Making sense of an abstract business
The reinsurance business is one of the most abstract businesses in general, writes the German newspaper Frankfurter Allgemeine Zeitung in an article on the 2014 international meeting of the reinsurance sector in Monte Carlo.
An enterprise promises a monetary amount to another enterprise in case a defined loss occurrence materialises. While the writer is certainly correct in his description of the industry in general, reinsurance has played and continues to play an important role in our socio-economic systems.
Making the impossible possible
One example of the traditional role of reinsurance has always been to ensure that large infrastructure projects such as airports, roads, industrial installations and power plants can be completed successfully. In the African context, by far the biggest infrastructure challenge is the generation and distribution of electricity.
The bulk of electricity is currently generated from coal, while the potential of hydroelectric power is a long way from being fully exploited. The World Economic Forum estimates that $100 billion a year will need to be invested in infrastructure alone over the course of the present decade if desired growth targets are to be reached.
What is required for such projects is expertise in the areas of product development, premium structuring, claims, capital and risk management. Reinsurers offer a product range from cover for financing risks and developing suitable project policies, including marine insurance, third-party liability insurance and project delay insurance, to bonds, liquidated damages and terrorism covers.
After commissioning, insurance protection is required through various property covers, such as business interruption, third-party liability and special solutions like guarantee covers.
Capital relief solutions
Where else can a reinsurer add value in today’s times? In many countries, including South Africa, insurance has become subject to stricter regulations by the supervisory authorities.
While reinsurance was previously a matter usually dealt with by the Reinsurance Manager of an insurer, it is now either the Chief Financial Officer or Chief Risk Officer getting actively involved and capital management, which includes reinsurance as a capital instrument, has become a standard item on the agenda of board meetings. Why is that?
South Africa is undergoing a regulatory reform that is going to challenge the financial situation of insurers. The new risk-based capital framework, Solvency Assessment and Management (SAM), demands appropriate capital requirements for the insurance industry in proportion to the risks they assume. Insurers will need to focus on their risk profiles, assess capital adequacy and be more proactive regarding capital planning and management. Besides the change in regulation, economic volatility, largely driven by a highly competitive insurance market, has increased the focus on capital management.
To take advantage of growth opportunities, access to capital and the return on capital have become a high priority for the top management of insurers – with different reasons and motivations. While start-up insurance companies are looking to strengthen their financial position by generating new business and by enlarging their portfolios, established companies may be struggling to meet increasing shareholder expectations.
Digitalisation
What is the reinsurers’ playing field of tomorrow? Digitalisation is triggering a revolution in the business world. Many business models can be replaced or improved by digitalisation, and reinsurers have long since ceased to be just spectators on the side lines. Big Data applications, for example, make it possible to assess risks at an earlier stage and more precisely. The power of data, moreover, makes data collectors such as Google, Facebook and Amazon potential competitors. Access to customers will change, and many established ways of processing business will be rethought.
In reinsurance, access to data and its correct interpretation are critical. Better data analysis and much greater data resources will provide a chance to push the limits of insurability and thus develop new business.
