Contributor: Patrick Thiele CEO, PartnerRe Ltd.
The new economic reality that underpins our industry requires a shift in thinking away from cycle management to a longer term “reality” management. Patrick Thiele looks at what re/insurers need to do to remain profitable in this low growth environment.
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As we enter a new renewals season, it is clear that the environment in which re/insurers operate is changing. The non-life market has been shrinking for the last three years. Technical pricing is eroding further each year and the economic forecast and demand for insurance in the Western world is not encouraging.
The industry has seen peaks and troughs before of course – over the last decade we’ve had an exceptionally good run and it could be argued that we were naturally due for a dip. The question is whether what we’re seeing today is a normal part of the industry cycle or whether this is the start of new and permanent re/insurance landscape.
To understand how to approach this “new reality”, we must first step back and think about what underlies our perception of an insurance cycle. If we look back at industry cycles since 1980, they have always been set against an economic backdrop of inflation, GDP growth, low levels of employment of under 5% and rising capital markets. What we’re seeing today is a fundamental shift in the economic reality that underpins our industry to a non-inflationary environment with low or no real growth, increased unemployment to 8-10% and low investment returns.
This new economic reality in the U.S. and Europe has important implications for the re/insurance industry. With fewer factories producing cars and other goods, and fewer workers to buy them, there will be little or no growth in exposures. With excess capacity and high unemployment, it is probable that we will be in a low or no inflation environment for the next few years. That will likely have two consequences – very low short-term interest rates and a continuation of the benign insured loss trends that we've seen over the last six years.
For reinsurers, the issue is how to maintain adequate profitability and stability of capacity in a very low risk-free return environment. The solution lies in good management – the discipline and maturity that the industry has shown in the last few years will stand it in good stead in an environment where companies will have to run a “tighter ship” by watching overheads and managing expense ratios and by taking a technical approach to pricing and terms and conditions. For cedants, there will be more emphasis on the re/insurer relationship. In the best partnerships, reinsurers provide not just an unquestioned ability to pay claims and an appetite for risk at a fair price, but are knowledgeable discussion partners for their clients.
In the new environment in which we find ourselves, traditional cycle management and waiting for the next upswing may not be enough. Reinsurers need to be prepared to manage the current reality which may continue to be the only reality for some time yet. The sooner we get to grips with this, the better placed we will be to offer our clients reliability, stability and continuity of offer in a difficult and uncertain environment.
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