Is (Re)insurance a Truly Scalable Business…?

Over the long term, the P&C (re)insurance business tends to grow its premiums at a rate roughly equivalent to that of GBP in mature, developed markets. After all, Insureds buy insurance because they believe they need it, not because they want it, even though all parties know that a properly-structured (re)insurance programme, or appropriate covers are essential to protecting businesses, livelihoods and financial wellbeing against exogenous shocks.

Of course, from time-to-time, new risks arise (such as cyberattacks), or the perception of risk changes (such as those related to climate). However, it is hard to create new growth models, even if one can create new delivery mechanisms such as ILS or ILW, or tweak claims definitions through innovations such as parametric covers.

And while market pricing goes in cycles, and new “class of” companies arise, historically there is little evidence that (re)insurance in the aggregate is scalable in the way that other industries can be. In fact, it is becoming ever more bifurcated between specialized, niche businesses and those which truly do have individual scale, and the ability (should they wish to) to defend market positions. As matters stand, many (re)insurance businesses struggle to earn their true cost of capital, or even destroy value, rather than create it.

New entrants benefit from an absence of legacy systems and loss reserves, but they are still, generally, competing based upon the same historic business models, but trying to do so “better” or “differently”. Even the new “AI-supported” Lloyd’s Syndicate, Ki, intends to act as a “follow-the-form” underwriter, and is, therefore, dependent upon the business models of existing brokers and carriers.

All this begs the question of whether or not it is feasible to create a new, scalable paradigm that will somehow fundamentally change the industry. Conceptually, it is hard to think of a completely new, “fundamental” product line that would cause potential Insureds to say: “I never knew I would need/want that”, absent the advent externally of a new product or risk. However, It is certainly possible, as the Awbury Team did in creating its business model, and scaling up a completely new business, to find ways to solve problems that potential clients have struggled with because they believe no effective solutions exists, and so displace existing products, create new demand, stimulate growth, and add value. Yet, in most cases, the industry still follows on from the businesses others create, which then give rise to the need to protect against or manage new risks (cyber, or satellite being two that come to mind), or to penetrate markets where the need for protection is still under-served- the so-called “protection gap”. Essential, yes. Original, no. At Awbury, we aim to be both original and essential.

Therefore, unless it can solve existing issues in new ways, for the foreseeable future, the industry will have to focus on finding an edge in its underwriting processes so that it can consistently achieve Combined Ratios well below 100%, and/or continue to reduce and re-design its cost structures if it is to increase its profitability.

The exponential scaling beloved of the venture capital/”tech” nexus remains a distant dream, even a fantasy, although, as indicated above, one should never ignore the potential for a business model being created that somehow that is so effective that it becomes scalable at the expense of the industry as a whole.

The Awbury Team

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