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LONDON — Insurers and reinsurers are reassessing their business strategies as prices soften, exposures evolve and new capital providers drive change throughout the commercial insurance market.
To respond to the changing commercial environment, companies will have to offer coverage that protects balance sheet risks not covered by insurers and explore new profitable lines of business wherever they are available, several industry executives say.
Catastrophe reinsurance rates already have fallen, and insurance and reinsurance buyers are seeing lower or weakening prices in several other market sectors. And nontraditional capital providers are keeping sectors of the market flush with capacity.
While new capital entering the market is a direct threat to traditional market participants, resourceful companies can use the new capital to their own advantage, executives say.
Insurers and reinsurers still should be well-positioned to offer buyers relevant coverage and operate profitably as the market softens, but they will have to be innovative and adaptable, several of the executives said during panel sessions at the International Insurance Society's 50th Annual Seminar held in London last month.
Insurers and reinsurers, who generally have pushed prices higher over the past several years, are dropping prices in many sectors, said Nikolaus von Bomhard, CEO of Munich Reinsurance Co.
“I was proud of the industry for a long time because of how we managed the financial crisis — by and large, I think it was outstanding ... but now we come to the point where I lose my pride a little bit because I see us falling into the old traps that I hadn't seen us falling into in the last 10 years,” Mr. von Bomhard said.
Reinsurance prices in particular are softening in many areas, said Denis Kessler, chairman and CEO of Scor S.E. in Paris.
“The environment is challenging, and there are headwinds that we all face, but I remain optimistic,” he said.
While the market for reinsurance may be soft generally, individual markets differ and reinsurers can redeploy their capital in profitable markets and profitable lines of business, Mr. Kessler said. Reinsurers that mainly offer commoditized coverage, such as some natural catastrophe coverage, may suffer in the current market, but diversified companies can look to other areas, he said.
“We are in a cyclical industry, and every good company has a set of strategies and a plan for a soft market and a different set of strategies and plans for a hard market,” said Albert Benchimol, president and CEO of Axis Capital Holdings Ltd. in Bermuda. “It's about risk selection. Prices may be down, but not every building is going to catch on fire, not every company is going to get sued, so risk selection and analysis is very important.”
Insurers and reinsurers also can grow by offering coverage that addresses the evolving risks of their policyholders, said Inga Beale, CEO of Lloyd's of London.
Commercial entities are facing a changing array of risks and many of their traditional risks still are not covered by insurance, she said.
In general, insurers take on only about 10% of the balance-sheet risks that companies face, so there is a huge opportunity for insurers to grow, even in mature markets, Ms. Beale said.
However, insurers need to adapt if they are to address the new risks facing policyholders, said Evan Greenberg, chairman, president and CEO of Ace Ltd.
“Our ability to remain relevant ... and not marginalized is questionable,” he said.
Commerce is developing “in intangible areas” such as intellectual property, cyber technology and biochemistry, and insurers will have to offer meaningful protection to address those risks to remain relevant, Mr. Greenberg said.
Also, insurers have to adapt to meet the needs of a new generation of risk managers who are imposing new demands on the industry, said Dominic Casserley, CEO of Willis Group Holdings P.L.C.
“We are seeing risk managers move from a generation who were primarily insurance purchasers ... to a generation who may be differently educated and who have become true risk managers whose clients are the CEO and CFO,” he said.
And those executives are asking risk managers questions about the correlation between traditionally insured risks and other risks that their companies face, Mr. Casserley said.
The insurance and reinsurance industry itself is changing as well, and those changes are affecting how the industry offers coverage.
Alternative capital providers such as hedge funds, pension funds and, increasingly, individual investors are providing significant amounts of capital through the insurance-linked securities market, several executives said during the conference.
While natural catastrophe reinsurance historically has been the most profitable area of the reinsurance industry, the business “is breaking away to financial markets and that's challenging for the traditional market,” said Urs Ramseier, chairman of Twelve Capital, a Zurich-based investment manager specializing in the insurance industry.
Other reinsurance risks, such as liability risks, theoretically also could be transferred to capital markets, but it is difficult to structure capital market products with an appropriate trigger to address those risks, Mr. Ramseier said.
But as nontraditional capital providers expand in the reinsurance market, traditional reinsurers also can benefit from the trend through purchasing retrocessional coverage from the new markets, investing in insurance-linked securities and offering catastrophe bonds, Mr. Kessler said.