Ripe for Reinvention
The global reinsurance market is facing a series of unique challenges, according to the major players in the market who assembled in Monaco for the annual Les Rendez-Vous de Septembre.
The Monte Carlo Rendez-Vous has always marked a key point in the year, as reinsurers, brokers and rating agencies assess where the market stands as it enters the last three months of 2014, especially when it comes to renewals. And there is now a common consensus that the reinsurance market is facing a softening market environment.
James Vickers, chairman, Willis Re International, told Risk & Insurance® that continued softening of the reinsurance market set the overall mood at the Rendez-Vous, with good results and low levels of major claims leading to a plentiful supply of capacity but an increasingly lower level of demand for reinsurance.
“The cost of reinsurance is dropping and there are no positive signs on the horizon,” Vickers said. “The trend is also for more clients looking to retain risk. But some reinsurers are at or near the bottom and if the market softens any more, they and the ILS (insurance-linked securities) investors may well start to walk away.”
According to Vickers, another issue raised at the Rendez-Vous was what amounted to the “tiering” of reinsurers by cedents as they look to consolidate their reinsurer line-up, rating reinsurers according to size, security and breadth of service offering. Bigger beasts like Swiss Re and Munich Re are seen as being in a “premier” division and others in less important divisions beneath them.
In this climate, Vickers said, clients are increasingly looking for added value, asking themselves what, precisely, they’re getting from their reinsurance contracts — not to mention their reinsurers. “Terms and conditions are clearly on the agenda. It’s a legitimate tactic for reinsurers to maintain premium levels by offering broader terms and conditions. They’re being pragmatic,” he said.
“With this background, buyers are being more sensitive when it comes to where they are placing business. They need to be very clear in their minds who their long-term and sustainable reinsurance partners are going to be.”
The state of the reinsurance cycle was also a topic of interest for Swiss Re. Speaking at the Rendez-Vous, Michel M. Liès, chief executive officer of Swiss Re Group, said, “In my 35 years of experience in the business, I’ve seen many turns of the reinsurance cycle and have learned that pricing is only one dimension of it.
In order to succeed, you need to develop your business model based on a deep understanding of market fundamentals, participants’ behaviors and the evolution of your clients’ needs. Rigorous cycle management, portfolio steering and underwriting discipline remain the obvious tools for profitable success. There are opportunities for our industry — especially in high-growth markets.”
Hannover Re agreed about the softening of the market, adding that the pressure on prices, especially in the U.S. natural catastrophe business, has been further exacerbated by the inflow of capital from alternative sources — i.e., the ILS market, which for its part is experiencing substantial cash inflows from pension and hedge funds.
In a statement released just before the event, Hannover Re added, “As a further factor, the protracted low level of interest rates is putting a strain on reinsurers, with pricing discipline taking on particular significance in the face of diminished investment returns. These general conditions are in turn likely — provided the current year is once again spared market-changing major loss events — to shape the treaty renewals as of 1 January 2015.
“Innovative insurance solutions in new areas are the key to long-term profitable growth.” — Torsten Jeworrek, reinsurance chief executive officer, Munich Re
“On the one hand, competitive pressure will therefore probably remain high. On the other hand, reinsurance prices should — leaving aside a few exceptions — stabilize relative to the business renewed for the 2014 underwriting year because scope for further rate reductions is limited in light of the return on equity required by reinsurers.”
In its press conference at the Rendez-Vous, Munich Re announced it believes that there will be a moderate rise in demand for property-casualty reinsurance. In the highly developed markets in Europe and North America — which already have large premium volumes — it anticipates growth of 1 percent in each of the next three years. In Asia-Pacific and Latin America, the growth forecasts are 3 percent and 4 percent, respectively, but starting off from a much lower level, with this growth being fueled partly by increasing market penetration and rising values of material assets, particularly in emerging markets.
Torsten Jeworrek, Munich Re’s reinsurance chief executive officer, stressed that “innovative insurance solutions in new areas are the key to long-term profitable growth.”
According to Munich Re, the environment for the start of negotiations on reinsurance treaty renewals at Jan. 1, 2015 is still dominated by strong competition and extremely low interest rates for investments. Years where losses were relatively low are magnifying pressure on prices.
Jeworrek said, “We provide cover for loss events that do not occur every year, but we need to earn adequate premiums over all those years. In our business, if your thinking is short-term, you pay a high price later.” Munich Re underlined that it intends to stick with its rigorous underwriting policy.
Fitch Ratings’ fundamental outlook for the reinsurance sector is negative due to the softening market. In addition, the onslaught of alternative capital leads it to expect that prices will continue to fall, and that terms and conditions will weaken into 2015 across a wider range of business lines.
Fitch added that price adequacy is expected to decline in 2015, although rates of return are expected to remain above reinsurers’ cost of capital. Earnings pressure is forecast to increase across the sector as softening pricing in property business will migrate to other lines, such as casualty, as reinsurers look to redeploy capital in more profitable areas.
“Persistence of low investment yields increases the risk of adverse investor behavior as both reinsurers and investors seek higher returns,” the ratings agency said in a statement. “The inflow of alternative capital has included select use of hedge fund-based investment strategies, which not only impact balance sheet quality, but are designed to provide a pricing advantage for the reinsurer that can aggravate softening markets.
“Alternative reinsurance and changes in reinsurance purchasing are expected to have long-term implications. The growth of alternative capital is viewed as a credit negative for traditional reinsurers’ ratings, as a significant portion of capital-market funds is expected to remain permanent. Thus, Fitch views the current soft market as not just a normal cycle.”
“Some reinsurers are at or near the bottom and if the market softens any more, they and the ILS (insurance-linked securities) investors may well start to walk away.” — James Vickers, chairman, Willis Re International
Fellow rating agency Standard & Poor’s believes that reinsurers have a continuing role to play in the global economy, but they must find a way to prove their worth to new clients and reinvent their business models to remain relevant in a climate of rapidly changing market dynamics.
It stated that: “Competition from traditional and non-traditional sources in reinsurers’ core markets is forcing them to make adjustments to retain their relevance in a rapidly changing global economy. [We] believe that the traditional reinsurance business model is under threat from external sources, such as corporations and technology companies that could become substitute providers of risk protection. If reinsurers fail to make use of their key strengths and expertise to establish their relevance to new and existing clients, the traditional reinsurers could find themselves marginalized.
“As reinsurance capacity outstrips demand, competition in the global reinsurance market is intensifying. Premium rates declined materially at the major renewal dates in 2014. As reinsurers look to deploy excess capacity, we observe that competition is spilling over from the catastrophe lines of business, and is now weakening pricing in most lines around the globe.”
Rating agency A.M. Best came to a somber conclusion in a briefing note on the global reinsurance market that it released a month before the Rendez-Vous. It stated that: “Given where rate adequacy is, it will continue to take optimal conditions, including benign or near-benign catastrophe years, a continued flow of net favorable loss reserve development and stable financial markets, to produce even low double-digit returns. Such return measures would have been considered average or perhaps mediocre just a few short years ago.
“In our view, companies with diverse business portfolios, advanced distribution capabilities and broad geographic scope are better positioned to withstand the pressures in this type of operating environment, and have greater ability to target profitable opportunities as they arise. It also places increased emphasis on dynamic capital management in order for companies to manage the underwriting cycle and remain relevant to equity investors.”
The café terraces of Monte Carlo will be bathed in sunshine, literally and figuratively, when reinsurers and brokers meet for Les Rendez-vous de Septembre (RVS), commencing Sept. 9.
Monaco is one of the few European locations to avoid the dark economic clouds that descended on the continent in the wake of the banking sector’s meltdown and ensuing financial crisis. Following five years of austerity, voters used the European Parliament elections in May this year to voice their dissatisfaction.
Yet, despite this sullen atmosphere, the biggest casualties of boom-to-bust such as Spain, Ireland and Greece have been steadily pulling out of recession over the past year.
While Munich Re is averse to speculating on the mood that is likely to prevail at 2014 RVS, its latest Insurance Market Outlook (PDF), published in May, predicted that a broad-based economic recovery across many countries would see global insurance premium growth accelerate to 2.8 percent this year, from 2.1 percent last year, with a further improvement to 3.2 percent in 2015.
Munich Re’s chief economist, Michael Menhart, noted that the pick-up comes after three years of relatively low growth rates.
“In many cases, reinsurance has been used as a means of managing any potential earnings volatility arising from these larger retained portions.” — Charles Whitmore, managing director, head of the property solutions group, Guy Carpenter
Charles Whitmore, managing director, head of the property solutions group at Guy Carpenter, said the “improving economic environment in Europe has enabled insurance carriers to repair balance sheets and press ahead with consolidation and increased retention appetites.”
“In many cases, reinsurance has been used as a means of managing any potential earnings volatility arising from these larger retained portions.”
This generally optimistic outlook was tempered by the fact that Munich Re expects reinsurance premium growth to be more modest than that for primary insurance.
Over the next six years, the German reinsurer expects average growth in global reinsurance markets in real terms of little more than 2 percent per year. RVS attendees will also look back on this year’s January 1 and April 1 renewals, where pricing pressures saw declines of as much as 20 percent for U.S. CAT business.
As Munich Re’s report noted, while the potential of the world’s emerging markets — particularly the so-called BRIC economies of Brazil, Russia, India and China — was a hot topic a few years back, for the time being the major industrialized nations are back in the driving seat.
While the group expects China’s premium volume (which was around $284 billion in 2013) to double by the end of the decade, it will still lag way behind the United States, whose premium volume it predicts will pass the $1,624 billion level by 2020.
Possibly the biggest BRIC disappointment — which attendees may seek to explain — is Brazil. Hopes were high when the country began liberalizing its reinsurance market six years ago, ending the near-70 year monopoly of state-owned IRB.
Within four years, more than 100 reinsurers had established a presence in the country. However, this summer’s World Cup underscored how the economic optimism in 2007, when Brazil won the rights to stage the contest, has steadily dissipated.
Insurer confidence on the country’s economic outlook has fallen to a record low and Standard & Poor’s is among those warning that profitability in the Brazilian reinsurance market remains elusive.
Many reinsurers instead appear to be focusing on gaining a presence in India, once the long-delayed Insurance Laws (Amendment) Bill 2008, which would allow foreign reinsurers to set up offices in the country, is finally cleared by parliament.
France’s biggest reinsurer, Scor, is among those that have signaled their intent to add an Indian operation. Such hopes will have been encouraged by the landslide election victory in May of Narendra Modi. India’s 15th prime minister swept to power on a promise to kick-start an underperforming economy, which reinsurers hope will mean an end to the stalling in opening up its market.
The Top Three
But which trio of issues is most likely to dominate the discussions in Monaco?
“We can be certain that one of the prime themes, as always, will be the prognosis for reinsurance pricing, capacity, [and] terms and conditions at the coming January renewal,” said Christopher Klein, managing director and head of Europe, the Middle East and Africa (EMEA) strategy at Guy Carpenter.
“A second topic will be the continuing influx of new capital into the reinsurance sector from so-called nontraditional sectors, despite the surplus of capacity.
“In the absence of a market-changing loss, continuing pressure on prices and returns can be expected. However, to date, the greatest effect has tended to be in the North American catastrophe market. We will be interested to see if the new capital will start to make significant inroads into the EMEA and Asia Pacific (APAC) regions and non-catastrophe classes.
“Finally,” Klein added, “a favorite topic of discussion at Monte Carlo is speculation about corporate activity and consolidation. This year, we have witnessed some high-profile attempts at consolidation in Bermuda. Expect this topic to continue to make headlines.”
Bryon Ehrhart, chief executive of Aon Benfield Americas, predicted at last year’s RVS that a further $100 billion of alternative capital would enter the reinsurance market by 2018 and said that so far, this prediction is on track.
He cited the decision in early June by the European Central Bank to cut its main interest rate to a record low of 0.15 percent and entering into what the headlines call “uncharted territory” by reducing its interest rate on deposits to a negative figure for the first time, of -0.1 percent.
This could mean that the predicted figure of $100 billion needs revising upwards. As he pointed out, major pension funds are making promises to retirees of returns of 4 percent upwards, against returns on conventional investments that are typically 1.25 percent to 1.5 percent.
Ehrhart cited two relatively recent entrants: Stone Ridge Asset Management — which launched two reinsurance-linked funds as recently as November 2012 and already has $2.5 billion under management — and LGT Capital Partners.
“The impact of the hedge fund reinsurers has been fairly transformative,” he said.
“They have put forward material capacity at very low prices and opened up a whole new set of opportunities for our clients.”
Inevitably, these pricing pressures continue to impact the long-established carriers. As A.M. Best commented earlier this summer, global reinsurance companies in the first quarter of 2014 benefited from below-average catastrophe losses and most continued to report favorable reserve releases, yet those that are publicly traded saw their stock lag the market. From a group of 20, only Bermuda’s Maiden Holdings managed a strong gain (of over 14 percent). The ratings agencies will doubtless dissect this overall sluggish performance at Monte Carlo.
Big Data and El Niño
What else is likely to be on this year’s agenda? The big keynote session or “presentation-debate” will be on Big Data and its potential to significantly change how reinsurers do business. While details of participants were sketchy at the time of writing, the session will be chaired by Michel Liès, chief executive of Swiss Re and the reinsurer said that it “wants to examine with RVS participants and clients how Big Data can enable new business opportunities and how privacy concerns can be addressed.”
Gretchen Hayes, managing director, global strategic advisory at Guy Carpenter, noted the “reinsurance industry is still at the beginning stages when it comes to the potential and competitive advantages of Big Data in combination with predictive analytics.”
“As these technologies continue to advance, insurance companies are reaping the benefits of gathering and analyzing vast amounts of information that come through their own internal networks as well as that of their business partners and even through new external sources.”
Video: The Weather Channel reports on some of the possibilities associated with an El Niño in 2014.
With reports suggesting that there is a 90 percent chance that an El Niño will disrupt global weather patterns this year, the recurring climate phenomenon could also force itself on the discussions.
Beginning as a vast expanse of water in the Pacific that becomes abnormally warm, El Niño has the potential for adverse weather effects ranging from a weaker-than-usual monsoon season in India that starves its paddy fields of vital rain, to scorching heat and bush fires in Australia and sharply reduced fishing catches in South America.
The European Centre for Medium-Range Weather Forecasts predicts that the El Niño phenomenon is highly likely to occur this year; indeed, the organization believes it could potentially be the most damaging since 1997-98, which produced the hottest year on record and a string of natural catastrophes, an estimated 23,000 deaths and total economic losses in the region of $35 billion to $47 billion.
The Promise of Technology
The field of workers’ compensation claims management seems ideally suited as a proving place for the power of technology.
Predictive analytics in the hands of pharmacy and medical management experts can give claims managers the data they need to intervene in troublesome claims. Wearables and other mobile technologies have the potential to give healthcare providers “real-time” reports on the medical condition of injured workers.
Never before have the goals of quick turnaround and transparency in managing claims appeared so tantalizingly achievable.
In the effort to learn more about technology’s potential, in September, Risk & Insurance® partnered with Duluth, Ga.-based Healthcare Solutions to convene an information technology executive roundtable in Philadelphia.
The goal of the roundtable was to explore technology’s promise and to gauge how advancements are serving the industry’s ultimate purpose, getting injured workers safely back to work.
Big Data, Transparency and the Economies of Scale
Integration is a word often heard in connection with workers’ compensation claims management. On one hand, it refers to industry consolidation, as investors and larger service providers seek to combine a host of services through mergers and acquisitions.
In another way, integration applies to workers’ compensation data management. As companies merge, technology is allowing previously siloed stores of data to be combined. Access to these new supersets of data, which technology professionals like to call “Big Data,” present a host of opportunities for payers and service providers.
Through accessible exchange systems that give both providers and payers better access to the internal processes of vendors, a service provider can show the payer the status of the claim across a much broader spectrum of services.
“One of the things I see with all of this data starting to exchange is the ability to use analytics to predict outcomes, and to implement workflows to intervene.”
–Matthew Landon, Vice President of Analytics, Bunch CareSolutions.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes,” said roundtable participant Chuck Cavaness, chief information officer for Healthcare Solutions.
Integration across multiple product lines also produces economies of scale for the payer, he said.
Big Data, according to the roundtable participants, also provides claims managers an unparalleled perspective on the cases they manage.
“One of the things that excites us as more data is exchanged is the ability to use analytics to predict outcomes, and to implement workflows to intervene,” said roundtable participant Matthew Landon, vice president of analytics with Lakeland, Fla.-based Bunch CareSolutions, A Xerox Company.
Philadelphia roundtable participant Mike Cwynar, vice president of Irvine, Calif.-based Mitchell International, agrees with Landon.
“We are utilizing technology to consolidate all of the data, to automate as many tasks as we can, and to provide exception-based processing to flag unusual activity where claims professionals can add value,” Cwynar said.
Technology is also enabling the claims management industry to have more productive interactions with medical providers, long considered one of the Holy Grails of better case management.
Philadelphia roundtable participant Jerry Poole, president and CEO of Malvern, Pa-based claims management company Acrometis, said more uniform and accessible information exchange systems are giving medical providers access to see how bills are moving through the claims manager’s process.
“The technology is enabling providers to call in or to visit a portal to figure out what’s happening in the process,” Poole said.
Another area where technology is moving the industry forward, according to the Philadelphia technology roundtable participants, is mobile technology, which is being used to support adjustors and case managers and is also contributing to quicker return to work and lower costs for payers.
The ability to take a digital tablet to a meeting with an injured worker or a health care provider is allowing case managers to enter data and give feedback on a patient’s condition in real time.
“Our field-based case managers have mobile connectivity to our claims systems that they use while they’re out of the office attending doctor’s appointments, and can enter the data right there into the system, so they’re not having to wait until they are back at the office to enter critical clinical documentation,” said Landon.
Injured workers that use social media, e-mail and the texting function on their mobile phones are staying in better touch with those that are charged with insuring that they are in compliance with their treatment plans.
Wearable devices that provide in-the-moment information about an injured workers’ condition have the potential to recreate what is known in aviation as the “black box,” a device that will record and store the precise physical state of an employee when they were injured. Such a device could also monitor their recovery process.
But as with many technologies, worker and patient privacy also needs to be observed.
“At the end of the day, we need to make sure that we approach technology enhancement that demonstrates value to the client, while ensuring patient advocacy,” Landon said.
As payers and claims managers set out to harness the power of computing in assessing an injured worker’s condition and response to treatment, the cycle of investment in companies that serve the workers’ compensation space is currently playing a significant role.
The trend of private equity investing in companies that can establish one-stop shopping for such services as medical case management, bill review, pharmacy benefit management and fraud forensics has huge potential.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes.”
— Chuck Cavaness, Chief Information Officer, Healthcare Solutions.
The challenge now facing the industry, one the information technology roundtable participants are confident it can meet, is integrating those systems. But doing so won’t happen overnight.
“There’s a lot of specialization in the industry today,” said Jerry Poole of Acrometis.
Years ago there was a PT network. Now there’s a surgical implant guy, there’s specialized negotiations, there’s special investigations, said Poole.
The various data needs to be integrated into an overall data set to be used by the carriers to help lower the cost of risk.
Securing Sensitive Information
Long before hackers turned the cyber defenses of major national retailers inside out, claims management professionals have focused increased attention on the protection of data shared across multiple partners.
Information security safeguards are changing and apply to what technology pros refer to “data at rest,” data that is stored on a particular company’s servers, and “data in flight,” data that is transferred from one user to another.
Mitchell’s Cwynar said carriers want certification that every company their data is being sent to needs to have that information and that both data at rest and data in flight is encrypted.
The roundtable participants agreed that the industry is in a conundrum. Carriers want more help in predictive analytics but are less willing to share the data needed to make those predictions.
And as crucial as avoiding cyber exposures and the corresponding reputational damage is for large, multinational corporations, it is even more acute for smaller companies in the workers’ compensation industry.
Healthcare Solutions’ Cavaness said the millions in loss notification and credit monitoring costs that impact a Target or a Home Depot in the case of a large data theft would devastate many a workers’ compensation service vendor.
“They’d be done in a minute,” Cavaness said.
The barriers to entry in this space are higher now than ever before, continued Cavaness, and companies wishing to do business with large carriers have the burden of proving that its security standards are uncompromising.
Workers’ compensation risk management in the United States is by its very nature, complex and demanding. But keep in mind that those charged with managing that risk get better results year after year.
Technology has a proven capability to iron out the system’s inherent complications and take its more mundane tasks off of the shoulders of case adjustors.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.