What will the future of the traditional reinsurance industry look like?
In her book, “Making a Market for Acts of God,” Paula Jarzabkowski argues that the long-term stability of the reinsurance industry is in doubt, highlighting factors like buyers consolidating their traditional reinsurance programs and adding bits of capital from alternative providers. (See related article, “Long-Term Stability of Reinsurance Market Questioned.”)
Executive SummaryIs the future of the traditional reinsurance industry in jeopardy? Executives of some of the world’s leading reinsurers weigh in.
Other experts have expressed concerns about the blurring of lines between insurers and reinsurers.
Carrier Management asked reinsurance company executives whether they’re worried about the future of the traditional reinsurance industry and what roles they believe traditional reinsurers and alternative reinsurance capital will (or should) play in the next decade.
Tad Montross, Chair and CEO, General Re Corp.
The phrase “new normal” is in vogue today. The underlying question: Is this secular or cyclical change? I would argue that given the current positive reserve runoff, benign cat experience, low interest rates and favorable loss trends, it will prove to be cyclical change.
Brian Boornazian, Chairman, Aspen Re and President, Aspen Re America
For an industry or business to rest on past success is a sure way to ensure the lack of future success.
As the world changes, our industry certainly will have to evolve to meet those changes. As with any change like this, there are certain to be casualties along the way. However, the fundamental need for transfer of risk remains, albeit in a different and changing form. As long as this is the case, there is a need for experts who truly understand that risk.
New alternative capital may enter the market, but there is a disconnect between the amount of capital entering the market and the amount of skilled and knowledgeable underwriters who truly understand the risk where that capital is looking to be deployed. There is far more financial capital than intellectual capital, and therein lay the future opportunities as we move into the next decade. The winners will be those that marry the highest quality underwriting capital with the most efficient financial capital.
Bill Donnell, President of U.S. Property/Casualty, Swiss Re
An important thing to note is that not all reinsurers are created equal. We believe that a global, well-diversified reinsurer model makes good business sense for clients and will continue to do so. For example, Swiss Re is far more than just a capacity provider. We offer a broad range of services and expertise. Most of the new entrants just offer capacity.
We will continue to innovate and work together with our clients to grow their business. Understanding and listening to our clients helps us provide customized and innovative solutions. These long-term business relations are complemented and not substituted by alternative capital. Swiss Re has been instrumental in developing the ILS market.
Over the years there have been occasions where the topic of rethinking the business model has come up. Look at the flurry of Bermuda startups and sidecars in the 1990s and after the tragic events on 9/11. In the longer run, the reinsurance market always continues to grow and absorb the new concepts and players. The industry will continue to evolve in the future. I believe that Swiss Re’s 150-plus-year tenure is due in part to our ability to evolve.
Gregory S. Hendrick, Executive Vice President and Chief Executive, Reinsurance Operations, XL Catlin
What industry doesn’t change over time? We live in a time of incredible change, with a pace of innovation and creativity unmatched in our history. Entire industries come and go in years rather than centuries. VHS tapes, CDs and TomToms (GPS systems) are just three examples of products that changed a marketplace only to be replaced by something better.
The traditional reinsurance marketplace is not immune to change, and we are seeing the beginning steps of creating a new reinsurance marketplace. This will require us to be innovative and analytical, but most of all we need to listen to our brokers and customers. We need to become agnostic to capital source and embrace alternative capital to provide the lowest cost product possible. Closing the gap between economic and insured loss through innovative products thereby creating new premium streams is critical to our long-term success.
There is one difference between the industries noted above and reinsurance. Unlike just about any other business, we do not know the cost of goods sold at the time we sell our product. Quite often that cost is not revealed until a much later date. We sell our products based on what we know about our brokers and clients as people. In the end, reinsurance is and for my working future will be a people business. Relationships matter in our business, not for some old-fashioned idea of payback but rather for the ability to trade through the ups and downs of any trading relationship. Our challenge is to blend the new world with the old world. It is a challenge we embrace at XL Catlin.
Steve Levy, President, Reinsurance Division, Munich Reinsurance America Inc.
There are challenges in the reinsurance space for sure. However, the industry is adaptable and resilient, as we have seen over the years. Those who do not adapt will have serious problems. We have been seeing these changes taking place for years and have been responding. The industry may not look the same in the future, but there is clearly a role for traditional reinsurers with extensive underwriting expertise and close client relationships.
We believe that providing clients with advice in the areas of underwriting and claims, as well as customized reinsurance solutions that address their risk and capital management needs, will be the decisive factors for success. In addition, these factors will be key to providing significant capacity across all lines of business, innovative products and top financial security to clients.
Mike Krefta, Chief Underwriting Officer, Hiscox Re
There is a real blurring of lines between insurers and reinsurers, which is the natural consequence of large amounts of capital trying to find the shortest route to those who control risk. Roles in the industry will adapt whether you’re a broker, underwriter or capital provider.
The commoditized areas of reinsurance business are more susceptible to long-term change structurally, but it’s the niche specialty lines that can’t be as easily commoditized, and there will always be a role for the more traditional reinsurer in these specialized areas.