11 July 2018

Commercial Risk Europe: Insurers increasingly use reinsurance for earnings protection and volatility reduction

Risk appetite is increasingly central to insurers’ business decisions, according to Willis Towers Watson’s latest survey. The Global Reinsurance and Risk Appetite Survey Report 2017/2018 reveals that insurers are becoming less tolerant of missed earnings targets as a result of pressure from investors, and are increasingly turning to more sophisticated metrics, such as return on equity and economic capital.

The survey finds that reinsurance is used increasingly for earnings protection and volatility reduction by insurers whose purchasing is guided by “risk appetite statements” deployed to optimise capital management and profitability targets. It also shows that 80% of insurers consider their risk appetite statements when defining their reinsurance strategies. Of 260 insurers from 51 countries surveyed, 98% have adopted a formal risk appetite, or intend to within three years.

“Respondents’ enterprise risk management capabilities have improved, but more progress is needed to achieve companies’ risk-culture goals,” states Willis Towers Watson. “Meanwhile, most respondents said that cyber is their main risk concern, due largely to difficulties in defining and managing cyber both from the underwriting and operational perspectives.”

James Kent, global chief executive officer, Willis Re, commented: “Managing the volatility of underwriting results is of prime importance to insurers, and reinsurance strategy measured by risk appetite is key to that. This is particularly relevant for public companies where perceived volatility can severely impact share price, but also a wider range of insurers are now much more likely to consider a broad range of consolidated earnings metrics when assessing the impact of reinsurance. Our survey shows that the number of non-life insurers using rate of return on equity as their primary earnings metric has doubled in the past two years. This is in line with what we are currently experiencing in the field when realigning reinsurance programmes to insurers’ strategies.”

Most respondents say cyber risk is clearly their main concern of a range of emerging risks, due largely to the difficulties in defining and managing this risk both from underwriting and operational perspectives. Indeed, technology, cyber risk and industry disruptors are prime concerns for insurers, according to the survey, while regulatory issues remain central. Other concerns include climate change, globalisation and connectivity.

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