Understanding of market bifurcation key for insurers to achieve success: Oxbow Partners

As underwriters adopt a new ‘bifurcated’ approach to their operating models, insurance companies must develop a clear understanding of how market bifurcation will play out and strategically position themselves to succeed in the market, Oxbow Partners highlights in a recent report.

‘Bifurcation’, according to analysts, involves a more structured approach to their underwriting operation models.

Traditionally, the London Market has operated an integrated underwriting model, where teams are organised by line of business.

Some of these are led by highly skilled underwriters “able to write portfolios of lead or influencing lines whereas others have been largely follow-oriented,” Oxbow Partners explained.

With the new ‘bifurcation’ trend, companies are also striving for leadership by investing heavily in top talent, data, and technology.

Leaders will further strengthen their positions by finding new ways to increase their capacity, such as forming consortia, the report noted.

At the same time, companies are changing their approach to follow lines. This shift focuses on portfolio management instead of individual underwriting, often using automated decision-making tools.

Advanced companies now employ various follow strategies, from using external capital to support their own policies (self-follow) to fully automated systems that evaluate each risk in real-time.

“The self-follow model highlights the close relationship between market bifurcation and third-party capital strategies,” Oxbow Partners analysts stated.

Companies typically see three advantages in dedicated follow businesses:

Flexibility: Data-driven portfolio management allows for quick responses to market changes and new opportunities.

Diversification: They can access risks they would not normally underwrite in-house.

Efficiency: Follow models can reduce expenses by 5-9 points. However, traditional follow strategies also have their own challenges.

“Leaders will put down larger lines, potentially supported by consortium capacity. This will then trigger algorithmic follow capacity. Brokers will then place a portion of their business in their cross-class facilities. This leaves very limited space on the slip for other capacity,” analysts explained.

Oxbow Partners concluded: “We believe that companies need to have a strong house view on how market bifurcation will play out and where they want to play in the market. This should then seed a strategy about where to lead and follow, and how to play in different channels. They should also consider the impact that differential pricing across the slip would have on this strategy.”

To succeed, companies must adapt their operations and build a platform that allows them to win with their chosen models, Oxbow Partners advice.

According to the report, this often means separate operating models for each for the lead and follow businesses. Early adopters can gain a significant advantage.

Analysts said: “Early-mover carriers will get market access that allows them to build scale quickly, can create a revenue opportunity from third party capital, and will manage their overall costs.”

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