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Global reinsurance giant Swiss Re has highlighted the key macro trends that its research finds are threatening the insurance and reinsurance business model, among which are the insurance-linked securities (ILS) sector and in particular the risk of collateralised reinsurance.
Each year Swiss Re publishes its Sonar report that seeks to identify emerging and developing societal risks that the insurance and reinsurance industry should care about. Alongside this the reinsurer also highlights the key macro trends that are at work in the risk markets and in society at large.
Of particular interest, given our focus on the capital markets and the disruptive business models that are emerging, is the section on the competitive and business environment, which is where alternative capital features as a trend reshaping the industry.
Within the competitive and business environment macro trends that are reshaping the re/insurance market and driving its future, Swiss Re specifically highlights the growth of alternative capital, saying that it is “playing a significant role thanks to a strong rebound of CAT bonds in 2017.”
With alternative capital in re/insurance now sitting at around $100 billion, according to Artemis’ data and analysis, the influence it has on global insurance and reinsurance market players is increasing, making the development of the ILS market a key macro trend for the sector.
Swiss Re also highlights that “collateralised reinsurance has gained most traction,” which the reinsurer says highlights “the importance of alternative providers.”
While we’re convinced that the rise of ILS and collateralised reinsurance is a positive for the industry, as it has helped to flatten the market cycle, made diversifying reinsurance counterparty capital sources more effective, provided new coverage and structural options to reinsurance buyers, and ultimately helped to keep the costs of insurance down thanks to the lower cost of capital markets backed capacity, it is how the alternative capital trend combines with some of the other macros trends that Swiss Re highlights that could drive much greater disruption over the longer-term.
Within the same group of competitive and business environment trends, Swiss Re also highlights re/insurance value chain disaggregation, saying that the value chain continues to transform rapidly.
While Swiss Re explains that leading the value chain transformation are “efficiency gains enabled by the digital revolution, changing customer expectations and newly emerging partnerships with non-insurance companies and Insurtech start-ups,” we’d also suggest that the capital markets and ILS funds have been leaders in breaking down the levels of intermediation between risk and capital, ultimately to the benefit of the insurance consumer.
Numerous ILS initiatives have now connected primary, largely catastrophe exposed risks much more directly with their managed pools of capital markets funding, with some of these efforts dating back quite a few years now.
This has significantly heightened the efficiency of the risk transfer chain and driven significant benefits for many. This has also provided a valuable example for insurtech’s, in how they can use technology to more directly bring risk and capital together in recent years.
While potentially smaller in overall impact across re/insurance, the ILS fund market’s efforts to more directly match risk and efficient capital have been instrumental in driving the macro trends that now threaten much broader disruption across the industry and that have now forced all traditional players to embrace them.
Additionally, it’s worth commenting on the fact that not all tech disruption is actually smoothing out the process of bringing risk to capital, in some cases it’s actually adding new layers of intermediation, or checkpoints along the value chain, albeit with much smoother user experience (in the main).
Swiss Re notes this, saying, “Traditional roles along the re/insurance value chain are shifting, with new players offering solutions for specific points of interaction along the entire value chain.”
There are going to be positives and negatives to new entrants that target specific points on the value chain, or seek to create new customer touch points entirely. Some will smooth the process of matching risk and capital, others may actually end up being an extra and sometimes unwanted link in the chain, meaning their life span may be short as the bigger-picture players will disrupt them in time anyway.
As an aside, it’s evident that this is playing out in the insurtech venture capital world currently, as the top VC’s with experience across the digital world are targeting their investments at startups that can smooth the value chain experience, while others, including some venture arms of re/insurers, seem more focused on startups that target a specific area of the chain, or seek to create a new one. It will be interesting to watch this play out and to see where success lands.
Thos insurtech startups that look to add efficiency to the process of transferring risk, by this we mean more meaningful functionality than just putting a shiny user interface on top of existing industry practice, are the ones likely to cause the greatest disruption and to have the biggest potential for significant success.
Hence looking to the capital markets, a source of both efficiency and one driving disruption itself, to connect it with risk using insurtech is likely to feature as a macro trend in Swiss Re’s reports in years to come.
Finally, Swiss Re’s report notes the importance of re/insurers finding their position in the value chain and readying themselves for the new world that is developing.
“Players need to think about their value proposition and how to align processes and talent accordingly,” the reinsurer says, which aligns itself with our view that establishing how to get paid for the expertise and intellectual capital you bring to the market, remains a key goal for traditional re/insurers as the value chain evolves.
You can read Swiss Re’s new Sonar report here.