As the cogs of change churn through the reinsurance industry bringing new market entrants, InsurTech, and block-chain technologies which promise to rewrite the standard modus operandi, the Reinsurance Association of America President Frank Nutter discussed the challenges of reinsurance adaptation.
He said the challenge facing the industry is whether or not the traditional business model makes sense; “we see companies diversifying into the insurance sector, they see the capital markets as largely competitive and complimentary, they use the capital markets to add capacity to it.”
For reinsurers, the future lies in “this blended approach to provide capacity for the insurance sector and not just in the catastrophe area. The opportunity for the reinsurance sector is probably looking at the more efficient use of capital, the traditional capital model requires a certain return on equity.”
Nutter added that investors in the capital markets have a different expectation and their impact could be that they become like “a more efficient, more scaled down reinsurance company to deal with providing capacity without the core function that it’s often had in the past of being more of a partner with insurance companies versus just a capacity provider.”
As it navigates the increasingly competitive re/insurance market environment, the Reinsurance Association of America has been seeking out risk transfer opportunities in government programmes, such as Florida Hurricane Catastrophe Fund, Florida Citizens, Louisiana Citizens, the National Flood Insurance Programme (NFIP), the Export/Import Bank.
Nutter said; “all of these government risk-bearing entities we’ll be approaching or have approached, either by way of legislative or regulatory change to facilitate risk transfer into the private sector as a new growth opportunity.
He added that after the NFIP purchased reinsurance in 2017 and 2018, the expectation is that in spring of 2018, the federal government again will be through FEMA looking at expanding its purchase, however, largely through the role of alternative capital, and that’ll be an important part of what brokers and firms look for in ways of opportunities.
Moving on from an above average catastrophe loss year in which the re/insurance sector has retained its capital base, Nutter said the market environment is a “two-edged sword, showing resilience but also making the re/insurance arena more competitive.”
Nevertheless, he added, “one would expect to see this as the new normal; significant catastrophes, additional capacity affecting prices, and core capacity capability that the sector has always provided.”