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Rendez-Vous Report

Pricing Pressure

Alternative capital is shaking up the reinsurance market, while issues such as Big Data are moving onto the agenda.
By: | August 4, 2014 • 6 min read

The café terraces of Monte Carlo will be bathed in sunshine, literally and figuratively, when reinsurers and brokers meet for Les Rendez-vous de Septembre (RVS), commencing Sept. 9.

Monaco is one of the few European locations to avoid the dark economic clouds that descended on the continent in the wake of the banking sector’s meltdown and ensuing financial crisis. Following five years of austerity, voters used the European Parliament elections in May this year to voice their dissatisfaction.

Yet, despite this sullen atmosphere, the biggest casualties of boom-to-bust such as Spain, Ireland and Greece have been steadily pulling out of recession over the past year.

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While Munich Re is averse to speculating on the mood that is likely to prevail at 2014 RVS, its latest Insurance Market Outlook (PDF), published in May, predicted that a broad-based economic recovery across many countries would see global insurance premium growth accelerate to 2.8 percent this year, from 2.1 percent last year, with a further improvement to 3.2 percent in 2015.

Munich Re’s chief economist, Michael Menhart, noted that the pick-up comes after three years of relatively low growth rates.

“In many cases, reinsurance has been used as a means of managing any potential earnings volatility arising from these larger retained portions.” — Charles Whitmore, managing director, head of the property solutions group, Guy Carpenter

Charles Whitmore, managing director, head of the property solutions group at Guy Carpenter, said the “improving economic environment in Europe has enabled insurance carriers to repair balance sheets and press ahead with consolidation and increased retention appetites.”

“In many cases, reinsurance has been used as a means of managing any potential earnings volatility arising from these larger retained portions.”

This generally optimistic outlook was tempered by the fact that Munich Re expects reinsurance premium growth to be more modest than that for primary insurance.

Over the next six years, the German reinsurer expects average growth in global reinsurance markets in real terms of little more than 2 percent per year. RVS attendees will also look back on this year’s January 1 and April 1 renewals, where pricing pressures saw declines of as much as 20 percent for U.S. CAT business.

As Munich Re’s report noted, while the potential of the world’s emerging markets — particularly the so-called BRIC economies of Brazil, Russia, India and China — was a hot topic a few years back, for the time being the major industrialized nations are back in the driving seat.

While the group expects China’s premium volume (which was around $284 billion in 2013) to double by the end of the decade, it will still lag way behind the United States, whose premium volume it predicts will pass the $1,624 billion level by 2020.

Possibly the biggest BRIC disappointment — which attendees may seek to explain — is Brazil. Hopes were high when the country began liberalizing its reinsurance market six years ago, ending the near-70 year monopoly of state-owned IRB.

Within four years, more than 100 reinsurers had established a presence in the country. However, this summer’s World Cup underscored how the economic optimism in 2007, when Brazil won the rights to stage the contest, has steadily dissipated.

Insurer confidence on the country’s economic outlook has fallen to a record low and Standard & Poor’s is among those warning that profitability in the Brazilian reinsurance market remains elusive.

Many reinsurers instead appear to be focusing on gaining a presence in India, once the long-delayed Insurance Laws (Amendment) Bill 2008, which would allow foreign reinsurers to set up offices in the country, is finally cleared by parliament.

France’s biggest reinsurer, Scor, is among those that have signaled their intent to add an Indian operation. Such hopes will have been encouraged by the landslide election victory in May of Narendra Modi. India’s 15th prime minister swept to power on a promise to kick-start an underperforming economy, which reinsurers hope will mean an end to the stalling in opening up its market.

The Top Three

But which trio of issues is most likely to dominate the discussions in Monaco?

“We can be certain that one of the prime themes, as always, will be the prognosis for reinsurance pricing, capacity, [and] terms and conditions at the coming January renewal,” said Christopher Klein, managing director and head of Europe, the Middle East and Africa (EMEA) strategy at Guy Carpenter.

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“A second topic will be the continuing influx of new capital into the reinsurance sector from so-called nontraditional sectors, despite the surplus of capacity.

“In the absence of a market-changing loss, continuing pressure on prices and returns can be expected. However, to date, the greatest effect has tended to be in the North American catastrophe market. We will be interested to see if the new capital will start to make significant inroads into the EMEA and Asia Pacific (APAC) regions and non-catastrophe classes.

“Finally,” Klein added, “a favorite topic of discussion at Monte Carlo is speculation about corporate activity and consolidation. This year, we have witnessed some high-profile attempts at consolidation in Bermuda. Expect this topic to continue to make headlines.”

Bryon Ehrhart, chief executive, Aon Benfield Americas

Bryon Ehrhart, chief executive, Aon Benfield Americas

Bryon Ehrhart, chief executive of Aon Benfield Americas, predicted at last year’s RVS that a further $100 billion of alternative capital would enter the reinsurance market by 2018 and said that so far, this prediction is on track.

He cited the decision in early June by the European Central Bank to cut its main interest rate to a record low of 0.15 percent and entering into what the headlines call “uncharted territory” by reducing its interest rate on deposits to a negative figure for the first time, of -0.1 percent.

This could mean that the predicted figure of $100 billion needs revising upwards. As he pointed out, major pension funds are making promises to retirees of returns of 4 percent upwards, against returns on conventional investments that are typically 1.25 percent to 1.5 percent.

Ehrhart cited two relatively recent entrants: Stone Ridge Asset Management — which launched two reinsurance-linked funds as recently as November 2012 and already has $2.5 billion under management — and LGT Capital Partners.

“The impact of the hedge fund reinsurers has been fairly transformative,” he said.

“They have put forward material capacity at very low prices and opened up a whole new set of opportunities for our clients.”

Inevitably, these pricing pressures continue to impact the long-established carriers. As A.M. Best commented earlier this summer, global reinsurance companies in the first quarter of 2014 benefited from below-average catastrophe losses and most continued to report favorable reserve releases, yet those that are publicly traded saw their stock lag the market. From a group of 20, only Bermuda’s Maiden Holdings managed a strong gain (of over 14 percent). The ratings agencies will doubtless dissect this overall sluggish performance at Monte Carlo.

Big Data and El Niño

What else is likely to be on this year’s agenda? The big keynote session or “presentation-debate” will be on Big Data and its potential to significantly change how reinsurers do business. While details of participants were sketchy at the time of writing, the session will be chaired by Michel Liès, chief executive of Swiss Re and the reinsurer said that it “wants to examine with RVS participants and clients how Big Data can enable new business opportunities and how privacy concerns can be addressed.”

Gretchen Hayes, managing director, global strategic advisory at Guy Carpenter, noted the “reinsurance industry is still at the beginning stages when it comes to the potential and competitive advantages of Big Data in combination with predictive analytics.”

“As these technologies continue to advance, insurance companies are reaping the benefits of gathering and analyzing vast amounts of information that come through their own internal networks as well as that of their business partners and even through new external sources.”

Video: The Weather Channel reports on some of the possibilities associated with an El Niño in 2014.

With reports suggesting that there is a 90 percent chance that an El Niño will disrupt global weather patterns this year, the recurring climate phenomenon could also force itself on the discussions.

Beginning as a vast expanse of water in the Pacific that becomes abnormally warm, El Niño has the potential for adverse weather effects ranging from a weaker-than-usual monsoon season in India that starves its paddy fields of vital rain, to scorching heat and bush fires in Australia and sharply reduced fishing catches in South America.

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The European Centre for Medium-Range Weather Forecasts predicts that the El Niño phenomenon is highly likely to occur this year; indeed, the organization believes it could potentially be the most damaging since 1997-98, which produced the hottest year on record and a string of natural catastrophes, an estimated 23,000 deaths and total economic losses in the region of $35 billion to $47 billion.

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.