06 May 2015
Reporter: Stephen Durham

Soft market a challenge for reinsurers, says Xuber

Ongoing soft market conditions have been cited as the biggest challenge facing reinsurers, while analytics and modelling represent the greatest opportunities, according to research from Xuber.

The software house surveyed senior professionals including insurers, reinsurers, brokers, industry organisations, lawyers, insurance-linked securities (ILS) investment managers, analytics firms and modellers, across the UK, US, Bermuda, Canada, Channel Islands, Cayman Islands, Germany and Switzerland.

Of those surveyed, 81 percent listed soft market conditions among their top five concerns, and this was followed by competition from third party capital (66 percent), and mergers and acquisitions (66 percent).

According to Xuber, the problems caused by a soft market are being compounded by “the emergence of alternative capital flooding the industry” in the form of catastrophe bonds and other sources of ILS.

As one to the survey respondent said: “The real threat is publicly-listed insurers and reinsurers who have to maintain scale to appease their shareholders. Ergo, they’re writing everything.”

“What happens to all those classes of business that (for years) have been propped up by property catastrophe? If the margin in [catastrophe] continues to be eroded, how can businesses afford to maintain these marginal lines?”

The last 12 months have seen a wave of mergers and acquisitions activity as reinsurers have joined forces to achieve scale and most observers are predicting this will continue.

Although revealed as a joint second challenge, respondents generally viewed this as a positive force as mergers and acquisitions create opportunities for smaller organisations to create niche and specialist offerings.

Better use of analytics and modelling was cited by 71 percent of executives as the top opportunity to refine the identification of risk and reward to empower better business decisions.

Partnering with third party capital was the second top business opportunity with 69 percent of respondents listing it in the top five.

Although third party capital was also listed as one of the key challenges, Xuber stated that reinsurers “understand that new investors entering the market do not possess the unique expertise to expertly manage risk”. Consequently reinsurers have a distinct opportunity and advantage over alternative capital.

Chris Baker, executive director at Xuber, commented: “These results corroborate the findings released in the Bermuda survey we conducted last year where soft market conditions were cited as the key industry challenge.”

“Surviving and prospering in the soft market will require companies to operate at optimal efficiency, and their IT systems will be central to this. Only the savviest of reinsurers who recognise that technology can be the catalyst for change will emerge unscathed.”

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