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Reinsurers need to manage expense & invest in InsurTech: PwC

6th November 2017 - Author: Steve Evans

In the consistently competitive, challenged and evolving reinsurance market, companies need to focus on cost optimisation and reducing expenses, in order to remain agile and be able to take advantage of future opportunities, according to PwC.

Add on the impacts of recent catastrophic losses, which are estimated to total an industry-wide financial hit of somewhere around $100 billion, and it’s easy to see that reinsurers need to be lean in order to take advantage of any opportunities that may arise.

But disruption from new entrants, alternative capital and technology start-ups in the InsurTech world are the main threats to reinsurers long-term stability, requiring a response focused on efficiency to help maintain competitiveness.

Arthur Wightman, PwC Bermuda and Insurance leader, explained, “The insurance industry is undergoing fundamental transformation as it comes up against the impact of new technologies, regulation, accelerating shifts in consumer demand and mounting competition from InsurTech players. But in the face of so many disruptive challenges, it’s important not to lose sight of the huge opportunities they’re creating for insurers.

“As the most disrupted of any industry, based on PwC’s 20th CEO Survey, the need for re/insurers to be fit enough to stay ahead has never been greater. Only through a strategic focus on cutting bad costs can scarce resources be freed up to invest, allowing re/insurers to grow and compete with new services, products or geographies.”

RMS

The reinsurance industry runs on an expense ratio that is too high to be able to compete with new business models and InsurTech start-ups, therefore it is vital that reinsurers learn to erase costs that are unnecessary, while adopting new ways of doing business and new tools that enable them to deploy their capacity more efficiently.

Technology and the reinsurance industries ability to embrace it and adapt to it are seen as key. So while managing and optimising costs, reinsurers also need to invest in InsurTech for the future.

“PwC research shows that as many as 86% of insurance CEOs believe that technology will either completely reshape or have a significant impact on their industry over the next five years,” Wightman explained.

He continued, “Insurtech innovations are helping to strengthen reinsurers’ capabilities in areas ranging from the use of drones for post-catastrophe loss assessments to artificial intelligence, robotics, big data and blockchain. Reinsurers also are providing technical and financial support for a variety of insurtech startups, many of them aimed at providing the speed and convenience demanded by millennials and other digital natives.”

But it’s key to focus in the right areas, invest in technology that can benefit the business and back start-ups that offer both benefits to the business as well as potential future profits.

Matthew Britten, PwC Bermuda Insurance partner, further explained, “Re/insurers must have a view of the landscape of tomorrow, a clear strategy and know their differentiating capabilities.

“The margin for error and opportunity to create returns has never been more compressed, so companies need to be agile in response to these forces. In our view, the ability to optimise cost through the utmost discipline, whether business-as-usual or initiative-driven, needs to be as much a core competency in successful reinsurers as risk selection or capital allocation.

“Fit for growth is just one framework or way of thinking which can help make the strategic focus on optimising cost a core part of how a business chooses to play.”

InsurTech provides a key opportunity and is not just a threat, Britten said, “Reinsurers are coming to see insurtech as a transformational rather than disruptive force and embracing the innovation potential within their businesses. But choosing the right partners and translating new technologies into tangible solutions are the real challenges.”

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