For many reinsurers utilising a hybrid business model, the insurance segment has often been a drag on profitability that has outweighed any benefits it affords, according to a panel of industry experts.
Speaking on AM BestTV, Mario Bonaccorso, Chief Financial Officer at PartnerRe, said that his company had made a deliberate choice not to be in the primary business, as it takes different skillsets to be a profitable primary insurer.
The business model is extremely intensive in terms of data, IT, claims, and distribution, he noted.
Mark Kociancic, Group Chief Financial Officer at SCOR, agreed that this view was consistent with the view at SCOR, and added that the reinsurer did not want to compete with its clients.
Theoretically, a hybrid model should offer companies better access to risk, broader distribution capabilities, and a greater geographic spread, said Robert DeRose, Senior Director at AM Best.
However, in reality, for most companies the insurance segment has been a drag and the reinsurance segment more profitable, he argued.
“I do think that there’s still a benefit to diversification and having multiple channels of distribution,” he remarked, “but they do have to be profitable.”
DeRose stated that the hybrid model was popular in the early 2000s, but the profitability of the reinsurance segment was usually superior compared to the primary business.
If management concludes that the lack of profits does not justify the diversification, he said, companies would be better off sticking with their core competencies.
This is what PartnerRe and SCOR have done, but DeRose observed that they were in the minority, with most other reinsurers opting for a hybrid model.
Bonaccorso also warned about the prospects of entering the primary insurance business: “Basically, I think reinsurance entering the primary insurance sector increases your access to risk. That’s a matter of fact.
“The question is, can you do this profitably, and at which cost, in term of damaging your existing distribution, with your client base with whom you’re going to compete?”
Kociancic echoed the concern about competing with your clients, adding: “I think the real issue if you enter the primary side, whether it’s personal lines, commercial, or specialty, can you bring any kind of competitive advantage to your business case for it?”
