"High-quality data is key to enabling reinsurers to compete and write the right risks while maintaining pricing discipline" - Ray Johnston, Head of Strategy and Innovation, Eurobase
The hardening reinsurance market is no short-term blip – it’s a long-term correction after nearly two decades of soft market conditions, intense pricing competition and deteriorating performance. With inflation and climate change providing additional tailwinds for reinsurers, Goldman Sachs recently forecasted reinsurance rates will continue to harden until at least 2024.
This is being driven by a confluence of factors including the increasing frequency and severity of cat losses and related adverse prior year reserve development; the growing impact of social inflation and secondary perils; the spectre of ever expanding and evolving cyber risks; and, of course, the widespread losses and uncertainty inflicted by the pandemic, the war in Ukraine and political risk.
COVID-19 appeared to be the final straw that triggered the onset of the hardening market that is now in full swing. Over the past 12 months we have witnessed significant price increases in a wide array of reinsurance classes, as well as a tightening of capacity, terms and conditions as the industry works hard to improve its cost-of-capital. Unfavourable loss history has driven expenses in lower layers, prompting many reinsurers to attempt to avoid attrition by favouring historic loss-free layers, in addition to taking steps like imposing higher deductibles and lower event limits.
With investment returns also suppressed due to a long run of historically low-interest rates, returning to sustainable underwriting profitability is the Holy Grail for the industry, and these are all impactful actions to help improve the performance of portfolios. However, the smart use of data is arguably just as important a tool – and an increasingly critical differentiator. Here are five ways reinsurers are using data to gain a competitive edge in the hardening rate environment:
1. Risk selection
Hardening rates make reinsurers focus on the most profitable business. To do this well, they need to automatically capture relevant data in a timely fashion. Such information may come from a variety of sources both structured and unstructured and must be interpreted into an ingestible standard. This then needs to be validated, cleansed and fed into the underwriting process. Such is the importance of data in risk selection, reinsurers are now penalising insurers for poor data quality.
2. Exposure management
The hardening market is a result of a challenging loss environment. Rates may be rising but exposure management remains mission-critical. It is essential to maintain a detailed level of information to manage aggregation and accumulations, while real-time data, end-to-end visibility, advanced modelling and analytics are key tools in managing exposures across the portfolio on a gross and net of reinsurance basis.
3. Modelling emerging risks
The frequency and impact of hard-to-model perils such as wildfires, cyber risks and pandemics are growing. With models that rely on historical losses becoming increasingly obsolete, reinsurers must harness predictive modelling and AI to stay on top of emerging risks as well as economic risks such as inflation and interest rate scenarios – but these tools are only as good as the data they are fed.
4. Optimising retrocession
Managing the mix between risk retention and retrocession is key to ensuring the best protection vs cost ratio and safeguarding against future volatility. Automated tools, real-time data and analytics can help reinsurers optimise their risk-return profiles across complex programmes.
5. Delegated authority business
Reinsurers are being more selective with their capacity which is understandably seen as a threat to MGAs. However, MGAs that access high-quality data can differentiate themselves while helping reinsurers seize on profitable growth opportunities. With the right tools, MGAs can select, write and manage risks effectively. In parallel, systems can ensure they are automatically adhering to the underwriting guidelines and authorities set out by the reinsurer/ With this level of automation, detailed risk information can then be reported to their capital providers through real-time integrations.
Raising rates and tightening terms are effective tools to help reinsurers recover from years of soft market conditions but, as we have seen before, what goes up must eventually come down. Those who will succeed over the long term will be those with the best quality data and the acumen to interpret that data – empowering them to optimally manage their risks and write profitable business in both hard and soft market cycles.
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