The reinsurance business faces multiple challenges. Years of soft market conditions followed by sudden, sharp hardening periods; tremendous losses from man-made and natural catastrophes; and open-ended liabilities (e.g., asbestos, terrorism) are putting intense pressure on reinsurers.
These difficult conditions challenge reinsurers to adapt and come up with creative solutions. Reinsurers control their risk through sophisticated risk analysis, careful pricing and setting of terms and conditions, and capital management—including retrocessions, where needed.
Most reinsurers see data analysis as core to their business and to supporting these solutions. They are investing in BI, data analytics, and sophisticated, specialized components (e.g., modeling tools). Once some reinsurers begin investing in data analysis and predictive modeling, the others must follow; otherwise, the latter will face adverse risk selection and lose market position.
At the same time, the technology solutions in place at reinsurance companies often lag other areas of the insurance industry. Many reinsurers still manage millions of dollars of business via Excel, often on individual laptops.
Drivers for system replacements include moving from Excel spreadsheets to centralized systems, pressure from internal and external auditors, managing the large amounts of regulatory reporting that the industry requires, and making reinsurance data available to BI and data analysis tools. However, the pressure is not for modern systems; it is for stable and robust systems that can support current business.
COVID-19
COVID-19 loss development remains slow and difficult to quantify. The impact on reinsurers depends in part on their exposure to lines, e.g., event cancellation, and long-tail liability business, e.g., D&O and workers’ compensation. Some reinsurers plan to add pandemic exclusions to 2021 coverage for lines like medical professional liability and workers’ compensation. However, the current lower-than-expected number of claims may make attempts at exclusions challenging.
The pandemic has seen court closures and slower court activity, though this is expected to be temporary with a return to pre-pandemic concerns about social inflation. Stricter terms and conditions are anticipated as part of January 2021 renewals and going forward. Additionally, it is not clear what the ultimate decision on a US federal backstop will be.
Chubb has proposed a combination of programs, one for larger businesses and one for smaller businesses. All insurers would be required to participate in the smaller business program, which would see the government and insurers split coverage of payroll expenses for up to three months. The program for larger businesses would be voluntary for insurers, which would again split costs with the federal government.
Life Reinsurance
Life reinsurance has changed from being the province of a select few companies focused on specific solutions, often around mortality risk, to include smaller players and newer entrants. These small players and new entrants are reinsuring non-core blocks of business and capital support for acquisition costs and reserving related to new business. Newer capital providers include capital markets firms, hedge and pension funds, and family offices.
Reinsurance Financial Trends
Reinsurers’ capital is more than adequate, and interest rates are still low. As with primary insurers, finding high-growth niches and appropriate underwriting are the keys to long-term profitability for reinsurers. Existing market players and new entrants are pursuing a range of strategies to boost growth and profitability, including diversifying to new geographies or into primary insurance, participating in mergers and acquisitions, offering alternative capital solutions, and shifting focus toward high-growth, niche business.
Technology Capabilities
Reinsurers are investing in core capabilities in marketing, underwriting, billing, and claims. Other investments include data and analytics for distribution and for finance as well as digital capabilities in marketing and claims. The relative lack of investment in distribution is due to primary insurers’ handling of broker commissions and low transaction frequency. Similarly, the concentration of the broker and reinsurance landscape makes marketing less of a priority.
Technology Priorities
New options for third-party data are becoming available that aggregate public and semi-public data from social media sites and government records; some reinsurers are piloting these services alongside more traditional third-party data players. Reinsurers are demonstrating their value to cession partners by acting as data aggregators to pass along underwriting insights. Reinsurers are also adopting AI and machine learning internally and on behalf of primary insurer clients.
Reinsurer workflow systems, internal and with counterparties, are often less developed than those of high-volume primary insurers. Reinsurers are considering the potential impact of imaging, workflow/business process management, and rules-based underwriting systems.
In general, reinsurers look at core system replacement to centralize from spreadsheets and gain better access to their data. They are focusing on moving to modern technology while improving user experiences. Reinsurers continue to monitor developments around blockchain. Some are exploring RPA to automate processes, freeing up resources for value-added work while improving cycle time and process consistency.
Increased regulatory scrutiny is likely, regardless of whether Solvency II directly impacts a reinsurer. Improving data collection and control over that data are key initiatives for most reinsurers to meet regulatory standards. Reinsurer IT executives are collaborating with risk management and finance departments to prepare for more frequent data calls and seeking more detailed levels of data to comply with new, risk-based capital requirements.
For more details on business and technology trends in reinsurance, read Novarica’s latest report on the market segment here.
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