Reinsurers lead on innovation, third-party capital a highlight: AM Best


The reinsurance sector is leading on innovation across the broader spectrum of the insurance space, according to rating agency AM Best, who note that the use of third-party capital is one of the highlights that has helped to deliver flexible, off-balance-sheet capital.

Based on its assessment of innovation within the global re/insurance industry, AM Best found that the reinsurance sector had the largest amount of innovation “Leaders” again this year.

Reinsurers “have had to innovate in areas of enterprise risk management, portfolio construction, and risk accumulation,” AM Best explained.

The rating agency believes that as reinsurance contracts have a “relatively straightforward composition”, they lend themselves more readily to innovation.

AM Best further explains that, “Some offshore domiciles have embraced innovation, enabling reinsurers to craft terms and conditions and charge rates that incorporate the results of sophisticated risk modeling, contingent pricing, and novel ways of approaching difficult risks.

“These efforts may include tailored cyber coverages, introduction of alternative capacity vehicles, and products that specifically address frequency and severity issues regarding secondary perils.

“A reinsurer’s value proposition is closely aligned with an innovative culture, which rewards creative product design and uses internal risk modeling to seek out profitable opportunities.”

While competition in reinsurance has intensified greatly over the last 25 years, reinsurers have also learned to harness trends to their benefit.

Including the appetite of the capital markets to invest in catastrophe risk linked assets, such as catastrophe bonds and other insurance-linked securities (ILS).

AM Best notes that, “Reinsurers have made significant strides forward by matching informed risk modeling with third-party capital in sidecars, cat bonds, and other insurance-linked securities (ILS) structures that are now being developed and used by relatively small reinsurers.”

Going on to say that, “These strategic partnerships benefit reinsurers by providing flexible off-balance-sheet capital, while the capital providers benefit from a more informed view of risk.”

AM Best also notes that reinsurance firms are becoming increasingly technically adept.

“Reinsurers are using the knowledge they gain from predictive modeling and AI to develop new products that will help clients manage risk, such as providing supplemental information in addition to the standardized catastrophic peril model used, making them even more valuable business partners,” AM Best said.

For us, looking ahead, it is the advanced reinsurance players with a mature approach to third-party capital partnerships, as well as the technical capabilities to harness advanced solutions such as AI, that will find themselves breaking new ground in years to come, in terms of identifying how best to slice, dice and share risks across owned and rented balance-sheets, enhancing their capital efficiencies at the same time.

Reinsurance continues to only scratch the surface on what’s possible with advanced technology today, in portfolio management, construction, and product development terms.

But we expect to see a rapid advancement towards much more active portfolio management techniques, more efficient ways of trading and transferring risk, as well as in the use of advanced technology to better identify the capital source suited to matching with risks and the layers of programs, as the industry embraces AI and other solutions more fully over the next two to five years.

That’s not to mention the significant efficiencies that could be generated by really analysing waste in the market chain, to reduce expense, lower cost-of-capital, for the ultimate benefit of the insurance consumer.

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