Traditional reinsurers will need to adapt to remain relevant in a rapidly changing market, according to partners at EY Bermuda.

Rapidly advancing technology, abundant alternative capital and changing customer demands are transforming the industry and agility will be key to success.

EY has posted a report on “The future of reinsurance: welcome to the post-predictability era”, which outlines the challenges traditional reinsurers are facing.

In an interview with The Royal Gazette, Simon Burtwell, EY Bermuda partner and regional consulting leader, and a contributor to the report, and Craig Redcliffe, partner at EY Bermuda and regional insurance leader, discussed its findings.

Mr Burtwell suggested that the traditional model of reinsurance, in which companies largely wait for business to arrive, was becoming outdated.

“I don’t think anybody can afford to be a traditional reinsurer any more,” he said.

“The world is moving on at really significant pace. The needs of cedants and their end-user customers are changing fast, and the interests of capital providers are changing fast.”

He described adaptability as the industry’s greatest strength, with reinsurers increasingly finding new ways to deploy their expertise and capital.

Mr Redcliffe said speed of decision-making would be critical to success.

“I think the biggest risk is increasingly going to be about making the decision too late — you could call it strategic inertia,” he said.

Reinsurers have strong balance sheets and considerable expertise, but the needs of their clients, sources of capital and technology are evolving faster than many companies’ decision-making processes.

Mr Redcliffe also warned of “strategic disintermediation”, as other market participants take on functions traditionally performed by reinsurers.

MGAs could control the origination of business, brokers could provide analytics and structuring, alternative investors could supply capital, and technology companies could deliver sophisticated risk analysis.

Reinsurers who fail to adapt could be left providing lower-margin balance-sheet capacity, while others capture more valuable relationships and fee-generating business.

Mr Redcliffe said reinsurers were evolving from simply providing capital towards managing risk intelligence and capital more broadly.

Their underwriting knowledge, proprietary data, modelling capabilities and claims experience could be used to help insurers and MGAs design products, price risks and manage portfolios.

“The strongest reinsurers will be the ones that combine their rated balance sheets with sidecars and ILS funds and manage their own third-party capital platforms, and then effectively decide where they're going to put risk,” Mr Redcliffe said.

“Maybe their share of the risk-bearing capital may be shrinking somewhat, but it doesn't necessarily mean their economic relevance is dissipating,” he added.

Alternative capital investors generally did not want to build large underwriting teams, establish extensive client relationships or manage complex claims, he added.

Mr Burtwell said private equity investors had increasingly moved away from risk-bearing property and casualty insurers towards intermediaries including brokers and MGAs, where they could pursue growth without the same underwriting volatility.

Long-term investors, such as pension funds and sovereign wealth funds, were likely to provide more dependable capital than opportunistic investors seeking short-term returns, the EY partners suggested.

The industry's transformation is also being driven by artificial intelligence.

Mr Burtwell and Mr Redcliffe expected AI to automate many routine activities, including processing submissions, extracting data, modelling exposures and reviewing claims.

However, they did not expect the new technology to eliminate the need for skilled professionals at Bermuda reinsurance companies.

Mr Redcliffe said: “I think ultimately the work is going to be redistributed rather than entirely removed.”

Mr Burtwell identified portfolio optimisation as a particularly promising application. Insurers and reinsurers often possess extensive data without fully understanding which parts of their portfolios generate the strongest returns.

He said companies were increasingly looking for valuable insights within their existing data, particularly as market conditions softened.

However, he questioned whether businesses were yet achieving sufficient returns on their growing investments in AI.

“I think we're now in the next phase of can we actually improve productivity and reduce cost by adopting AI more large scale in our business,” he said.

Technology is also creating risks that could challenge the industry's capacity to provide protection.

Mr Burtwell highlighted the growing concentration of global economic activity around a handful of major technology companies and cloud infrastructure providers.

“So, how do we deal with the exposures that this new aggregation of technologies is bringing to the commercial world? Mr Burtwell said. “And is the insurance sector set up to deal with much of that? I think the answer at the moment is probably not.

“You look at the sorts of losses that any one of those magnificent seven could deliver to the commercial world, were they to suffer a large scale outage of any magnitude, and it would be multiples of the sort of the $1.7 trillion of capacity that we've got in the industry.”

Rather than excluding difficult emerging risks, insurers and reinsurers should help develop new approaches to managing and financing them, potentially involving governments, public-private partnerships or mutual structures.

“What we don't want this industry to do is stand back, exclude, and hope it's not coming,” he said.

For Bermuda, both executives see considerable opportunities.

Mr Redcliffe said the island's strength lies in its concentration of rated reinsurers, ILS funds, sidecars, captives, specialty insurers, life reinsurers, brokers and professional services firms.

“I think Bermuda’s real opportunity is not simply preserving the traditional model, but also becoming that marketplace where risk is originated, analysed, structured, and matched to that most efficient form of capital,” he said.

The challenge would be to maintain underwriting discipline, expand beyond traditional property catastrophe business and balance innovation with regulatory credibility.

Mr Burtwell agreed that Bermuda was particularly well equipped to lead innovation.

“We’ve got the talent, we’ve got the capital, we’ve got the strong regulation, and we’ve got all the capabilities we need to be a sandbox for innovation,” he said.

He suggested Bermuda could do more to promote its history of developing new insurance and reinsurance structures.

Looking ahead, Mr Redcliffe said a softening market would expose differences between companies that adapted successfully and those that struggled.

Stronger reinsurers would protect underwriting terms, reserve prudently and be prepared to reduce business volumes when pricing was inadequate.

Mr Burtwell returned to adaptability as the defining characteristic of successful reinsurers.

“Reinsurers need to adopt a very flexible model now, more than they ever have done before,” he said.

• To read EY’s report of the future of reinsurance, click here