The trends impacting insurance and reinsurance companies are typically aligned, but sometimes the trends push and pull in an opposing (but complementary) way. Current forces in the insurance industry are pushing many insurers to simplify their products and channels, while at the same time those forces are having the opposite impact in reinsurance, pulling away from simplicity and towards more complex reinsurance contracts. We'll get into this in more detail, but first we need to look at the three major areas of disruption in the global insurance and reinsurance industry: capital and regulation, competition, and technology.
Capital and regulation
Large parts of the world are awash with capital looking for a place to be reinvested. This includes a large increase in alternative capital (ex. Diversified pension funds, endowments). Diversified capital allocation models are guiding where the money is going. Alternate capital is both a threat and an opportunity to reinsurers. While alternate capital sources can result in additional (and less regulated) competition for reinsurers, it's also an opportunity for smaller reinsurers to partner up with these larger alternate funds, giving them access to business they wouldn't have had before.
As a specific example, the industry has seen a growth in CAT Bonds, risk-linked securities that transfer a specified set of risks from a sponsor to investors. At the same time, CAT insurance pricing is at an all-time low.
Along with this, increased global regulation may be causing a retreat from long-term products, especially due to the fact that not all firms are being treated equally (as an example, look to the Systemically Important Financial Institution (SIFI) and the different, higher financial standards they need to meet).
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Competition
Competition in the insurance industry has obvious implications for reinsurance as well. Rate reductions are persisting, especially in property. With a low interest rate environment remaining in the short-term. there are more price decreases on new business compared to renewal, and reinsurers will look to more nuanced contracts when the premiums per policy are reduced.
In addition, there will be continued activity in M&A in insurance and there has been an industry consolidation in the Lloyd's marketplace. While bigger insurers have more leverage with reinsurers, it also means that reinsurance contracts will need to slice up larger books of business.
Technology
When it comes to technology, just as it's true for insurers, the biggest impact to reinsurers is around data. Advanced predictive analytics in reinsurance is helping to optimize returns for strategic capital and allowing reinsurers to do a much more detailed review of their business, letting them slice and dice the kinds of business they want to be reinsuring. While data analysis has always been key to reinsurers, this analytical power is growing daily, and will directly result in greater contract complexity. Since this analytic capability is spread across large and small reinsurers alike, this also means the number of reinsurance contract negotiations is increasing. In the past, smaller reinsurers would follow the main reinsurer, all accepting the same terms. Now, insurers need to negotiate those details with each reinsurer.
Across the insurance industry, data is increasing in amount, frequency, and variety, and this is driving innovations in specialty lines. Advances like drone-based claim inspection for catastrophes and crop damage have broad impact in how the industry sees and understand large scale events.
Even in the areas of capital and competition, technology's impact is being felt. The use of new technology allows not only more scale, but also enables firms to diversify, triggering M&A's to exploit synergies. It's clear that global insurers and reinsurers can no longer think of themselves as somehow insulated from the effects of the rapid changes in information technology that are disrupting the more consumer or commodity lines of the market.
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Simplicity vs. complexity
Unlike the pressure towards more complexity from the reinsurer end, insurers are facing continual pressure to simplify their insurance products.
There's a strong desire to appeal to millennial consumers who are notoriously underinsured, but in general expect consumer interactions to be straightforward and a pleasant experience tailored specifically to their needs. Will this mean more types of targeted products that are smaller and simpler in scope? Will it mean shorter term as-needed products that cover a single need? Either way, it points to a diminishing of the large, multi-faceted, all-purpose insurance product that is built around what the insurer wants to sell rather than what the consumer wants to buy.
Additionally, insurers are struggling to better utilize online sales channels. Direct sales have moved from personal lines to small commercial lines, and will continue to impact traditional means of doing business, but even when not causing disintermediation, the online channel is being used to optimize the process of pairing consumers with agents and speeding up the overall exchange. However it is being utilized, online forms and self-service portals work better with less questions and simpler products.
Finally, third-party big data sources are proliferating and third-party organizations are beginning to offer predictive analytics and risk scores that synthesize larger sets of data than most insurers could ever gather on their own. This means it will be even easier to rate and underwrite products with less information gathered up front. Insurers who want to embrace this will have to accept learning less about each individual customer and—once again—drive towards a simple product to take full advantage of that third-party data. The improvement to the consumer experience and the lessened expense of customer acquisition will be worth it to many.
However, this simplification of insurance products will actually lead to the inverse with corresponding reinsurance contracts. As the insurance products themselves reduce in complexity, relationships with reinsurers are increasing in complexity. Reinsurers will have access to the same third-party data sources as insurers, and will be using data analytics to look at the business in different ways. And, if less data is gathered up front results in less risk distinction, reinsurers will use more complex formulas to build that distinction into the back end.
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Impact to systems
How does this impact the systems insurers are using to manage their reinsurance? Historically, insurers haven't focused much of their budget in this area, and most are either using legacy technology or custom Excel spreadsheets to manage their reinsurance contracts and cessions. But lately, there has been increasing interest in modern ceded reinsurance systems, and it's likely there will be further growth in spending over the next five years.
More contract complexity, more differentiation between reinsurer contracts, more contract negotiations and renegotiations—this change in approach to reinsurance means that it will no longer be feasible for insurers to manage cession with spreadsheets or inflexible legacy systems. While some may build the technology themselves, most will either search for a modern core system or look to their existing policy administration and claims system vendors for additional reinsurance components.
In general, the vendors selling standalone reinsurance management systems to North American insurers tend to either have (a) a large client base, but legacy technology; or (b) modern technology, but a very limited North American client base. This means insurers are either taking a chance as an early adopter or holding out as long as they can for clear leaders to emerge who offer both a truly modern technology and have the customer base and experience to back it up. In the next five years, expect to see some interesting shifts in which vendor the industry considers the reinsurance management leader.
Jeff Goldberg is a Vice President of Research and Consulting at Novarica with expertise that includes data analytics and big data, digital strategy, policy administration, reinsurance management, document automation, SaaS and cloud computing, data governance, and software engineering best practices such as Agile and continuous delivery. Prior to Novarica, Jeff served as a senior analyst within Celent's insurance practice, was the Vice President of Internet Technology for Marsh Inc., Director of Web Technology for Harleysville Insurance, worked for many years as a software consultant with many leading property/casualty and life/health insurers in a variety of technology areas, and worked at Microsoft contributing to research on XML standards and defining the .Net framework. Most recently Jeff founded and sold a SaaS data analysis company in the health & wellness space. Mr. Goldberg has a BSE in computer science from Princeton University and an MFA from the New School in New York. He can be reached directly at jgoldberg@novarica.com.
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