Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Big reinsurers: Demand, diverse business to fend off alternative capital


Large global reinsurers expect flat reinsurance renewals and continued growth, despite sources of alternative capital and other market developments potentially denting their share, through their diverse business mix and a continuing expansion of the demand for reinsurance around the world.

Reinsurers were out in force at the recent Monte Carlo Rendezvous event, making their opinions on alternative capital flowing into the reinsurance market abundantly clear and ensuring that the traditional reinsurance business model received plenty of airtime at the various press briefings and roundtables.

Munich Re said that it expects the January reinsurance renewals will see its portfolio remain largely stable in terms of pricing, with a possible further dip in non-proportional catastrophe reinsurance business offset by stability in its proportional reinsurance and other business segments.

Swiss Re also expects a successful renewal in January and said that rates will remain attractive. It expects a further dip in natural catastrophe reinsurance rates, but other opportunities within its broad book of business would more than compensate for any further price declines it believes.

Both of the reinsurers said they expect that demand for reinsurance globally will continue to increase and expect to secure decent shares of this new business for their books. Due to their existing diverse books of business and ability to enter into new markets through scale, both reinsurers said they operate in areas where alternative capital is going to find penetrating the market much more difficult, at least for now.

Munich Re believes that primary insurers seeking expansion will drive further need for reinsurance protection. Torsten Jeworrek, a Munich Re Board member, said; “The overall economic situation remains clouded by uncertainty. Reinsurance is still indispensable for many primary insurance clients because of their growing need for tailor-made solutions.”

“Broadly diversified reinsurers like Munich Re offer their clients far more than just capacity. We demonstrate this particularly in the case of complex risks such as large industrial risks, and also in segments that are not standardised such as liability, agricultural reinsurance or aviation”, continued Jeworrek. “With our vast expertise, we create solutions that are individually tailored to the risk profile and balance sheet of each individual client. These could be transactions offering solvency relief if the client needs capital at short notice, or innovative covers for new technologies, such as renewable energies. In the future, we will thus continue to play an indispensable role in covering constantly growing values.”

The comments made around the Monte Carlo event were clearly designed to put investors at ease that the impact alternative capital, from third-party sources such as pension funds, has been having on the reinsurance market was not going to impair results.

The question of how sticky alternative capital will be in reinsurance was raised by both reinsurers, with the opinion seemingly being that most would stick while some might depart should interest rates rise or a large catastrophe loss event occur. Whether more capital would flow into the market after a loss event was not focused on, despite the many reports from other market participants of large amounts of capital waiting in the wings.

Rendezvous saw comments from reinsurers about alternative capital being ‘dumb’, so not understanding the risks it is taking on, about it being naive and not understanding the reinsurance pricing model, about it being too focused on one class of risk (property catastrophe) and lacking in innovation as well as about it being fickle and unlikely to show the loyalty reinsurance clients value.

At the same time there were comments from the alternative side about the sophisticated nature of alternative capital providers and managers, the appetite to broaden the market into new lines of business and perils, the desire and willingness to innovate among ILS managers and end-users of alternative capital and an ambition to construct new business models to compete with the larger reinsurers while wanting to support insurers reinsurance needs over the longer term.

These mixed messages are not helping customers to come to terms with the changing reinsurance landscape. At this time it is impossible to say who is most accurate, a great deal of the comments at Monte Carlo are designed to talk up the commenters specific sector.

All we can say for certain is that the reinsurance landscape is changing including the reinsurer business model, more people believe that alternative capital is here to stay than believe it is going to exit the reinsurance market, reinsurers are nervous, alternative reinsurance capital providers are willing to support their insurance clients but also want traditional reinsurers support as well, the inflows of capital will continue and this is a really big deal for the reinsurance market.

The rhetoric is likely to continue and may build up in the run up to the January reinsurance renewals if all indications continue to point towards further rate declines, so be prepared for a lot more discussion of these trends across the reinsurance media.

The diversity within a major global reinsurers book of business is perhaps even an opportunity for them to work alongside alternative capital to provide new solutions, larger lines and work out ways to get more peak risk from new and diverse business areas into the capital markets. The ILS players would happily work alongside reinsurers towards this goal, which as a result would find somewhere for continued inflows of capital to go, while freeing up large reinsurers to continue to expand sideways into new areas safe in the knowledge that ILS and alternative capital will support their peak risk transfer needs.

The winners at the renewals will be the providers of reinsurance capacity, be they traditional or non-traditional, that keep their heads down and focus on providing clients with attractive and well priced reinsurance products. These firms will be easily identified or recognised by their silence as they focus on business and less on making vociferous claims.

The truth is that there is room for everyone in this market. Change is ahead for everyone, it’s not just reinsurers facing potential consolidation, there is an expectation in the market that smaller ILS players may have to consolidate too to combat competition. As the new normal continues to develop challenges lie ahead for everyone, alternative or not, and with more capital on the sidelines the competition is only going to get hotter.

More reading:

There are so many reports and commentaries on alternative reinsurance capital and ILS thanks to the Monte Carlo Rendezvous event that we felt it worth highlighting some other reading on the topic, all from the last two weeks, which you can find below (most recent first):

Are reinsurers facing consolidation or changing business models?

As reinsurers react in Monte Carlo ILS managers keep cool and carry on

Alternative capital growth driven by collateralised reinsurance: Swiss Re

Alternative capital may squeeze out equity capital in reinsurance: Willis Re

Lloyd’s Nelson: Alternative capital can help insurance grow to $2tn by 2025

Insurance-linked securities market calling for innovators: PwC

Catastrophe bond market may hit $23 billion by end of 2016: GC Securities

Alternative capital as significant to reinsurance as emergence of Bermuda: S&P

Demand for alternative reinsurance instruments and ILS to continue: Fitch

Alternative capital the biggest challenge for traditional reinsurers: Moody’s

Lloyd’s Nelson warns on ‘systemic’ risk of alternative reinsurance capital

Broker facilities an opportunity for third-party capital to expand reach?

Opportunity for reinsurers to learn from ILS: Aon Benfield CEO

Capital markets investors boost global reinsurer capital to $510 billion (including a useful list of links to many alternative reinsurance capital initiatives that we have covered previously)

Strong capital inflows bring ILS & cat bond market to new high: Aon Benfield

Alternative capital a disruptive force in reinsurance: Goldman Sachs

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