How to succeed in adversity
Against this backdrop, reinsurers have to adhere to a number of key principles, if they are to succeed. In a marketplace under pressure from commoditisation and a lack of differentiation, a distinct and discernible franchise becomes crucial. In times of increasing client expectations and eroding loyalty, reinsurers need to support their cedants with market and product expertise and serve them with speed, reliability and authority.
Delegation and lengthy approval or referral processes are no longer acceptable, in particular in an emerging market environment, where clients are accustomed to negotiate with decision makers who can act swiftly. Ultimately, that principle requires a matching organisation based on structure, an open though centralised business architecture, tight risk management procedures and a consistent underwriting philosophy.
A strong corporate identity also includes a consistent message that resonates well with client expectations. The ability to portray the value of reinsurance credibly for facilitating and protecting economic and even societal progress enables a discussion with cedants which extends beyond price negotiations and opens up new business potential.
Efficiency is essential to be able to provide a meaningful product in an environment of declining margins. Mono-line or regional reinsurance set-ups are conceptually flawed. No longer can a reinsurer build a franchise on the basis of covering a single risk class and catering towards one regional market. Today’s reinsurance newcomers, including Peak Re, need to establish a global presence with multiline capabilities at a very early stage of their life. Only a fully diversified portfolio offers the opportunity to selectively underwrite risks that match reinsurance shareholders’ growth and return expectations. More precisely, each risk has to be evaluated according to its benefit for the overall balance of the portfolio.
Diversification may come in different forms or shapes though. Complementing the stability and predictability of a mature market book of business with the dynamic inherent volatility of an emerging market portfolio is the most obvious approach. Mergers and acquisitions might be a further route to enhance efficiency through a combined book of business.
In Peak Re’s case, we announced the plan to acquire a 50% stake in a Caribbean primary insurer – not because we are keen to underwrite personal line and frequency risk in that part of the world, but because the company’s book effectively diversifies our portfolio with its bias towards Asia’s natural catastrophe perils. Investing in a Caribbean insurer also showed our enthusiasm in supporting the insurance industry in this developing market. The transaction was completed in August.
Overall corporate efficiency is obviously also a consequence of tight underwriting discipline, cautious risk management and stringent cost management. All these elements are essential as in absence of sizable investment returns, technical results will remain the only reliable source of income for the foreseeable future.
In today’s business environment, controlling administrative expenses is gaining huge importance, in particular as other factors almost inevitably add to expenses, such as higher acquisition costs or franchise investments. If a reinsurer’s cost ratio is too high, it cannot keep up with the market’s overall pressure on prices and will lose business as a result. Concentrating back- and middle-office functions centrally in one location while limiting local operations abroad to client-facing entities might be one approach to keep administrative expenses in check.
Management teams in reinsurance face the formidable challenge of reconciling the imperative of franchise enhancement in an increasingly commoditised market place, with the need to place greater emphasis on administrative expenses as a long-neglected determinant of financial performance in reinsurance. As a most basic prerequisite, proximity to clients and, as a result, in-depth expertise and knowledge of direct insurance markets remain key.
Many clients expect their reinsurer to be more than just a capacity provider. They want a sparring partner and a trusted consultant who shares global experience and is able to support them with tailored solutions as well as with product and business development advice. Ultimately, reinsurance in its best sense is a function similar to private equity in that the reinsurer provides risk capital to enable the cedant to further profitably grow its business, to mutual benefit. With this mind-set in place, reinsurers stand a good chance of enhancing their relevance to the client while keeping a close eye on operating cost.
Growing the overall “cake”
Reinsurers need to address what appears to be a declining appetite for insurance. The global insurance penetration has been shrinking ever since the beginning of the soft market in 2007 from 7.5% to 6.2% in 2014 (according to Swiss Re Sigma). From that angle, the relevance of our industry has been diminishing despite the enormous growth in insurable assets in emerging markets in particular. Reinsurers therefore need to find solutions of how to grow the overall market by generating new business and tapping in unserved or underserved segments of the market – be it through product innovation, geographic expansion or by simply bringing new cedants or risks to the market.
This will require long-term investments, commitment and, in particular, an entrepreneurial and hands-on approach. Microinsurance in frontier and emerging markets is a great example for providing protection to previously uninsured markets or parts of society. Reinsurers, based on their product expertise and knowledge of local market conditions are well-positioned to facilitate the further growth of microinsurance. There are ways in supporting emerging markets via different reinsurance initiatives and Peak Re alone underwrites already seven different programmes across Asia and in lines such as trade and credit life, agriculture or property, sometimes through Public-Private Partnerships with governments.
Furthermore, through participating in developmental programmes reinsurers can contribute their know-how to help establish financial solutions in combination with private capital to protect against the impact of exogenous shocks like natural catastrophes. And finally, many risks remain uninsured due to the lack of data. By supporting initiatives that help gather these data, for example the research conducted by the Shanghai Typhoon Institute, the insurance industry does not only greatly enhance its knowledge about relevant risks but also make a material impact on saving lives, especially if a super typhoon were to occur, as the Chinese Government will use the data collected to work on crucial precaution, protection and evacuation plan.
The global market is evolving and expectations from clients keep changing. Therefore, reinsurers have to have the ability and courage to deliver original thinking in order to stay on top of the game and be sustainable in the long run.
