If insurance rates increase or companies can’t find cover, will today’s underwriters have the skill sets to manage?
There is a feeling in some parts of the (re)insurance industry that the role of underwriters and brokers has been diminished by the soft market.
With rates low, everyone seems to be scrambling around for business and, in some cases, dropping standards. And with more lines of business being commoditised – a trend expected to continue as data analytics becomes more mainstream – careful, expert assessment of risk and placement of (re)insurance can seem less critical.
The market seems to revolve more around electronic placement, with some downsizing not uncommon within companies.
Yet underwriters and brokers are vitally important, for two reasons in particular.
- There is a rising emphasis on emerging, systemic risks, which are fast-changing and hard to quantify.
- Sooner or later the market will, to some extent, harden.
The faster-changing nature of many industries, and the blurring of many traditional industry lines, is presenting a raft of emergent hard-to-quantify risks.
Take cyber risks: these are still evolving at a great pace many years after the (re)insurance industry first took note of them.
New technologies, such as drones or autonomous cars, will create further risks and pose (re)insurers with the challenge of creating new insurance products – products that cannot be commoditised, and which will need technical experts.
Granted, a broker’s role does have to change: rather than the siloed approach sometimes adopted in the past, multi-classes are bundled together increasingly often.
More and more reinsurance structures cover diverse risks – for example, we’re seeing more global programmes across a range of perils, from energy, to cyber to property. So cross-discipline expertise is more important and will need to improve.
More than ever, reinsurance is just a form of capital. So brokers need to see reinsurance in that light, and understand how it compares with other forms of capital. Reinsurance, for example, can be very good risk arbitrage, if it has the right expertise behind it.
Joining the dots
Brokers need deep-seated class expertise and business acumen and to be more technical, and consistently appreciate, and factor into their work, the link between:
- risk transfer and
- capital management.
In the current soft market, risk transfer – the ability to transact, to underwrite risk well – is sometimes being diminished as a skill set. In some cases, underwriters don’t bother to ask questions because it won’t affect prices, brokers don’t provide so much information. There is less vigour.
This is fine, in a soft market. But I think there is still an insurance cycle. It might not be as spiky or as pronounced as before, but the market will eventually harden, to some extent.
Some of the biggest insurers are looking to buy more reinsurance, so we could be at an inflexion point. If or when the market hardens, brokers who appreciate the three aforementioned areas will become vital. Other brokers might be found out.
Consider: there are people with ten years’ underwriting or broking experience who have never dealt with a hard market.
At present you can find reinsurance brokers dealing in classes with which they have very little knowledge or specialist expertise.
But if there are large losses and companies can’t get cover, or rates increase, are these people equipped to handle the negotiations? Will they really understand whether the revised prices and terms really are suitable? Are they really prepared?
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For more information, please contact Keith Harrison, CEO, UK & Europe, JLT Re on +44 (0)20 7886 5335 or email firstname.lastname@example.org