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Insurers are increasingly buying reinsurance as protection for their earnings, guided by “risk appetite statements” which optimize capital management and profitability targets, a survey by Willis Towers Watson has revealed.
According to the Global Reinsurance and Risk Appetite Survey Report 2017/2018, 80% of insurers consider their risk appetite statements when defining their reinsurance strategies. This is due to pressure from investors, which make insurers less tolerant of missed earnings targets.
As a result, these firms are moving to more sophisticated metrics, such as return on equity and economic capital.
From the 260 insurers from 51 markets surveyed, 98% have adopted a formal risk appetite, or plan to have one within three years. Companies’ enterprise risk management capabilities have improved, but more progress is needed to achieve their risk-culture goals. Meanwhile, many insurers stated that cyber is their largest risk concern, mostly due to difficulties in defining and managing cyber from both the underwriting and operational perspectives.
“Managing the volatility of underwriting results is of prime importance to insurers, and reinsurance strategy measured by risk appetite is key to that,” said James Kent, global CEO of Willis Re. “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 programs to insurers’ strategies.”
Meanwhile, Alice Underwood, global leader of insurance consulting and technology at Willis Towers Watson, added: “Changes to the global regulatory environment have increased the emphasis on capital measures and targets. Although regulatory capital is still the most relevant capital measure, economic and catastrophe risk capital are gaining momentum. The use of internal capital models increased substantially from a third to more than half of insurers between 2015 and 2017.”
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