It’s over ten years since Hiscox completed its first reinsurance renewals from its new reinsurance operation in Bermuda (a move instigated by Hurricane Katrina) and, in that time, the changes in the reinsurance world have been seismic. Carriers, clients, capital, regulation and even the skillset of the reinsurance underwriter have been turned upside down to leave an industry unrecognisable from the industry which first responded to Katrina.
Take capital: ten years ago, the capital streams that we have now either didn't exist or were viewed as somewhat esoteric. Insurance Linked Securities (ILS) is a good example. There were a handful of niche specialists back then – essentially investment managers – but ILS has now become a mainstream provider of capital to the reinsurance sector. Alternative capital? It’s not such a distinction now and the lines between ‘traditional’ forms of capital and ILS funds have become increasingly blurred.
Insurance companies have also changed. There are fewer of them for starters as mergers and acquisitions (M&A) have played out and swallowed up many – both smaller niche players and significant ones. And those that remain don’t buy reinsurance like they used to. Confidence and strength in their own balance sheets has meant many buy less reinsurance and retain more risk. Their reinsurance panels are smaller as they look to work with fewer reinsurers who can offer significant line sizes and offer more added value in terms of consultancy, multi-year commitments, composite coverage and a greater willingness to meet client needs. We could now be seeing a return to more reinsurance buying as results slow but that trend is yet to play out: efficiency remains the name of the game.
A more diverse offering
Given all this change, what of the reinsurers themselves? Like the insurers, there are now fewer reinsurers as a result of M&A activity and a consequence of the need to be more meaningful for clients through a more diverse product offering and greater financial clout. The pure play property catastrophe reinsurers have all but gone. Comparisons can be drawn with the fund management world which is facing its own wave of consolidation as technology disrupts its existing business model and demands asset managers acquire new skills to stay relevant.
Risk management in reinsurance is now far tighter than it was in terms of how accumulations are monitored (particularly in areas such as terrorism and cyber). The ability to aggregate and think about complex risk aggregation issues is much better and there is no doubt that it's a safer reinsurance animal than it was ten years ago which can only be a good thing for the industry.
Underwriters no longer just underwrite
It’s also an industry staffed by people with a very different skillset. An underwriter no longer simply underwrites; now you're a capital management specialist or banker, a marketer, a ratings specialist, a catastrophe modeller, a portfolio manager... There are so many ways in which the role has adapted and evolved and we’re seeing a real process of up-skilling. It’s still a fun place to work but the expectations are far higher.
The regulatory environment has also changed massively in the UK with the Prudential Regulation Authority and the Financial Conduct Authority taking over from the FSA, while Lloyd’s has stepped up its game as well as the phasing in of Solvency II. Of course, the decision to leave the European Union is going to have an, as yet unknown, impact on how the business is regulated in the UK.
Back to the future?
Given this decade of change, it’s easy to assume that we will continue to see further structural change in the industry. While we almost certainly will, we could also see the return of some past features of the market. We know that individual profit centres within insurance companies used to buy a substantial amount of reinsurance but, as companies realised economies of scale, reinsurance buying became increasingly centralised. Now, because of shareholder activism, tricky quarterly results, and the falling price of reinsurance, we are starting to see an increased demand for decentralised reinsurance and profit centres coming back into the market to buy bespoke covers.
While we have probably seen the end of the mono-line reinsurers, some smaller, niche operations may start to prosper in areas like cyber and renewable energy although the likeliest longer term outcome for such outfits will be they'll either do very well and diversify themselves or they'll be swallowed up by other reinsurers.
Innovation must win out
Whatever the industry faces, welcome developments like the recent growth in product innovation must be more systematic across the industry. We have to work far harder for every opportunity and while it may be challenging, it’s also a great position from which to plan and look ahead to the next ten years.
This article first appeared in Insurance Day on 16 November 2016.
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