September 16, 2014

Innovate & adapt to navigate a reconfigured reinsurance industry: S&P

Innovation and adaptation are two key traits of global reinsurance firms that will succeed in remaining relevant as they navigate what will eventually result in a reconfiguration of the reinsurance industry, according to Standard & Poor’s.

The challenging soft reinsurance market environment, of excess traditional capital, growing alternative capital and ILS, lower prices and margins, structural change and what we believe will be a deeper reinsurance convergence, will require reinsurers to find ways to prove their worth to clients and reinvent their business models, S&P says in its latest report released today.

The report, the latest in a string published by S&P in the run up to the Monte Carlo reinsurance Rendezvous, highlights the importance of remaining relevant in the current environment of rapidly changing market dynamics. Challenged from all sides, traditional and non-traditional, reinsurance firms must turn to client service, innovation and be willing to adapt if they are to remain relevant.

Staying relevant, to clients, brokers, partners and even to their own shareholders, has become a bit of a buzzword for essentially remaining viable. Relevance is what makes a reinsurer stand-out enough to be included on renewals as a lead, enough to even get on the slip sometimes and S&P warns that if reinsurers do not adapt and find ways to innovate their chances of remaining relevant, perhaps even surviving as a viable entity in its own right, are going to be much slimmer.

Competition from both traditional and non-traditional sources in reinsurers’ core markets is making them adjust or adapt in order to retain relevance. S&P does not mince its words, saying that the traditional reinsurance model is not just under threat from alternative capital, insurance-linked securities (ILS) and capital markets investors, but also that; “The traditional reinsurance business model is under threat from external sources, such as corporations and technology companies that could become substitute providers of risk protection.”

S&P is absolutely right. Technology firms are looking at many of the same issues that reinsurers focus on and as we all know firms like Google are skilled at moving into new markets, removing friction and breaking down barriers between products and the necessary capital or financing. It has already done this in industries like travel and has looked at insurance sectors such as motor, so there is every reason to believe that in the future they will look to any reinsurance risks that can be commoditised, broken down, understood and algorithmically matched with capital. Reinsurers beware.

Such disruptive change is likely a way off though and S&P’s report really deals with the near term horizon of the next year or two, during which it believes reinsurers need to be innovative and adaptable. The risks are clear, S&P explains; “If reinsurers fail to make use of their key strengths and expertise to establish their relevance to new and existing clients, the traditional reinsurers could find themselves marginalized.”

Over half of the global reinsurers that it rates are susceptible to the lower pricing and reduced margins caused by the softened reinsurance market environment, says S&P. In such an environment opportunism is not the answer, a longer-term view of product development is required if reinsurers are to be successful.

This means reinsurers need to become adept at spotting emerging trends, product design as well as development, innovation and also incubation of product ideas. Long-term success comes from long-term planning, a mantra in many industries, is something the reinsurance industry may need to accept if it is to spot and capitalise on opportunities to create value for its shareholders.

Source: Artemis

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