The future of reinsurance (RI) markets is being reshaped by new technology, alternative capital and reinsurers bundling value-added services with reinsurance. These forces are leading to new trends, in a backdrop of changing RI buying patterns, emerging risks and the realities of ever changing regulation. Placement processes have evolved at a slow pace while acquisition costs are on the rise. The reinsurance placement process includes discovering RI prices, agreeing to contract terms and conditions, and allocating limits among several reinsurers. It is a complex, slow and expensive process that involves face-to-face meetings with numerous handovers. The ensuing inefficiency and opacity makes this market ripe for more automation.
The technology to automate complex processes that require intermediation by trusted parties has advanced in the past few years. Helping with the uptick are participants like the Lloyd’s market who have mandated electronic placement. However, several RI contracts are distinctive enough that automated placement is impractical due to the complexity. Property and casualty RI programs being straightforward, lend themselves to more automated placement. Insurtechs such as Tremor saw this opportunity and began in this part of the market.
Auction site Tremor improves price discovery for risks, making transactions more cost efficient. It has found success with more traditional cat reinsurance. Tremor launched a weekly Industry Loss Warranty (ILW) auction in the middle of the COVID-19 disruption to keep delivering liquidity through any potential market dislocation. It provides key marketplace management information making it an effective risk trading platform to draw both reinsurance buyers and sellers.
Features include quoting tools that allow cedents and reinsurers to more precisely express their terms, aggregate reports that offer insight into transactions and the wider market, and a portal enabling brokers to leverage the marketplace on behalf of clients. Reinsurers can add subjectivities after expressing supply curves and capacity limitations. With subjectivities, one layer subsidizes another to maximize a reinsurer’s allocation while ensuring the aggregate price still meets the company’s needs.
Tremor Technologies’ risk transfer marketplace counts 33 Lloyd’s of London syndicates among the risk capacity providers signed up, representing over $33 billion of capacity. Nearly a fifth of companies signed up to provide capacity are ILS funds.
Akinova allows brokers to list risks with accompanying documentation and conduct auctions with specific capacity providers or the marketplace as a whole. Taking RI online and logging trades electronically is a substantial step forward compared to the current shuffling of papers. The auction functionality combined with market intelligence ensures a more efficient market. Chat and news functionality adds a community building touch.
Vested interests in the current system can be strong, making any change a challenging endeavor. Incumbent underwriters and brokers with profitable, multi-year relationships are likely to resist changes. Established culture and ways of working may block change to entrenched processes. One major reinsurer declined because underwriting was worried about revealing pricing.
B3i is an interesting industry initiative, which has eighteen shareholders including many of Europe’s largest groups including Ageas, Allianz, AXA, Generali, Hannover Re, Liberty Mutual, Munich Re, SCOR, Swiss Re and Zurich. Its Cat XoL is is built on distributed ledger technology. The application supports end-to-end digitization of the placement process from cedent to reinsurer. Parties can negotiate terms, agree rates and complete placements.
Given the rapid and drastic shift to remote working, it was just a matter of time before the reinsurance market would break free from many of its person-to-person interactions. Automated placement is a positive for distribution platforms and insurers. Platforms gain market power, insurers would see rates fail, from lower distribution costs and lower pricing as platforms increase competition among reinsurers. For reinsurers, the implication is more nuanced. Access to risk expands, but so does competition.
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