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Six Trends That Will Determine the Future of Global Non-Life Reinsurance Authors £ € 01011 $ 01001 Y 10010 01010 S £ This time is different Six trends that will determine the future of global non-life reinsurance Authors Clive Buesnel Insurance Leader – UK +44 (0)20 7303 3247 [email protected] Neal Baumann Global Insurance Leader +1 212 618 4105 [email protected] Kurt Mitzner Insurance Leader – Germany +49 21187 722656 [email protected] Peter Evans Insurance Research Leader – UK +44 (0)20 7303 0010 [email protected] Will Wilson UK Insurance Regulation & Advisory +44 (0)20 7007 7088 [email protected] Gaurav Narula Insurance Research – UK +1 678 299 5112 [email protected] Contact details of our insurance leaders across the world can be found at the end of this report. Discover more insurance insights and analysis like this at deloitte.co.uk/Insurance This time is different | Six trends that will determine the future of global non-life reinsurance Contents Foreword 02 Executive summary 03 Part one: Future trends 05 Part two: Future scenarios 35 Conclusion 40 Endnotes 41 Contacts 42 01 This time is different | Six trends that will determine the future of global non-life reinsurance Foreword The global non-life reinsurance industry has consistently delivered high returns, weathered storms both natural and financial, and innovated the way in which risk is identified, analysed and controlled. Yet, for an industry built on forecasting In this report Deloitte’s leading reinsurance We would like to thank those who took and preparing for the unexpected, we tend specialists have focussed on developing a part in our research. We look forward to to overestimate the speed and scale at deeper understanding of the trends that your feedback on the report and welcome which we change. Parts of our industry can will most likely shape the industry over the your thoughts on the future of reinsurance be slow to adapt. Major incumbents are next ten years. more broadly. powerful and barriers to entry high. To identify and examine the most However, no one would disagree that some important future trends, we interviewed aspects of reinsurance are profoundly leaders from reinsurers, brokers, capital different from only ten years ago. Most markets players and start-ups. The obviously, since the financial crisis so-called interviews have been supported by market alternative capital has grown from a niche data and case studies. In summary, it is our risk transfer mechanism to comprise view that: almost one-fifth of the industry’s capital. Clive Buesnel • six key trends will be most important to Insurance Leader – UK In addition, the forces of change are the future of global non-life reinsurance stronger than ever. Emerging applications of technology specific to reinsurance, an • these trends will affect the industry’s ever-expanding data universe, reinsurance- structure and economics, the role focussed start-ups and capital markets are of reinsurers and how business is combining to drive change more strongly transacted than in the past. • the industry will be two-speed, with Furthermore, profitability is trending innovators and followers side-by-side down, adding fresh impetus for change. Normalising for natural catastrophes and • industry-level growth and profitability will excluding the impact of reserve releases, remain low by historical standards the industry’s return on equity has fallen in four of the last five years. Even in years • at company level, the gap between top without major catastrophes, return on performers and the rest will widen equity is now little above cost of equity. • pivoting current business models using As a result there is a polarised debate on new technologies will underpin success. the future of global non-life reinsurance. Market participants have widely differing views. Some believe the traditional reinsurance model must change to survive. Others are cynical of disruption and believe the market will evolve along its current lines with the same players dominating for many years to come. 02 This time is different | Six trends that will determine the future of global non-life reinsurance Executive summary Future trends The future of the reinsurance industry will be shaped primarily by new technologies, alternative capital, capital markets structuring techniques and reinsurers bundling value-added services with reinsurance. These forces will lead to the six key trends below, adding to the perennial issues of new regulation, changing reinsurance buying patterns and emerging risks. 1. Pivoting to risk transfer plus service 2. Hollowing out of the middle-market model Consolidation will continue among Reinsurers will strengthen their relevance reinsurers and brokers. The epicentre of by pivoting away from providing primary dealmaking will be in the middle market, insurers with capacity, which they need less leading to the emergence of fewer, larger than in the past. Instead, reinsurers will focus on global reinsurers. The strategic rationale for smoothing primary insurers’ earnings, protecting them M&A will be a combination of greater efficiency to defend from the ‘risk of ruin’ and offering them value-added margins, more flexibility to allocate capital across a services. These services will include technology solutions broad range of markets and a wider offering to retain that help primary insurers to optimise their business and key clients. operating models. 3. Ongoing influx of alternative capital 4. Blurring of the value chain’s The market will witness the continuing boundaries influx of alternative capital. It will spread Insurers, brokers and reinsurers have from being tightly focused on property been repositioning themselves within the catastrophe to a broader array of risks, reinsurance value chain to defend, create lowering the cost of capital for the market in or capture greater value. New technologies general and the reinsurers that embrace it, in particular. and InsurTechs are accelerating this blurring of the Reinsurers will continue to develop new business models boundaries in the value chain. At the same time, due to focused on structuring and issuing risk, rather than pricing falling faster than costs, the economics of the retaining it on the balance sheet. value chain have become unsustainable. To address this, incumbents will reshape the value chain based on closer alignment between client needs and their competitive advantages. This will result in three main types of value chain: advice-led, efficiency-led and service-led. 5. Rise of automated placement 6. Rise of exchange-based secondary The reinsurance placement process has markets evolved slowly and acquisition cost ratios Infrastructure providers are building have been rising steadily. Now, however, electronic exchanges to facilitate faster the market is seeing the convergence of and cheaper trading of insurance linked multiple powerful forces that suggest automated securities (ILS). However, these exchanges face reinsurance placement will be increasingly adopted. a number of high barriers, such as slow and infrequent These forces range from new technologies to InsurTechs reporting on losses affecting traded securities and launching in this space to market-modernisation opaque processes for valuing them. Traders will initiatives. Nonetheless, adoption will be gradual, and overcome these barriers, allowing the reinsurers that focused on property catastrophe in the first instance. fully exploit secondary markets to optimise their risk and Automated placement will most benefit distribution capital more dynamically. platforms and alternative capital providers. 03 This time is different | Six trends that will determine the future of global non-life reinsurance Future scenarios Report structure Our analysis suggests that the greatest This report is divided into two parts. threat of disruption revolves around the Part one examines the future trends degree to which: that will have greatest impact on the reinsurance industry over the next five • alternative capital will back risk to ten years. It analyses the implications of these trends for the market’s size, • technology will enable risk placement profitability and dynamics, and the and trading. barriers that will impede the trends. Part two examines the opportunities and We analysed four future scenarios to threats for reinsurers across four future understand the main opportunities and scenarios, focusing on where disruption threats for reinsurers in more detail. The is most likely. results indicate that these scenarios have widely differing implications. However, what will underpin the success of all the scenarios will be the use of new technologies to pivot current business models. For instance, an evolutionary scenario is where alternative capital remains at its current level and the industry shuns further use of technology for risk placement and trading. Even in this case, which sees the least change of the four scenarios, new technologies will be critical to growth because they will enable a service-based business model with new revenue streams. 04 This time is different | Six trends that will determine the future of global non-life reinsurance Part one: Future trends £ € 01011 $ 01001 Y 10010 01010 S £ 05 This time is different | Six trends that will determine the future of global non-life reinsurance Part one: Future trends Forces behind the future trends Powerful forces are reshaping the reinsurance industry. The most significant over the next ten years will be: New technology – rapidly-advancing Capital markets structuring – new technologies, such
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