather current choppy conditions and reach a calmer (and stronger) position.