Adjusting to a new normal in a risk based world
There is no doubt that we live in a risk based world. From tropical storms and droughts to earthquakes and riots, the world that we live in today is a far cry from the one that we lived in 20 years ago.
We have recently seen the effects of this in South Africa. Shortly after one of the most devastating droughts in the country’s history, tropical storm Dineo brought rain in abundance. There is a saying that one must be careful what is wished for lest it is received. We got the rain that we prayed for… in bucket loads (for most provinces, at least).
Significant pressure
The frequency, and quantum, of increased claims places significant pressure at the doorsteps of insurers who provide valuable cover in these situations; in turn, they rely on a trusted business partner to fund their claims. And the reinsurance industry is ready to answer the call.
Speaking at the recently held AON Benfield Client Day, Mike van Slooten – AON Benfield Global Head of Market Analysis – pointed out that the world actually went through a period where there were very few natural disasters. During this time, reinsurers were able to build up the capital that is needed to facilitate the market’s current spate of increased claims.
“There was a slight concern when there were no natural catastrophe events, and the reinsurance industry was in a position where it was asking serious questions about the climate that the industry operates in. But we now see a significant number of events occurring on a more frequent basis; so we are now building businesses that are able to cope with this new normal,” said Van Slooten.
A view on the past
What did the reinsurance industry look like five years ago? Van Slooten pointed out that because there are very few focused reinsurance companies in the industry, there are a large number of companies that were chasing a risk pool that simply isn’t growing. This had an impact on pricing which is why the industry is currently experiencing a soft pricing cycle.
“This makes it very difficult for the industry because it becomes very hard to see returns, and investors do not like that. Because of this, we have seen increased activity in mergers and acquisitions in an attempt to find ways to cope with the current claims environment,” said Van Slooten.
If we go back 15 years ago, we can truly appreciate how the industry has evolved into what it is today. Van Slooten pointed out that 15 years ago:
- The reinsurance industry was significantly fragmented;
- Individual companies were serving individual markets;
- Rick management was not as high level as it is today; and
- The influence of ratings agencies and regulation was very small.
Fast forward through time
If we consider the defining aspects highlighted above, can we say that we are living in the same industry? Most certainly not.
First of all, as Van Slooten pointed out, there have been significant natural catastrophe losses in the market. Research shows that in 2011 alone, there was over $120 billion in losses.
Added to this is the fact that there is hardly any capacity left in the market, yet a lot of capacity left in the industry. There has also been increased attention from ratings agencies that require reinsurers to stick to very strict, and clearly defined, solvency regimes.
“What we also need to remember is that we experienced a significant financial crisis. This proved to be a challenging time for investors and attracted a lot of attention in terms of new allocations. It forced companies, insurers and reinsurers, to become more frugal and keep capital in the bank to handle the events as they occur,” said Van Slooten.
Survival of the fittest
Reinsurance has always been a numbers game. A successful reinsurer is the company that has the greatest access to capital.
This has changed the playing field of late as large reinsurers have been actively involved in the mergers and acquisitions market. This has made them larger and these big players are the ones that are finding it easier to survive in a high claims market.
This doesn’t mean that there is no room for growth. The insured risk in the market is not at the same level as the potential risk posed by catastrophe events. Van Slooten concluded his talk by saying that the challenge of the reinsurer of the future will be to find a way to close the uninsured gap in the market.
Editor’s Thoughts:
Adjusting to a new normal takes time, patience and foresight to see when claims will increase. Predictive modelling is currently very trendy in the market and is an example of the positive role that technology can play in the industry. How will this develop over time? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
