Senior executives from German reinsurer Munich Re, the world’s largest reinsurance firm, discussed the high-levels of competition in the market and alternative reinsurance capital at some length during the firms analyst conference last week.
Given the strength, size and diversity of Munich Re’s reinsurance business, as the largest player in the market with a diverse business across lines, regions, perils and structures, the reinsurers senior executives are worth listening to. At the analysts conference they discussed how Munich Re sees current market conditions and the influence of alternative capital on reinsurance as well as what the firm has done to avoid the most competitive areas of the market.
After the January reinsurance renewals Munich Re said that it had adjusted its portfolio to avoid the worst of the competition and the decline in rates. The firm also continues to leverage alternative capital for its own needs, both retrocession and to earn fee income, with its latest initiatives including its first reinsurance sidecar Eden Re Ltd. and its latest catastrophe bond issuance with Queen Street IX Re.
First to discuss the competitive reinsurance market environment and the influence and impact of alternative reinsurance capital was Chief Executive Officer Nikolaus von Bomhard. von Bomhard said that Munich Re has taken actions to combat falling prices and the high levels of competition from both traditional and alternative capital.
One area the reinsurer has focused on to attempt to minimise the impact of falling prices is by increasing the level of Risk Solutions business at Munich Re. This area underwrites large, single and facultative risks for corporate clients and industrial firms. As such Munich Re feels that it is one of the only re/insurers able to offer this type of product on a global basis given its scale and reach.
von Bomhard said that Munich Re takes what happens in the market very seriously but, amongst those that are affected, he feels Munich Re has a relatively better position. He puts this down to the diversification of Munich Re’s portfolio, the innovative and creative power of the group, the closeness of Munich Re to its clients and the franchise value of its offering. All of this only comes into play, said von Bomhard, when the reinsurance market is softening, as it is today.
Next to discuss reinsurance market conditions and alternative capital was Torsten Jeworrek, Munich Re’s CEO of reinsurance. Jeworrek said that while alternative capital was part of the reason for the extremely competitive January reinsurance renewals, Munich Re sees it more from the point of view of a well-capitalised reinsurance market.
Jeworrek explained that there are record levels of capital in the reinsurance market but the gap between the markets capital base and deployment opportunities is widening at the moment and new chances to put capacity to work are not growing fast enough. Jeworrek also recognised that fresh capital from pension funds, hedge funds and other capital market investors also played a part in January.
One of the key changes seen at the January renewals, explained Jeworrek, was that insurance companies retained more risk and became more intelligent in their reinsurance buying. This resulted in a reduced volume of available premiums in the market, which was particularly an issue for smaller or following reinsurance firms.
These smaller reinsurance firms were the ones which offered voluntarily reduced pricing and relaxed terms in order to stay on the reinsurance programs, laying the foundations for rate declines and increasing competition. Meanwhile, Jeworrek said, the pension funds offered capacity at competitive prices but not at prices dramatically below the rest of the market.
This comment is interesting as Munich Re here continues to seek to stress its differentiation from the smaller, more catastrophe focused reinsurance companies. At the same time Jeworrek did not try to blame capital markets investors for pushing down pricing, in fact saying that they were offering capacity competitively but not at significantly cheaper pricing.
Jeworrek then went on to discuss the changing business models in the reinsurance market, as new capital flows in to start-up reinsurers and funds which operate differently to traditional reinsurers like Munich Re. He said that Munich Re constantly evaluates new business models as they emerge and has studied the various collateralized and asset manager backed strategies to see if any work out to be more efficient than its traditional and globally diverse reinsurance model.
So far Munich Re has not seen a reinsurance business model that it feels has a better structural advantage over its well-diversified traditional reinsurance model, Jeworrek stated.
However Jeworrek did give away a small piece of insight on how it views pension funds deploying capital into reinsurance. He said that pension funds target 5%+ and fully collateralize the reinsurance they back where as Munich Re can re-use its capital and seeks a higher return of around 15%. Despite this though, Jeworrek said that the resulting price or profitability target from the two models is similar, which is perhaps telling given the leaner operational model of ILS and pensions directly investing in reinsurance.
Jeworrek noted that there has been some spill-over of alternative reinsurance capital into proportional lines of reinsurance business, but said that this was not yet a major factor at renewals.
Looking ahead to the April and June/July reinsurance renewals, Jeworrek said that Munich Re expects the price environment and competition to remain unchanged, in other words it will continue. He expects higher competition will make itself felt in Japan at April and expects to see some price reductions on the non-proportional side of the market. On the proportional side in Japan, Jeworrek expects to see rates static across the fire and earthquake side of the market.
For the mid-year reinsurance renewals, Jeworrek said predicting the rate environment is more difficult as the market has already seen high competition a year before. It remains to be seen whether rates continue downwards or whether the market pricing begins to flatten off, he commented.
If U.S. reinsurance rates come under further pressure, such as being down -10% to -15% at the next renewals, Jeworrek said Munich Re may look to shift more capacity to its specialty business and Risk Solutions unit. This perhaps suggests that Munich Re is only a 10% reduction in pricing away from pulling back dramatically from the U.S. property catastrophe reinsurance market.
The other choice would be to return more capital, but Jeworrek said he cannot see a reason to not be able to redeploy it into other lines of business that the Munich Re group underwrites. Another target for shifting capacity into or growing capacity at Munich Re is in tailored solutions offering capital relief to large firms and insurers, which Jeworrek said only a few large reinsurance firms can offer.
The analysts conference then moved on to questions for the panel of senior Munich Re execs, with some interesting topics being raised.
On pricing pressure outside of catastrophe, Jeworrek said that he sees price pressure is uniform around the world on all the non-cat property segments, however the price trend and price pressure is not as uniform and equal within the segment. It is more client specific, referring to the non-proportional property side, on the proportional side there is some pressure. One exception, the large single risk business in property, is seeing similar price pressure as in the catastrophe sector.
Jeworrek agreed that the pricing pressure and high-level of competition in global reinsurance markets could lead to smaller players finding themselves marginalised. He said that he sees some players offering cheaper pricing just to stay in the market. He also highlighted broker facilities, where reinsurers would guarantee capacity to brokers essentially following their book.
Jeworrek said he felt that this was not a positive development for the market, as brokers hold the client relationships and it is wrong for them to hold the underwriting pen as well. However he also noted that most of these efforts have been unsuccessful.
Jeworrek said that there is a chance of consolidation in the market, particularly in highly concentrated areas (likely referring to property catastrophe risks) where smaller players could find themselves targets for M&A.
On the topic of whether alternative capital would stay in the market he said some would stay, some leave, some may consolidate with others and at the same time still more capital may enter the reinsurance market.
When asked what his expectations were for reinsurance pricing should the market not suffer any major losses over the next two years, Jeworrek said he would expect to see a more pronounced version of the current market environment. Prices would continue to decline to some degree he said, but he expects that investors and alternative reinsurance capital providers will find a floor below which their risk appetites will not allow pricing to drop.
Interestingly, Jeworrek said that he expects risk models will force a pricing floor, particularly as many ILS investors, pension funds and alternative capital providers rely on models for pricing indications. The risk models will help to build a floor into market pricing below which it cannot drop, he explained.
von Bomhard added that for market conditions to change he feels that any loss would need to be of a model changing nature to really turn pricing. He cited the market in 2011, when catastrophe losses were high, noting that they didn’t move the pricing needle. A huge loss of $100 billion plus may not be enough to change the market anymore, von Bomhard suggested, adding that this is not necessarily a bad thing.
Finally, Jeworrek was asked whether Munich Re would withdraw from the U.S. catastrophe reinsurance market if pricing continues to decline.
He replied that withdrawing from U.S. catastrophe business, as it has been reported Berkshire Hathaway has, is not really an option for Munich Re. It has hundreds of clients in that space and if clients continue to deliver the right proposition, with the right profits, then Munich Re wants to support them, Jeworrek stated.
That suggests that Munich Re would never pull back completely from U.S. catastrophe reinsurance business but, as noted further up this article, the reinsurer may not be that far off a dramatic shifting of priorities away from catastrophe business if the mid-year renewals indicate further large rate declines.
The factors and external influences affecting Munich Re currently, which lead it to consider optimising its portfolio and shifting its priorities, are all affecting smaller reinsurers as well. In fact for some the effects of the competitive market and the influence of alternative capital will be exacerbated by their focus on specific lines and a regional focus on reinsurance business and these reinsurers will not have the luxury of being able to adjust portfolio and focus to maintain profits.
It’s clear that at the moment Munich Re feels the effect of growing competition from both traditional and non-traditional capital, but currently feels it can navigate the challenging market effectively. For alternative capital to deserve so much focus in a call discussing the reinsurers earnings and forecasts shows that the interest in the space, as well as its influence on traditional reinsurers, is not diminishing.
The upcoming renewals through the rest of 2014 are going to be fascinating to watch as are the quarterly reports from both large and small reinsurers as we begin to see the effect of rate declines and any change to underwriting priorities.
Read our article on Munich Re from last week: