Beyond leveraging technology to squeeze the utmost efficiency gains out of their operations, it is imperative that reinsurers systematically review and realign their strategic positioning within the reinsurance industry.
In view of unrelenting pressure on margins in the legacy business and the looming transformation of the value chain, what is at stake is reinsurers’ very survival.
The painful reality
Reinsurers are increasingly faced with dwindling margins because of the prolonged period of soft market conditions they are enduring. Pressure on returns can largely be traced back to the operational and investment sides of the business. And there is no evidence to suggest a recovery of the (re)insurance cycle to hard conditions.
What we are instead seeing is a gradual flattening of the (re)insurance cycle over time, partly owing to the abundant supply of both traditional and alternative capital, and partly because of the consolidation of the insurance market, which has led large insurers to retain as much risk as possible. Apart from embracing and actively managing multiple sources of capital in future, reinsurers will need to adapt their business models to a much flatter long-term cycle.
Furthermore, we have identified three major trends that are sweeping through the reinsurance industry and overturning long-standing structures and beliefs.
- Profound changes in client base: Primary insurers — the traditional clients of reinsurers — are undergoing radical change. As we saw in the first edition of our Dying, Surviving or Thriving series, roughly 45% of primary insurers in Switzerland will be squeezed out of saturated markets by 2030 in the most likely scenario. We expect a similar scenario in other countries. At the same time, new competitors from other industries are entering the insurance space (e.g., Volkswagen Insurance selling motor insurance). Reinsurers will have to rethink whom they serve and how.
- New risks and greater downside: Reinsurers are seeing new risks suddenly appear on their radar. In parallel, some risks are linked to greater downside (e.g., greater severity of losses in the event of natural catastrophes because of the emergence of mega-cities). However, reinsurers have so far been slow to reshuffle their product portfolios and adapt to the changing risk landscape.
- New approaches to how capital is employed: The capital management policies that reinsurers adhere to still reflect a time when capital was scarce. With the availability of capital no longer a constraint, they can now afford to take more chances, exiting early out of nonperforming investments so that they can sharpen their focus on more promising opportunities.