Reinsurers are facing a rethink in how and where they compete as mature markets slow and the search for fresh sources of value takes them into unfamiliar and potentially riskier markets.
As emerging market trade flows become more interconnected, ‘Confronting the new market realities’ looks at how to make sure your company is in the right place to pick up the best business. The paper also examines the challenges of keeping underwriting up to speed with the new risk and economic landscape.
As your business assesses how to compete in a world of twin-speed growth, the paper also looks at how to harness the latest advances in analytics to sharpen underwriting and refocus resources on higher margin business.
As growth in mature markets slows, many reinsurers are seeking out new opportunities, including developing their business in South America, Asia, Africa and the Middle East (together, these high potential regions make up what PwC terms as ‘SAAAME’).
But the move into new and unfamiliar markets may be exposing them to unforeseen losses. Making money and building competitive scale in markets that are becoming increasingly crowded and where volumes are still often quite thin is also a tough challenge. As ever more trade and associated risk transfer flows between the SAAAME markets and misses out the West, many developed market reinsurers face the further challenge of how to tap into business they may not see.
The cumulative result of these various challenges is ever more searching questions from analysts and investors about the viability of growth plans and how reinsurers are going to deliver the right returns.
Reinsurers therefore need to make sure they’re in the right locations to attract the best business and develop the differentiated presence that would allow them to deliver sustainable profits.
Some reinsurers will be able to develop the competitive scale and risk understanding in their target markets to deliver the returns investors expect. But others will not be so successful and may need to look at other options.
Some reinsurers are simply moving their capital to where prices are most favourable, without necessarily establishing a presence on the ground. When there are no such openings, they may look to return surplus cash to their shareholders.
Either way, it is vital to be clear about how and where the company intends to compete – hedging bets can only raise investor concerns about whether the business knows how it is going to deliver.
In ‘Confronting the new market realities’, Achim Bauer explores how the global risk and economic landscape is changing and key considerations for sustaining profitable growth.
Reinsurance is a 700 year old market. But insurance-linked securities (ILS) have captured a 14% market share in just 20 years.
ILS is sometimes portrayed as a threat to mainstream reinsurance by taking away investment and risk transfer business. But as some routine areas of reinsurance become commoditised, competition from the capital markets for risk transfer was always inevitable and is likely to increase.
Forward thinking reinsurers are setting up their own ILS vehicles to make the most of the increasing investor interest in ILS. Growth in ILS also allows reinsurers to transfer some of the routine risks off their balance sheets and onto the capital markets and hence free up capital and underwriting resources to focus on new and potentially more profitable risks.
What we expect to see ILS development offers reinsurers an opportunity to provide their expertise to ILS sponsors for a fee, harness new sources of capital and provide their clients with a better blend of risk transfer options.
In the longer term, ILS also opens up opportunities to bring capital and risk closer together in fast growth markets. A sizeable proportion of new investment in ILS is coming from China and the Middle East. Much more investment could come into ILS as structures are developed for local risks.
In Confronting realities, Arthur Wightman discusses the impact of ILS on the reinsurance market.
In Unlocking the potential of ILS, Arthur Wightman explores the rise in the ILS market and its future.
Some analysts and investors are sceptical about whether reinsurers’ growth plans will deliver the right returns.
Investors look to reinsurance to provide uncorrelated returns. They want capital to be allocated where it can deliver the highest return. In turn, reinsurers will naturally look to grow. This includes moving into high growth emerging markets. But, analysts and investors are becoming concerned about the squeeze on margins in many emerging markets, especially if the pursuit of market share leads reinsurers to write business at below breakeven rates.
Some reinsurers will be able to develop the competitive scale and risk understanding in their target markets to deliver the returns investors expect. But others will not be so successful and may need to look at other options or risk losing investor backing.
Indeed, for some a presence on the ground may not be necessary. As long as the prices are right, nimble players can move in, secure a favourable return and exit when premiums drop once again.
The underlying requirements are strategic clarity and transparency. Many reinsurers may need to do more to articulate where the best opportunities for their particular business lie, what they are doing to capitalise on them and what qualifies them to deliver. This in turn demands a clear vision of where and how the business is going to compete. It also demands a credible execution plan that can be translated into a financial performance metrics. The companies that are able to explain where they intend to go, why and what is in it for shareholders are winning the strongest investor backing and their share prices reflect this.
In Confronting realities, James Quin explores how to win over investors.