Six trends explored: top of mind for reinsurance companies | Risk Advisory | Deloitte


Six trends explored: top of mind for reinsurance companies

From a global perspective, reinsurance remains to have a distinctive business model compared to traditional insurance companies. It comes with its own characteristics and challenges. Internal reinsurance vehicles seeking for opportunities to align with corporate strategy. External reinsurers are, in a tempestuous environment, looking to improve solvency capital diversification effects and regulatory arbitrage hence increased focus on alternative markets.

The six trends

In the past years, the industry faced some headwinds relating to the business model, regulations and internal operations. In this article we explore six trends for the upcoming years:

1.       Persistent low interest rate;

2.       Alternative markets search;

3.       Catastrophic loss event impact;

4.       Emerging technologies;

5.       IFRS 17 implementation; and

6.       Increased in involvement in InsurTech.

Persistent low interest rate

“..Facing profitability pressure due to low interest rate environment..”

Reinsurance companies facing profitability pressure due to volatility in investment income, combined with a low interest rate environment and past catastrophic losses. Due to increased interest rate risk and income volatility there is pressure on internal budgets, key performance indicators (KPI) and ratios. Also, reinsurance constructions can be used to swap portfolios to other jurisdictions with favorable tax treatment and different capital ruling. The pressure on the profitability and the traditional business model might increase the search for alternative market entry.

Alternative markets search

“..Entry in emerging markets and actively search for growth opportunities in alternative markets (both geography and product oriented)..”

Global oriented reinsurers might look for opportunities in new markets to drive insurance premium growth and gain market share. The reinsurance market in Asia is projected to grow with a compound annual growth rate (CAGR) of 7% through 2018-2019 which is above the CAGR of 1.5% in the US and the CAGR of 0.4% of the global reinsurance market through 2019-2024 (SwissRe & Reuters).

Reinsurers might face barriers of market entry as a protection measure in high-growth markets. Nevertheless, emerging markets might be interesting as growth is driven by strengthening of the economy, a growing population, urbanizations and a rising middle class. From a customer point of view, (re) insurers should take into account local market circumstances and customer needs regarding product development. Other important factors are the increased amounts of alternative capital (e.g. cat bonds) in the sector (approx. 16% of global reinsurance capital according to Aon) and the current soft market. This has forced reinsurers to more diversify their business portfolio and improve their performance in other areas of business and products.

We observe a shift to new product areas e.g. advanced aerospace and cyber. Since 2015, we have seen reinsurers investing and partnering significantly on multiple foundations of innovation closer to the end user of insurance products. The activity of especially the two largest reinsurers, Swiss Re and Munich Re, has been noteworthy.

Catastrophic loss events

“..Economic losses due to catastrophic events globally..”

With the rise in natural catastrophes, reinsurers can look to improve insurance coverage and reduce the increasing protection gap. The global insurance protection gap, the difference between economic losses and the insured amount, was USD 193 billion in 2017 alone (SwissRe sigma). Also, reducing the protection gap gives rise to a sustainable insurance business.

In the past years we observe the sophistication of modelling catastrophic risk (cat risk). This is mainly driven by increased focus from rating agencies, embedding cat modelling in solvency regulations, increased data availability and increased computer power to run models.

For the assessment of cat risk and product development, reinsurers focusing on satellite imaging. That enables them to gather information that can be utilized in loss and risk assessments to assess  damage from natural disasters. Satellite imagery also enhances claim handling processes to assess the extent and type of damage, even for remote locations.

Emerging technologies

“..Adoption of new technologies such as big data, blockchain, robotics, artificial intelligence to optimize processes and enhance the business model..”

The adoption of emerging technologies offers opportunities to innovate and develop new insurance offerings with enhanced customer oriented focus, improved operational processes and assess risks arising from products and portfolios.

Reinsurers are partnering with technology firms to implement big data and analytic strategies. New business models are explored and often combined with partnerships and investments in InsurTech.

Increased involvement of robotics to perform potential tasks and processes regarding sales, underwriting, policy issuance and servicing, claims processing and risk management. We recognize that (re) insurance companies often set up specialized departments focusing on implementing robotics process automatization.

A blockchain enabled reinsurance platform can help reduce the losses on claim leakage and fraud, reduce time and cost of contract processing and facilitates automated processing of settlements between insurers, reinsurers and retrocessionaries.

We acknowledge that adopting new technologies requires change on all organizational levels and has effects on (current) staff who need to adapt and change mindsets.

IFRS 17 implementation

“..Becoming compliant with IFRS 17 is key. It also raises questions how to align with Solvency II and the impact on the reinsurance business model..”

(Re)Insurance companies face challenges in implementing IFRS 17 as reinsurance specific challenges arise. In the exposure draft of 26 June 2019 the IASB attempt to minimize the accounting mismatches arising between direct and reinsurance contracts.

However, the main challenges (re) insurance companies still facing are for example:

·         Grouping of treaties that cover multiple lines of business, portfolios or products;

·         Allocation of new (direct) business to the annual cohorts;·        

·         Contract boundary mismatch with the underlying direct insurance contracts vs. the reinsurance (treaty) contract boundaries; and

·         Translate IFRS 17 regarding specific topics and definitions e.g. “proportionate coverage”.

Additionally, the Variable Fee Approach (VFA) is not applicable to apply on reinsurance contracts. This might cause a mismatch in case the underlying direct insurance contracts are modelled for VFA. Insurance companies who have reinsurance held might utilize the possibilities to rearrange treaty and contract structures in case this is realistic from a cost/benefit point-of-view.

We observe that (re)insurance companies try to align their IFRS 17 implementation choices with Solvency II specific calculations.

Involvement of InsurTech

“..Increase of partnerships and investments in InsurTech in order to enhance returns and venture into new products, markets and geographies..”

On the Internet of Things (IoT), we see for example Munich Re acting as partner with Bosch and investing in IoT platforms like Relayr. Other start-up investments include Swiss Re as partner of Startup Bootcamp and Munich Re as investor in on demand direct insurers Trov and Slice. In turn, Trov plans to insure Waymo’s self-driving cars, bringing telematics developments and many different innovations within reach of Munich Re. In the Dutch market, we have seen the arrival of IptiQ (a Swiss Re white label) in the health insurance market, which was the first new arrival in the health insurance market 10 years’ time.

How we can help?

In general, Deloitte has a global network of (re) insurance specialists that are subject matter experts. Regarding the challenges mentioned above, Deloitte is been able to deliver support.

·         In the pressure on profitability, performance management and key performance indicator settings;

·         In the entrance of alternative markets and issuing alternative products, Deloitte can deliver independent advice by our global resources;

·         To keep control on the impact of catastrophic events, Deloitte can assist in optimizing, validating (e.g. second opinion) on Cat and reinsurance programs modelling;

·         Shaping the reinsurance company of the future together with Deloitte’s technology enabled solutions that will help to embrace emerging technologies;

·         In the IFRS 17 implementation by utilizing our reinsurance knowledge and strategic view. Delivering services to improve hedging and formulate a “Front-to-Finance” strategy;

·         Assist in Merges and Acquisitions (M&A) of InsurTech or assistance when entering into a partnership;

Get in touch

For more information about our reinsurance services or other risk services, please contact Pelle van Vlijmen, Yoeri Arnoldus or Peter Plat via the contact details below.

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