Reinsurance
Overview
One Minute Read
Reinsurance is a critical segment of the Insurance sector, focuses on the distribution of insurance products to individuals and businesses. Technological innovation, regulatory reforms and the increasing digitalisation of people’s daily lives are reshaping the financial services landscape and bringing new competitors. The COVID-19 pandemic has accelerated this with a cross-generational shift to digital. Reinsurers are being squeezed by declining economic conditions, rising climate change risks and sustainability. In response, the segment is transforming towards to a digital financial ecosystem, driven by five challenges and the widespread adoption of digital technology.
Segment Description
Reinsurance is a $0.3 trillion segment of the $25.6 trillion global financial services industry [1] [2].
Reinsurance, also known as insurance for insurers or stop-loss insurance, is the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. The party that diversifies its insurance portfolio is known as the ceding party. The party that accepts a portion of the potential obligation in exchange for a share of the insurance premium is known as the reinsurer. Reinsurance allows insurers to remain solvent by recovering some or all of amounts paid to claimants. Reinsurance reduces net liability on individual risks and catastrophe protection from large or multiple losses. It also provides ceding companies the capacity to increase their underwriting capabilities in terms of the number and size of risks. By covering the insurer against accumulated individual commitments, reinsurance gives the insurer more security for its equity and solvency and more stable results when unusual and major events occur. Insurers may underwrite policies covering a larger quantity or volume of risks without excessively raising administrative costs to cover their solvency margins. In addition, reinsurance makes substantial liquid assets available for insurers in case of exceptional losses.
The global Reinsurance market size is projected to reach $ 0.33 trillion by 2028, from $ 0.28 trillion in 2021, at a CAGR of 1.7% during 2022-2028 [3].
Key players include Munich Re, Swiss Re, Berkshire Hathaway, Hannover Re and SCOR SE.
The insurance process is complex and open to disruption, digitisation and automation.
Drivers
Shaped by the global megatrends, the pandemic, rising interest rates and a declining economy, the segment is being transformed by the five major drivers that are shaping the wider insurance sector.
However, two particular drivers are key for Reinsurance:
Risk – Risk is at the core of the insurance business. Risks related to climate change are growing. Insured losses from natural catastrophes have increased 250% in the last 30 years [1]. The growing severity of ransomware and other cyber extortion has been a prominent driver in price increasing for cyber reinsurance over the last few years.
Innovation – Digital attackers (including aggregators) are reshaping the competitive landscape and altering the cost curve by commoditizing product lines and driving down prices through increased transparency.
Risk
Climate change is increasing risk for insurers and by implication for Reinsurance.
2022 was another year of high loss, with overall losses of around $270 billion (previous year $320 billion) and insured losses of roughly $120 billion (previous year $120 billion). Overall losses were close to the average for the last five years, while insured losses were significantly above average (2017–2021: $97bn). The continued high level of insured losses is impacting insurers at a time when they are having to deal with both high inflation rates and a shrinking capital base due to rising interest rates. The latest driver has been the tens of billions of dollars in claims expected from Hurricane Ian, which made landfall in Florida in September 2002 and is expected to contribute $35bn-$55bn to insured losses of about $120bn in 2022. [1]
Resinsurers have stated that price rises will be most pronounced in the regions worst affected by natural catastrophe events in 2022, including Australia, Florida and France.
Going forward Reinsurers will need to consider how they price against peak risks associated with natural disasters. However they are also considering how they facilitate adaptation to climate change and foster climate-friendly technologies as part of risk transfer solutions.
Innovation
Digitisation is transforming the world and the new normal needs insurance.
One area of innovation is autonomous vehicles. The lack of human driver creates a whole new category of insurance which has little current data to define risk pricing. Swiss Re has partnered with Baidu’s autonomous driving business to focus on risk management research and insurance innovation to create autonomous driving insurance products for autonomous driving computing platforms, intelligent cockpits, robotaxi (driverless taxis) and other automated driving products.
Other areas include exploitng the deluge of data that is now available given the digital world enabled by mobile phones and IoT. These include healthcare, building and transportation.
Resinsurers can exploit their broad view of the market place to develop new risk models and digital platform services.
Transformation
The industry is transforming towards to a digital financial ecosystem, where today’s informed consumers enjoy a seamless, digitally enhanced experience, allowing them to switch across multiple access points and channels throughout the lifecycle, where rigid products are transformed into personalised and timely digital offerings on digital platforms, using artificial intelligence & automation to complement human interactions and where finance is embedded seamlessly into everyday life.
Insurance Brokers understand that the new normal is digital and will build on the wider insurance transformations:
Digital-first Engagement
Personalised Products
Intelligent Operations
Digital Platforms
and ultimately shifting business models to participate in the Open Finance Ecosystem.
However in Insurance Brokers there are two specific transformatiom:
- Analytics & Risk Solutions - Levergaing the expertise and industry-wide data collected by the Reinsurer.
- Digital Platforms - Delivering new insurance products and processes that benefit from the scale of the Reinsurer.
Analytics & Risk Solutions
Reinsurers are using their expertise and crucially the data they have collected from across the insurance sector to create solutions for insurers.
For example, Swiss P&C Re Analytics solution pulls on more than 150 years of risk expertise, the largest risk data pool and proprietary models to provide service to insurers to improve their risk analytics and pricing capability
In another area reinsurers are partnering with Healtcare providers to transforms raw patient data into interoperable data for healthcare organisations. It allows organisations relying on various healthcare data streams including health plans, Health Information Exchanges (HIEs), healthcare IT, life insurers, and health systems to get more value from their data. This will help improve life insurance underwriting.
The will rely on API and plug and play tools to provide a cloud-based analytcis capability that can be more easily intergrated into an insurers risk process.
Digital Platforms
As Reinsurers work with mutliple insurers they are well placed to create scalable solutions that white label services that can be consumed bu insurers and InsureTechs.
Digital Platforms are the core technology that will allow insurers to compete long-term but many have be constrained by legacy systems or as a start-up InsureTech are starting from scratch.
Swiss Re have launched a white label digital B2B2C platform called iptiQ. This would allow an insurer to upgrade its technology for an end to end digital solution.
This would rely on cloud, AI & analytics and security.
Digital Technology
Digital transformation will drive needs for Business Applications to help automate key processes and manage information. Data Management is needed to deal with a deluge of information caused by the growth of regulation and digitisation. Artificial Intelligence will help complement the human worker and drive efficiency.
Cloud computing will be utilised to support innovation, flexibility and customer experience, a Digital Workplace will enable a newly remotely located workforce, whether in-branch, at home or in offices and Networking & Communications to deliver a consistent and reliable experience.
Security, Compliance & Data Privacy is also critical as customers will expect an insurer to operate at a very high level of security and privacy to protect customer confidential information and money. Remote working, cloud and APIs all open up new attack surfaces and potential for security breaches. Finally, IT Governance & Management will be essential to manage the change and ensure value for money. Technologies such as blockchain may be key to digitising the financial ecosystem.