Reinsurance tutorials #10 • The Basics
What is tomorrow's reinsurance?
Today there is one issue that cannot be ignored: the COVID-19 pandemic.
The UNO has delivered an estimate of $8.500 Bn economical cost worldwide, which represents more than the worldwide premium of the insurance industry!
Clearly, there are extreme risks which are beyond the financial capacity of the insurance and reinsurance industries, and that call for a global private-public partnership to try to provide solutions. Some working groups have already been designed in the UK and in France…
Remember: To provide a service that takes out the volatility of risks from insurers, reinsurers try to secure their situation by spreading their risks, both geographically and in terms of line of business.
In the case of COVID 19, this does not work: the crisis is worldwide, reinsurers will have to pay for losses out of Europe, America, Asia, but also for different lines of business such as credit, BI, event cancellations, liabilities such as E&O, D&O, Life and Health, and so on.
It becomes not about compensation, but about accumulations.
Recently, Lloyd Chairman John Neale estimated the cost of the insurance industry at $200 Bn out of which half was on the liability side (losses), the other on the assets side (that is, the decrease in value of insurance company investments).
Some reinsurers may undoubtedly face difficulties and have solvency ratios issues. There might be a push for Mergers and Acquisitions, withdrawals from the market, new players (investors coming in).
The supply, i.e. the reinsurance offer, will at first reduce faced with an increased demand so that the prices which have started to increase will harden further.
In the future, everyone will be busy trying to close the protection gap as our world always asks for less risks, more cover, which means more financial means.
As for alternative solutions, provided by financial institutions, these have appeared and developed over the last 20 years under various forms called Cat bonds, ILS, ILW, side cars, or even collateralized covers.
Today, alternative solutions generate between 15 and 20% of the worldwide capacity dedicated to reinsurance.
They compete with reinsurers, but also play a very important role in protecting them.
They add to the global financial supply. While we had an oversupply in some lines of business such as Cat Property which push the prices down, there is a need to face extreme risks for more financial capacity.
That will constitute a challenge in the future.
To conclude, it can be said that our world is changing, new risks are emerging such as cyber, older ones such as the pandemic, both posing threats that had not been properly assessed. Reinsurance has to adapt to contribute to solutions. This is our role and our duty.
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