Navigating the future of insurance and reinsurance

The days of “scale for the purposes of scale” alone are going the way of the dinosaur.

Super large or “too big to fail” insurance (& reinsurance) companies will be like big whales waiting to be harpooned by shareholders or activist investors.

These companies will have all this excess capital and under-performing results… investors will demand it returned.   Especially as other markets and sectors are returning better returns on the investment.

Insurance companies that have large balance sheets of low or under-performing bond portfolios, with decreasing underwriting margins =recipe for M&A.

See our article on what the Insurance industry learning from Baseball and what happens if you are still focused on scale alone.

Data & Analytics

The tools of today’s day and age will require nimbler and more analytic players.
If you are keeping scale or the purpose of scale alone, you are probably a shark that can’t keep up with the others and will be devoured.  There are some powerful tools and data that we as an industry have failed to collectively analyze and ask for historically – and the pressure will increase unless the game is stepped up.  See our discussion about What the insurance industry can learn from Baseball.
The ability to utilize data to find the Signal within the Noise, is going to be a skill that will be rewarded by shareholders.  In turn also decrease volatility and while returning excess capital to shareholders, increasing ROE’s.  And driving up share prices. Win/Win/Win.

Adverse Selection

As we all know, adverse selection is a real issue and if your risk selection is flawed because your team doesn’t have the right tools….prediction…there will be blood in the waters..

Capital and Returns for Shareholders

The future insurers and reinsurers will be expected to achieve positive returns on their capital, not be large floating bond funds with no generation of alpha.
Matching the appropriate risk & duration with investors appetite will continue to be an evolving business model on the carrier side.   We are seeing examples of this at Arch, ACE/Chubb, etc.
Many would agree, without a major shift in risk appetite, we can expect margins to continue to compress.
That’s why Insurers and reinsurers are increasing share buy backs, returning excess capital to shareholders in forms of dividends, there by on the same or similar underwriting returns increasing ROE’s.  They are driving up share prices.
This is a powerful lever of buying back shares, returning capital to shareholders and improving ROEs on a smaller capital base.  Companies that successfully do this will see good appreciation in stock prices.

Underwriting Margins

Generating Underwriting returns has been and will be the future of the industry, but the competition is getting tougher with the recent entrance of new “total return” players.

These hedge fund based players are based upon minimal underwriting returns and maximizing the investment returns or float.

Although the total return model has come under stress with current equity markets, this isn’t anything new and new entrants will continue to be attracted to the float insurance and reinsurance offers.  Similar to the philosophy of Warren Buffet and Berkshire Hathaway.  I just don’t know anyone who has the track record to match returns with the “Oracle of Omaha”.

Mergers and Acquisitions

We can anticipate the smaller players will continue to serve as M&A targets.

We will see what results these teams have, as if they cant generate combinations of underwriting margins and strong consistent investment returns, it doesn’t sounds like investors will stick around as a good long term play.

However, readers please evaluate each investment on it’s own merits, the basis of both investment and underwriting returns (expected vs. actual).

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Arnold Smith

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