PwC says a vital focus is the still underpenetrated markets of South America, Asia, Africa and the Middle East. This, being a consultant’s report, presents an opportunity to shoehorn in an acronym that doesn’t quite work. PwC refers to these regions collectively as the SAAAME market. (Surprisingly, the consultant does not pronounce this loudly and in monotone, like a teenager would pronounce “Laaaame”, nor does one elongate the A’s in a husky drawl, like a fashionista might refer to you as “Daaaarling”. Instead, PwC insists it should be pronounced with two syllables, like Sammy, as in Sammy Davis Junior.)
Here lies the rub: “Crucially, this isn’t just going to be a one-way path, with Western reinsurers moving into emerging markets. Developed market reinsurers may face increased competition on their home turf if a well-capitalised SAAAME giant decided to move in and compete aggressively, either using rates or trading political clout and access to markets for business from established clients in developed markets. Is your business prepared for this potential threat?” asks the report.
In addition, as anyone even half awake during September’s discussions in Monte Carlo will have noted, the strong growth in insurance-linked securities (ILS) is also reshaping parts of the market.
“The key question for sponsors is how to develop untapped markets rather than cannibalising existing reinsurance demand,” says the report. “This challenge is mirrored on the investor side. As more capital moves into the market, investors may need to accept new types of risks or more extreme risks to maintain their target yields.”
The report warns that doing what you’re doing now a little better is no guarantee of survival or success in this evolving marketplace. “Similarly, your ‘fiercest competitors’ may not be your traditional rivals, but new entrants or new ways of doing business that you haven’t accounted for,” it adds.
The shift means “much greater use of your risk expertise”, thinks PwC. For the nimbler competitors, that will provide opportunities to diversify into primary insurance, predicts the report. Life reinsurance, pandemic risk and renewable energy offer other traditional market opportunities.
In these SAAAME markets, reinsurers face challenges from licensing and ownership restrictions, as well as mandatory cessions to local reinsurers in some places (something the report says is set to abate with the World Trade Organisation levering emerging insurance markets to open up).
The report points out the potential for a firm such as IRB, China Re or GIC to emerge as a dominant player amid the global competition as markets are opened.
“With their strong capitalisation, they could adopt aggressive pricing strategies, or use their local political clout to enhance the access of potential clients to their local markets. Small and mid-size reinsurers could become targets for acquisition as the SAAAME groups look to build up their expertise, diversification and international footprint or larger domestic companies seek to consolidate in the face of new global threats,” the report says.
It adds: “The question for the wider reinsurance market is how many global players it can accommodate once the SAAAME giants begin to realise their international ambitions, opening up the possibility of mega-mergers in the future.”
If all this is enough to get you thinking about packing it all in, do not fear: PwC has helpfully identified 10 attributes for the companies that will best be able to overcome their fiercest competitor and lead the market in the future.
They will be global players, with sufficient local presence in the major markets to ensure they can access business in each market effectively;
They will be known for their advanced capital and risk modelling and technical excellence in pricing, with am aim to make an underwriting profit over the cycle;
They will be headquartered and have subsidiaries in tax and regulatory efficient domiciles;
They will write both direct and reinsurance business, allowing them to take on peak risks as well as allow global companies to access the wholesale market without needing a captive;
They will have access to the capital markets, both to originate solutions for basic business as well as to reload capital after a large event;
They will use their data, technology and client data to create pricing and risk management advantage for themselves;
They will be innovators on product and risk type, proving real-time reporting of claims and risk management tools;
They will have strong brands within and outside the insurance industry;
They will focus on the need to manage their asset portfolio and extract maximum returns consistent with their risk appetite;
and they will be politically savvy, working with governments and other key stakeholders to offer cover in areas others may be reluctant to enter.
Simple. If this does not sound like you, perhaps it is time to pack it in.
The report ominously concludes: “Less agile counterparts could face the slow death of margin erosion as they compete over increasingly commoditised low value business. They may even run the risk of complete marginalisation if an ambitious and strongly capitalised new market entrant moves in to sweep up business where the only differentiator is price.”