REINSURANCE CAPACITY GROWTH TO OUTPACE DEMAND IN 2013

According to Reinsurance Market Outlook published by AONBenfield in January 2013, global reinsurance capacity growth is expected to outpace its demand.

The summary of the report is presented below:

Reinsurance capital reached USD500 billion in 2012. The lack of significant reinsured losses from catastrophes in 2012 was a reasonable departure from the building view of a "new normal" higher level of global catastrophes. Substantially lighter global insured catastrophe losses have restored confidence in both insurers and reinsurers. The new record level of reinsurer capital however, creates what is likely the widest gap between reinsurance supply and demand. Reinsurance supply, measured by capital, grew more than ten percent while reinsurance demand, measured by capacity placed was stable in catastrophe lines and declined in nearly all non-catastrophe lines.

 We expect much further work in the transition toward reinsurers managing more non-equity sources of capital to improve the value proposition to reinsurance buyers during 2013. Larger buyers of reinsurance are already accessing less expensive non-equity based capital to lower their weighted average cost of underwriting capital. This rotation will lead to more reinsurer share repurchases, consolidations and the creation of more reinsurer managed funds businesses. In five years, more than half of the top reinsurers will manage insurance-linked funds for investors.

Reinsurers will also begin to manage their own tail risk with better matched sources of non-proportional retrocession capacity from investors that will continue to find the diversification dynamics of the industry attractive for the foreseeable economic future. Insurers have benefited and will continue to benefit from these dynamics.

 Demand for insurance continues to grow globally but at a slow rate as mature economies continue to show low growth as excesses from the most recent growth years are worked-off and refinanced. There is hope for improved demand growth for insurance and reinsurance.

 While rating agency models and the expected solvency requirements now have insurers and reinsurers taking less risk per unit of capital than they ever have, if similar stress tests are eventually applied to corporate insureds the value of insurance would be more tangible. Lessons from recent events could also drive new demand. These experiences show that insured properties are repaired faster, cost governments less, don't threaten lenders' capital and provide communities continuity. The fact that such considerable efforts globally could be devoted to banking reforms without considering simple measures as insuring mortgaged properties is surprising (e.g. U.S. banks still don't require earthquake insurance on mortgaged properties).

 Economic realities for many governments that finance these risks today point to less premium subsidization and more privatization over time. The reinsurance market is well positioned to meet the additional capacity needs of private insurers should insurance utilization grow. Reinsurer capital has grown to levels far beyond what many governments considered possible when many of the existing government schemes were crafted.

 

While the aforementioned dynamics are in play, we believe global reinsurance supply will continue to be in excess of reinsurance demand for the next important renewal dates in April, June and July 2013. Barring very significant events, we expect our clients to find an orderly and competitive market for their risk transfer needs.

The Rise of Online Social Insurance – Embrace the Change

By Yves Colomb and Charles Wolstein, U.S. based consultants with Towers Watson

Online insurance communities are expected to emerge due to new technology and promise to revolutionise the way insurers do business, making it prudent for insurance leaders to evaluate the impact of online social insurance.

Fifteen years ago, it would have been far-fetched to predict the fall of certain iconic multinationals that consistently broke new ground in their industries. And yet, because they did not keep up with the technological pace, that is exactly what has happened, with some going bankrupt and others being bought at fire-sale prices or simply fading into oblivion. These are compelling reminders that new technologies have transformed business models and reshaped entire industries.

Relevance to insurers

Technology has already significantly changed the insurance industry. Most, if not all, insurance companies are now present and sell their products directly online, and insurance price comparison websites have upset many mature insurance markets and put pressure on profitability. Telematics motor insurance, or usage-based insurance (UBI) as it is known in North America, promises a revolution in individual risk behaviour and insurance purchasing patterns.

But these changes – however disruptive – are still part of an initial phase of the industry’s transformation which started in the early 1990s and has brought immense variety, transparency and choice to many aspects of people’s lives, and empowered them to make more informed decisions. Price comparison websites merely apply Expedia’s business model to another industry, providing consumers with top-down, one-way information flow. Telematics motor insurance, although a dramatic departure from traditional insurance models, is essentially a product of the individual empowerment age: Policyholders trade information on their vehicle usage for the promise of lower premiums and a fairer, more accurate assessment of their risk.

If the empowerment of individuals represents this initial phase of the insurance industry’s evolution, the next stage will see insurers’ top-down, vertical relationships between entities and individuals supplemented with horizontal and bottom-up activity (including peer networks, both social and technological). In other industries, this second phase of ‘social recombining’ has already led to the emergence of multiple layers of online social groups.

People, businesses and organisations sharing similar economic interests have banded together to purchase insurance coverage (or provide it to their peers) for as long as insurance has existed. But current technology encourages new associations to form. It is now relatively easy for individuals sharing similar interests to identify one another and associate online. Indeed, technology enables these previously unconnected people or organisations to identify their peers in ways that were never possible before. For instance, Groupon helped households save money during the last recession by offering group discounts. Importantly, participants were not connected in any way before joining the platform and would probably never have identified their shared interest without the help of technology.

In the near future, people or organisations seeking insurance could meet online and decide to form potentially large, grassroots online social insurance groups (OSIG). These groups could, for example, comprise all the good risks of a specific insurance product or people seeking to insure similar risks. Or it could be a large group from, say, the worst 10% of drivers banding together to obtain better coverage or lower premiums. Individuals would gain more clout and increased bargaining power by becoming part of a group of homogenous (and ultimately more desirable) risk profiles.

Finding favourable conditions

Challenging macroeconomic conditions can increase the perceived value of bargaining power. Sustained economic hardship would accelerate the transition to alternative insurance, as the demand for UBI in the United States after the 2009 global downturn illustrated. The insurance cycle can also push groups of insureds to seek alternative solutions. A strong hardening of insurance rates would provide a compelling incentive for favourable risk profiles to segment themselves away from other insureds. This is routinely observed with corporate captive formation and usage.

Risk profiles historically treated as either marginal targets by traditional insurers or niches by specialists (due to their inherent risk or their low volume), or ignored by both, also have incentives to form social insurance groups to build scale and increase their bargaining power. This is similar to the affinity-group strategy that senior drivers in the UK have used to make coverage more affordable over the last decade. An OSIG could also benefit would-be drivers pushed out of the market by prohibitive premiums and may even help reduce the number of uninsured drivers.

Preparing for online social insurance
Insurers have always worked with interest groups but have not always succeeded at regularly signing or sustaining profitable deals with them. In preparing their online social insurance strategies, insurers may need to:

♦ Counter the inherent volatility of online groups. Technology fosters the emergence of OSIGs, but also makes membership volatile, even though maintaining cohesion is essential to preserve its benefits. Online ‘games’, effective communication and frequent introduction of new features can help prevent member attrition.
♦ Anticipate where OSIGs will flourish, and position themselves to be the insurer of choice. For some groups, the insurer might try to be the moderator (although brokers will compete hard to own this space).
♦ Review their sales capability so that they have the right number of well-trained, properly focused people pursuing opportunities. Most insurers have some very good people in this area, but often their expertise is thinly spread.
♦ Recognise that sales may depend on meeting wider needs than just price. If OSIGs emerge, they are likely to have a common interest and may well prefer a provider that has some link with that shared interest. For example, a supporting wiki website aimed at motorcycle enthusiasts in the UK has proved to be an effective tool.
♦ Balance underwriting and sales. Sales are important, but should not dominate the process, because deals done primarily to grow top-line results often generate sustained underwriting losses.
♦ Recognise the potential impact on margins. If customers organise into groups, they will be better positioned to drive hard bargains and reduce profit margins. Efficiency, a firm control over expenses and a clear, realistic understanding of the economics of such arrangements will be especially important.

The online social age is already a major part of our daily life, but the insurance industry is not a front-runner in this evolution, and it could be several years before it enters phase two. Even if the next phase is not imminent and differs from other industries’ experience, insurers would be prudent to consider the emergence of online social insurance and how their companies would react.

Drawing lessons on transformational market forces from front-runner industries requires keeping an open mind to all possible futures, even if seemingly far-fetched. Some formerly great companies probably wish they had done more of that.