Reinsurance companies are positioned well to benefit from the potential disruption caused by the rise of digital technologies, according to analysts at J.P. Morgan.
Digital technology is advancing rapidly and increasingly looking to disrupt the global insurance and reinsurance sector. As a result, both insurers and reinsurers stand to potentially gain from improved efficiency and lower costs in various parts of the value chain, but according to J.P. Morgan, it could be the reinsurers that are best placed to reap the rewards.
“This is because they have fewer potential conflicts of interest than primary insurers – they have no insurance agents. Also the reinsurers’ legacy systems traditionally are also much less costly than those of primary insurers, so it is less costly for reinsurers to adapt their systems to the new technology,” say analysts.
In the past, note analysts, reinsurance companies have invested in new disruptive start-ups, highlighting Munich Re’s investment in Admiral since 2002. Furthermore, Munich Re’s longstanding relationship with Admiral, of which it is the lead reinsurer, also benefits the firm.
Continuing to use reinsurance giant Munich Re as an example, such as the firm’s investment in Wefox, J.P. Morgan analysts explore some of the things reinsurers can do regarding digital.
Analysts note a shift in costs with a digital investment strategy such as Munich Re’s, with cost reductions in the traditional business helping to fund digital investments. Furthermore, analysts stress that they believe that lower claims ratios in motor have helped pay for some of this investment.
Despite the potential benefits, going forward, analysts highlight a challenge with this type of business model, where the greater cost of digital investments is somewhat offset by lower claims in motor.
Analysts question what might happen when claims costs start rising again, which, in their view, could happen if inflation returns.
“Then combined ratios would rise, and insurers would likely look for more aggressive ways of cutting costs,” say analysts.
Ultimately, say analysts, this could lead to more sector consolidation in order to use digital to produce higher economies of scale more effectively.
“We note that in the period after 1997, when insurers changed their business model and focused on improving their combined ratio and realized gains contributed less to earnings, there was a wave of consolidation and a number of listed insurers were sold,” say analysts.
