As the global reinsurance market continues to experience a supply/demand imbalance, EY has warned of a number of threats to the industry’s business model that could see some struggle to survive, although opportunities do exist to navigate the testing and changing marketplace.
Global advisory firm EY, in a recent reinsurance industry note, has urged reinsurance companies to assess their business models and strategies in light of a rapidly changing sector.
Historically, reinsurance companies endured soft market cycles understanding that a major catastrophe event would deplete enough capital from the sector to turn the market, at some point. However, the abundance of reinsurance capital from both traditional and alternative sources continues to expand, and as a result the type of loss needed to drive a hard market cycle is increasingly unlikely, says EY.
Adrian Halter, Reinsurance Leader, Switzerland, EY, said; “The risk of running aground in an ebbing business is underscored by clear signs that reinsurers face a long-term structural phenomenon rather than a short-term fluctuation of the insurance cycle.
“What we are observing is the cycle’s gradual flattening over time as capital continues to stockpile, eradicating upper peaks in particular.”
According to EY, global reinsurance companies are heading towards a “dead end” with their current legacy models, and firms must adapt to the unprecedented change sweeping across the industry or risk losing relevance and market share to new, innovative business models that have adjusted to the new re/insurance world order.
Moving away from eroding premiums and the overcapitalised marketplace, EY highlights changing reinsurers’ clients as another challenge for the sector. The traditional clients of reinsurers are the primary insurance players, but falling premiums and competition from other industries, such as the growing InsurTech and FinTech space, is having an impact here.
As a result, EY claims that by 2030 nearly half of Swiss primary insurance companies will be pushed out of the market as a result of competition from new market entrants and innovation.
“We also expect that other countries will experience similar developments in the near future. Never before have reinsurers had to deal with such sudden and dramatic changes to their client base,” said Halter.
Exacerbated the challenges for reinsurers is the changing risk landscape, with threats such as cyber and terrorism becoming more frequent and urgent needs to address, and EY feels that companies are yet to provide the correct solutions in some of the new risk areas.
Forced migration is another emerging risk highlighted by EY. In fact, the advisory firm stated that forced migration failed to feature in the top 30 risks in 2012, but was identified as the number one threat in 2016, shifting to third in 2017.
Tom Schmidt, Cybersecurity Leader, Switzerland, EY, commented on the changing risk landscape; “Another megatrend that will have a huge impact on business continuity and data protection risks will be hyperconnectivity driven by Industry 4.0 and the Internet of Things, particularly in light of targeted cyberattacks.
“However, reinsurers have so far been slow to reshuffle their portfolios and adapt their models to the changing risk landscape, leaving their clients painfully exposed.”
According to EY’s analysis it’s clear that reinsurers must adapt to the changing risk landscape or “struggle to survive,” but while emerging risks like cyber, terror and forced migration present significant challenges for the sector, there’s also a chance for market participants to innovate and develop new solutions and business models that meets the demand of the new re/insurance landscape.
Entering new regions, insuring new risks, and repositioning along the re/insurance value chain, according to EY, are all ways companies can look to make the most out of the current market environment, which shows little sign of changing anytime soon.
“The reinsurance business in on the verge of tectonic change. Aside from unrelenting pressure on margins, the risk transfer value chain is set to undergo dramatic transformation in the coming years. This is a reality that requires an immediate and concerted response.
“Reinsurers have to decide where and how they intend to compete in the new insurance landscape,” said Halter.
