Reinsurance and global risks are by nature linked, since the reinsurance business is all about risk. To better understand reinsurance trends a look at the global risk landscape is required.
By Ana Cristina Borges, CEO MDS Re
The World Economic Forum’s Global Risks Report 2016 draws attention to ways in which global risks could evolve over the next decade, and points out risks that are becoming more imminent and have wide-ranging impacts. These include the largest refugee crisis since World War II; the economic slowdown in emerging markets; the ever-rising number of terror attacks that destroy human lives and disrupt economies; cyber crimes that cost an estimated $445bn (£340bn) a year; persistent unemployment and underemployment; and global warming, with temperatures likely to rise by one degree Celsius this year.
The report points out three interconnected risk clusters: the failure of climate change mitigation with water crisis and large-scale involuntary migration; the large-scale involuntary migration with risks related to social and economic instability; and the global economic risks with uncertainty around the impacts of the digital revolution.
These interconnected risks – especially social and political risks, climatic and cyber risks – necessarily impact the demand for new solutions from insurance, and reinsurance will only benefit from this.
In recent years, the reinsurance market has been the victim of a weak global economy and an oversupply of capacity, with cedents increasing their retention and centralising their purchasing for reinsurance, thus leading to a deterioration in premium rates and terms and conditions.
Furthermore, in the past few years, the investment market has remained under pressure, with low yields and weak profitability impacting technical reserves. For 2015, investment returns in non-life have been estimated at 10.9% of net premiums earned, down from 11.4% in 2014, and well below the 13.8% annual average of 1999 to 2007 and it is expected that this pressure on profitability will continue. To cope with this pressure, reinsurers will have to look closer at underwriting quality and seek new and profitable lines and markets.
More pressure is coming from alternative capacity, with insurance linked securities diversifying from cat bonds and expanding their reach into other segments, adding supply, further depressing premiums and perpetuating a soft market.
In the first quarter of 2016, there has been a slight upward trend in the demand for reinsurance, mainly due to Solvency II regulatory changes with increased capital requirements. We expect this trend to continue, albeit in a shy way.
The opportunity to turn the page and take advantage of these challenges may come from the ability of reinsurers to keep up with new risk trends and adapt their business models to new and unexploited opportunities, as well as entering emerging markets.
Understanding global risks and their interconnectivity is key. Emerging risks are by far the biggest priority for corporate clients, according to PWC’s survey of corporate risk managers Broking 2020: Leading from the front in a new era of risk. Clients are willing to pay more for more informed and innovative solutions.
Following this trend, the annual meeting of the World Economic Forum in Davos focused this year on mastering the Fourth Industrial Revolution. The discussion was about how the development of technology and digitalisation will affect regions, industries and society as a whole, and whether it will present new opportunities for all or become a factor of increased inequality.
The Future of Jobs report presented at Davos predicted that by 2020, five million jobs will be lost as a result of technological changes, and the development of technology will further disrupt current business models of companies and entire industries on a global scale.
These trends will impact all lines of insurance and reinsurance businesses – not only emerging risks like space weather, breakdowns in complex supply chains, nanotechnology, artificial intelligence, robotics, genetics, biotechnology and cyber risks, but also in the traditional risks.
Pension and health insurance will be affected by migration, constrained welfare state, unemployment and underemployment. Cat exposure will increase with climate change and the water crisis, while terrorism and political risks will be affected by digitalisation and cyber developments.
Technology will forever change a reinsurer’s business model. Big data, besides improving claims handling and reducing fraud, can help build a predictive and statistical information model to monitor risks and insureds’ behaviours. Anticipating the response to new trends will lead to more focused underwriting – in premium rates and terms and conditions – and better capital management.
Alongside innovative offerings for these complex risks, and the diversification of their portfolios, reinsurers should look to emergent markets that display low insurance market penetration and offer a potential for future economic growth. These markets are expected to continue to require insurance and reinsurance offerings.
Emerging markets are expected to remain growth drivers of global insurance, in particular Brazil, Russia, India, China and South Africa, alongside “frontier markets” such as Sub-Saharan Africa, the Commonwealth of Independent States, parts of South-East Asia and Middle East countries. Strong GDP growth and low insurance penetration rates will be key in making this happen.
These trends will continue to pose a challenge for reinsurers but will help create new opportunities for them in the coming years.
Published online by Insurance Post