Issues in focus
Reinsurance at Zurich:
Evolving to meet the demands of a changing market and a changing world
Reinsurance is a strategic risk management tool that insurers use to protect their capital in the balance sheet and mitigate volatility in their earnings. Like everything else, the reinsurance industry evolves over time, shaped by changes in the risk landscape and market conditions. It is important that all parties involved in reinsurance arrangements are aligned in their strategic goals and understand the changes in underlying business, internally and externally, for the relationship to sustain over time and across market cycles.
“Reinsurance does not represent a ‘quick fix’ to an underlying challenge or opportunity” explains Brian Kernkamp, Head of Ceded Reinsurance for Zurich.
Zurich took a big step forward in acting on that wider view more than a decade ago when the company embraced a centralized, end-to-end reinsurance model to maximize the value of its reinsurance purchasing. Data and analytics help in optimizing reinsurance structure, not just evaluating the economics of each transaction. The internal change in the reinsurance model and the advance of analytics have enabled a global approach to reinsurance structuring. This has led to a consolidation of major reinsurance placements across Zurich and created some of the most innovative structures in the market.
While this approach remains very effective, there is still a need to constantly evolve as the risk landscape and economic conditions change. There’s no denying the last two years have seen a hardening market for reinsurance. This has been driven by several factors, including the impact climate change has had on natural catastrophe exposures, increasing cyber threats, and the impact of social inflation (including increased litigation and “nuclear verdicts”), to name a few.
Fortunately, Zurich brings a lot of experience to navigating hard markets to help achieve the best results for our company, our customers and our other key business relationships. We’re always exploring ways to expand reinsurance capacity via additional sources of capital, with a deep focus on the natural catastrophe and cyber risks that are most pressing in this era. Zurich is also staying on top of issues that may impact future needs for reinsurance, such as ESG (environmental, social and governance) issues that have implications for a range of liability coverages. (See our article on Zurich Resilience Solutions’ tools and services to address ESG exposures on page 5.)
It is vital that we engage with agile reinsurers who can adapt as needed to help achieve mutual benefits for both parties. Everyone involved needs to understand and support shared strategies, and ensure decisions are made thinking beyond the basic economics of each transaction.
Strategic relationships with reinsurers require a few key ingredients, including:
Consistent business model, capacity and decision making
Understanding Zurich’s strategy and supporting it
Commitment to shaping a global portfolio to the mutual benefit of both parties
Tangible proof points of value creation beyond the reinsurance transaction
Shared values on key ESG topics
Consistent business model, capacity and decision making
Commitment to shaping a global portfolio to the mutual benefit of both parties
Understanding Zurich’s strategy and supporting it
Tangible proof points of value creation beyond the reinsurance transaction
Shared values on key ESG topics
Brian Kernkamp concludes, “Reinsurance is an integral part of our strategy at Zurich. Over time, we cannot arbitrage the reinsurance market either by timing or information asymmetry. However, even in a hard reinsurance market, loss experience is still a key differentiator for pricing. We should focus on gross underwriting.
“The biggest impact on organizational success will come from gross lines underwriting and pricing actions we take ... and those our Program Administrators take. These are the greatest enablers to success. If we don’t get those actions right, reinsurance can’t fix the issue. But it can be a part of the solution when we do get those actions right.”
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6 PROGRAM LEADER