Competing over the same cake could have disastrous results: Munich Re

by Artemis on September 14, 2014

How many times can reinsurance be likened to some of our favourite foods? At the Monte Carlo Rendez-vous it would seem the answer is more than one, as both reinsurers and brokers compare the current market to a pie or cake that everyone is competing over.

Willis Re earlier today compared it to a pie that everyone is fighting over and this afternoon, at its press briefing, the world’s largest reinsurer Munich Re preferred to take a sweeter angle when it compared the market to a cake.

Munich Re as the world’s largest reinsurer with huge diversification around the world and across multiple lines of business, both insurance and reinsurance, is clearly one of those that are both affected by current market trends and reinsurance price softening, but also one which manages to insulate itself to a degree.

The theme of its media briefing today revolved around Munich Re’s thinking that it needs to innovate and focus on specialism where others fear or fail to compete, while also avoiding any business it feels is no longer adequately priced.

Torsten Jeworrek, CEO of reinsurance at Munich Re, said; “As long as the market is soft we do not compete for the commodity business. We protect our balance sheet.”

This sensible approach has been a feature of Munich Re’s thinking and PR over the course of the last year, as it seeks to explain to clients, partners and investors its strategy for navigating a challenging reinsurance market.

Jeworrek asked why technical underwriting is not on the agenda for many in the industry? Going on to explain that the reinsurer is prepared to give up any business that it does not feel meets technical pricing levels and that it is resisting the ‘short-term’ (who knows how short or long-term this current pressure will be) pricing pressure and not giving way to demands for lower pricing if it does not feel they are warranted.

“Competing for the existing cake could have disastrous results,” explained Jeworrek. He went on to explain that Munich Re follows two pillars in its strategy, with discipline and cycle management on one hand and innovation on the other.

Munich Re expects moderate demand increase for reinsurance, driven by high-growth markets and demand for innovative solutions. The reinsurer feels well positioned to innovate and create new demand for itself, particularly on the borders of insurance and reinsurance, with its customised Risk Solutions unit and areas of the market such as weather, climate, energy, cyber and space risks. It also sees opportunity in areas such as reputational risks and emerging risks arising from the growth of the internet.

These are specialist areas, well outside the remit of third-party reinsurance capital and insurance-linked securities (ILS), at least for now, where large reinsurers like Munich Re can leverage their experience and depth of expertise to provide solutions and even create new market opportunities for itself. Smaller reinsurers perhaps do not have that luxury.

“Innovative insurance solutions in new areas are the key to long-term profitable growth,” explained Jeworrek. As is the need to be planning and thinking with a longer-term vision; “We provide cover for loss events that do not occur every year, but we need to earn adequate premiums over all those years. In our business, if your thinking is short-term, you pay a high price later,” he explained.

“In standard business, we will continue to resist pricing pressures and withdraw from business if necessary. We can deploy our know-how and capacity better in offering our clients new and intelligent coverage concepts for the most diverse requirements,” Jeworrek said.

The subject of technical pricing arose a number of times in the talk and presentation. Which leads us to ask, if technical pricing on their own balance-sheet capital is such an issue for Munich Re why doesn’t it just leverage third-party capital, with its lower-cost and efficiencies, to maintain its share of those competitive markets?

There has been talk about Munich Re expanding its Eden Re sidecar significantly, with the backing of capital markets investors and the speakers would not comment on this when asked. Perhaps this is part of the strategic plan, that when technical pricing does not meet the requirements of your balance-sheet capital you find a source that has an appetite for that level of return.

With reinsurers and insurers complaining that their costs of business are going up, due to issues like Solvency II and various capital requirement increases, perhaps they should increasingly look to fully-collateralise their limits using third-party capital, both to keep a foot in the door of the competitive pie (or cake) to ensure they are still invited to the (dinner) party in years to come.

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