Evolving supply and demand requires bespoke solutions

Despite what your Economics 101 professor taught you in your first year of college or university, market equilibrium is not based simply on price.

The reinsurance industry is far too complex to be defined as a one-dimensional world where price exploration is the sole definition of efficiency. 

The pandemic and the increased frequency of catastrophe events in the most recent five-year period has proved that the reinsurance industry has a history of responding with innovation after any big shock event. And that capital has always found a way to support the risk.

However, following the record frequency of North American and global natural catastrophes, social inflation and a historic pandemic in recent years, the market is fatigued and wants to work out new ways to identify, analyse and control risk.

As a result, overall industry capital should now be best characterised as expanding, but also shifting.

(Re)insurers are continually re-evaluating the risk-reward paradigm and electing in many cases to move further away from the losses created by more catastrophic events.  

Meanwhile, the reinsurance market has seen a number of solutions emerging in the form of insurtechs and technology solutions, which has led to a polarised debate around the future of reinsurance and broking. Many believe that traditional reinsurance models should be transformed, with a focus on automated placement in order to underpin success.  

However, as risk appetites change and fresh capital continues to enter the system, our supply and demand balance is shifting. Many placements in 2021 saw a trend of oversubscribed reinsurance layers and the return of excess capacity to a reinsurance market hesitant to redeploy that capital in the same areas as in 2016-2020.  

This shift away from loss may manifest itself in a tightening of terms and conditions – including increased primary policyholder deductibles, greater primary carrier retentions on reinsurance programs and more stringent terms, conditions and coverages offered by primary carriers and reinsurers.  

Now more than ever, clients need risk to capital cohorts that can manage the shift and provide dynamic and bespoke solutions that fit the needs of each portfolio. In an increasingly complex marketplace, there should continue to be a premium placed on intermediaries that can ideate, iterate and most efficiently align risk and capital.  

So, what’s the answer? Efficiently aligning risk and capital includes working closely with cedants and reinsurers to understand risk appetites, as well as structuring innovative new solutions that meet the objectives of all parties.

This process can produce leading and efficient solutions that include new and innovative uses of dual-trigger layers, sub-limits, inuring reinsurance, deductibles and attachment points while staying within the guidelines of the capital dedicated to support the risk.

In a dynamic and shifting market, exploration of the possible (whether face-to-face or virtually) will allow us as an industry to reshape the supply and demand imbalance and most efficiently pair risk with capital.

You can also view this article in the first weekly edition of #ReinsuranceMonth, which was published on 1 September by The Insurer and is available to download for free at theinsurer.com/reinsurance-month/weekly-editions.