Analysts at Jefferies said reinsurers are being viewed as a “safe haven” from AI implementation risks, but warned that if AI results in larger insurers taking share from mutuals and smaller players, demand for reinsurance could structurally reduce.
In a recent research paper, analysts from investment bank Jefferies pointed out that reinsurers have been viewed as a safe haven from risks associated with AI implementation for two reasons.
Firstly, the data required to underwrite reinsurance risks are not easily available, meaning that AI cannot directly replace the role of the reinsurer.
Secondly, the reinsurance market is sophisticated and has relatively few touchpoints. Jefferies highlighted that AI might disrupt distribution, meaning current underwriting incumbents have to ensure that their market share in one channel (e.g. price comparison websites) transfers successfully to another (AI platforms). Regarding reinsurance, analysts said they struggle to envisage sophisticated buyers of reinsurance using AI to make such critical, nuanced and bespoke purchases.
On the other hand, analysts stressed that customer demand is where reinsurers could find themselves indirectly exposed, as AI might reduce the number of participants.
Jefferies believes the biggest insurers will have the largest AI implementation budgets and are highly motivated to preserve their incumbent position. As a result, the insurance market might find that, over time, market shares organically consolidate among a smaller pool of large insurers.
If this is the case, analysts noted that this could be a problem for the reinsurance industry. Currently, insurers buy quota share reinsurance if they have insufficient capital to support elevated growth or need to rebalance their business mix to optimise diversification. In both cases, the customer need is far greater for smaller insurers with less access to capital and which are more likely to be growing rapidly in a narrow range of products.
Moreover, as larger insurers tend to be more diversified, they will see less material benefit from buying external cover. Conglomerates already rely less on external reinsurance to eliminate their tail risks, and if AI increases their market share, the reinsurance industry could become less relevant.
