Global insurer and reinsurer Allianz has spent the last few years transforming its reinsurance business to a centralised model, and next, according to Allianz Re CEO Amer Ahmed, it’s really about actively managing the portfolio.
Hosting a keynote at the recent LGT Capital Partners Ltd. event in Lucerne, Switzerland, during its second day – the ILS Symposium, which was run by the LGT ILS Partners Ltd. team, Amer Ahmed discussed Allianz’s centralised reinsurance transformation, the impacts of this moving forward and the wider role of insurance-linked securities (ILS).
“In the past we had maybe 50 subsidiaries, each of them buying reinsurance almost independently. Our subsidiaries liked us doing it this way, the reinsurers liked it this way and the brokers liked it this way, but it wasn’t really great for our shareholders,” explained Ahmed.
Adding; “So what we’ve focused on over the last few years is working towards centralising reinsurance, and we’ve pretty much reached that goal.”
The reasons for a shift towards a centralised model, explained Ahmed, is to move Allianz Re, its reinsurance division, away from purely focusing on reinsurance per-say, to a vehicle that’s about actively managing a portfolio, so not just concerned with trading reinsurance dollars.
Something that Ahmed feels Allianz and its peers have failed to do in previous years. Noting, however, that now the majority of larger, more relevant reinsurance market players are managing their reinsurance in a much more centralised, strategic manner.
“The target of centralisation was to improve the transparency and quality of data that will allow us to better understand our portfolio and better bring that risk to the outside market,” said Ahmed.
Highlighting the fact that if you total all the reinsurance premiums going outside the firm, including transactions associated with subsidiaries and so on, it totals around €12 billion and involves a very large amount of people, revealing that the industry “is very inefficient in how we’ve dealt with this in the past.”
The drivers for centralising reinsurance operations at companies like Allianz includes a desire to retain more profit from reinsurance that would otherwise exit the Group, a need to use reinsurance to more effectively manage capital, and to increase efficiency.
And for Allianz it seems to be working. Ahmed advised that “through the process of centralisation we’ve taken out almost €2 billion of premium from the reinsurance market. And at Allianz Re, from that pool of internal reinsurance we’re generating €350-€400 million of operating profit a year.”
This achieves a similar goal as ACE Group’s establishment of its hybrid reinsurance vehicle, ABR Reinsurance Capital Holdings Ltd., which will see ACE cede less business to the international reinsurance market and into its own vehicle.
So centralising, and the launching of hybrid, innovative reinsurance ventures like ABR Re, are really market participants responding to what Ahmed calls the “fundamental and rapid changes” of the industry, changes that he feels “are here to stay.”
As centralisation reduces costs, increases efficiency and generates operating income, while ensuring a lower use of traditional reinsurance capacity, the opportunities for alternative risk transfer tools, through alternative reinsurance capital, ILS and catastrophe bonds to cover ‘peak-exposures’ and offer innovative solutions becomes apparent.
During his keynote Ahmed stressed that the market “needs to wake up” to the fact that the abundance of alternative capital in the market is here to stay, and furthermore that it’s been here for some time and certainly isn’t something new.
He said; “People were thinking that after a loss we’d see if these people would still be around. I think this is a fallacy, there’s enough understanding and appreciation of the risk and how the asset class can fit into these portfolios I think, this is here to stay.”
In the past, Allianz has been a regular sponsor of catastrophe bonds covering its peak-exposures, and while this hasn’t been the case in recent years Ahmed explained that he “would certainly expect that they would be back at some point.”
Adding that the firm is extremely keen to “have a full toolbox of all the risk transfer instruments that are available, by type, duration and capacity provider.”
Discussing the use of ILS, Ahmed said; “If you look at the total capacity we buy, almost one-third is what I would classify as non-traditional, so cat bond, collateralized, swaps or multi-years, so over time it’s found its place in the programme.”
As the market continues to house ample capacity in traditional and non-traditional forms, Ahmed stressed the importance of putting this capital to work in developing, underinsured regions of the globe, with an aim of narrowing the economic to insured loss gap.
“Every year on average between $50-$100 billion of economic loss is uninsured. And if you break it down by geography and peril it’s most stark in the developing world,” he said.
Continuing; “We need to develop financing programs that will help society, which will give an opportunity to put all this capacity that’s out there, to put it to good use. It’s an opportunity we can create to provide more risk to the system.”
A valid and important point, and surely Ahmed isn’t alone in thinking the abundance of capital would be best served doing what it’s there for, providing effective, much needed risk transfer solutions to protect organisations, economies and societies globally against the world’s perils.
Looking forward, Ahmed said; “I think the industry is going to have an incredibly exciting rollercoaster over the coming years.”