A combination of difficult market conditions, better technology and changing attitudes could give a new breed of reinsurance trading platforms a better chance of survival than their predecessors.
But one reinsurance trading platform veteran warns that it will not be easy for the newcomers as they battle to gain acceptance.
Several unsuccessful attempts have been made to digitize reinsurance and large commercial insurance transactions. A big push was made to streamline insurers' placement of reinsurance risk at the end of the 1990s and early 2000s. The highest-profile failure from that era was Inreon, a collaboration between the world's biggest reinsurers Munich Re Co. and Swiss Re AG. It launched in December 2000 but closed in May 2003 when its backers pulled funding because of a lack of trading volume.
Now, a range of new reinsurance trading platforms is in the works. One is Akinova, an electronic insurance marketplace, which is expecting to complete its first trade by the end of 2019. Another is a new property-catastrophe excess-of-loss, or cat XL, placement product from the Zurich-based Blockchain Insurance Industry Initiative, or B3i, whose 18 shareholders include big names such as Munich Re, Swiss Re, AXA SA, Allianz Group and Zurich Insurance Group AG.
B3i announced version 1.0 of its cat XL placement solution in July and is aiming to put out a "production-ready version" in the fourth quarter.
Cost pressures
Today's tougher trading conditions mean that adopting electronic trading is more urgent than it was 20 years ago. Insurers have been battling persistently low interest rates since the 2007 financial crisis, and thus have not been able to rely on investment returns to prop up weak underwriting results. This has prompted a push to get the combined ratio, a key measure of nonlife underwriting performance, below the 100% break-even mark.
Companies are focusing on improving the cost ratio element of the combined ratio through electronic trading because they have limited scope to influence the loss ratio and are running out of other cost-cutting options.
"At a company level, they have done just about as much as they can to optimize costs," B3i CEO John Carolin said in an interview.
The insurance industry also seems to have overcome its technophobia. Henri Winand, co-founder and CEO of Akinova, said in an interview that assertions about the industry's reluctance to embrace technology would have been correct five years ago, but that now "there is a general acceptance that technology is changing the industry, and there is no debate about it." He added: "I think there is the acceptance in the boardrooms that technology is changing things — not going to change things, but changing things now."
It is not just fledgling technology companies that think the industry's attitude to technology has changed. David Priebe, chairman of Marsh & McLennan Cos. Inc.-owned reinsurance broker Guy Carpenter, said via email that there had been "significant technological advancements" in recent years and that the recent growth in the insurance technology, or insurtech, space "has helped create an environment more conducive to the development of electronic trading platforms."
Coupled with this, Priebe said, is a "greater willingness" to trade electronically. "There is a better understanding of the benefits that such a process offers and a recognition of the need to operate in a faster, more transparent and more cost-effective environment," he said.
There are also strong commercial incentives. Winand argues that faster trading and real-time price discovery "is the only way we can give an ounce of scale" to the problem of meeting client demand for cyber insurance cover.
"You are not going to be able to do intermediation and capacity creation by being sat down around a table having a conversation for three months as to what it would look like," he said.
Just as insurtech has shown insurers and reinsurers the possibilities of technology-enabled trading, it has also demonstrated the risk of being swept aside by nimbler, lower-cost rivals if they do not modernize their processes.
"At a very strategic level, people are worried about how fit-for-purpose their insurance company is to provide insurance in the future," Carolin said. "That has created the strategic imperative for something like B3i to happen."
A tough sell
All this does not mean new platforms will have an easy ride, according to Igor Best-Devereux, CEO of eReinsure, which was founded in 1999 and is one of the few survivors from that era.
The big challenge, according to Best-Devereux, is encouraging companies to adopt a new system. Part of the problem, he said, is persuading employees to use yet another system. Another is companies' technological readiness.
"The reality is that a lot of it is just buzzwords because ... the infrastructure inside these organizations that could leverage these kinds of platforms just doesn't exist," he said.
However, he said the development of application programming interfaces to connect the various platforms will help adoption of electronic trading, as will what he describes as a "generational change." He said: "We now have, in some of our clients, people who have never [transacted reinsurance] without using eReinsure in their entire career."
