ILS an established force, but may be in unsustainable territory: Swiss Re CEO Christian Mumenthaler

The insurance-linked securities (ILS) market has become “an established force” in the natural catastrophe underwriting markets, but Christian Mumenthaler, the CEO of reinsurance firm Swiss Re, questions whether ILS markets are operating in sustainable territory.

Speaking to Artemis in advance of the 2018 Monte Carlo Reinsurance Rendez-vous, Swiss Re’s CEO discussed the reinsurers use of ILS markets and alternative capital, something he sees other, smaller reinsurers having to use more of than his firm.

Mumenthaler explained, “We still take advantage of the ILS market to cede a portion of our peak risks, but compared to other smaller and less strongly capitalised players we rely a lot less on this form of alternative capital.”

The reinsurer believes it has the expertise in-depth to avoid coming too directly into competition with ILS markets in most areas of the market.

It’s clear that major reinsurance firms like Swiss Re have pulled back from the peak catastrophe risk zones where ILS capacity has taken the largest market share and Mumenthaler noted that his company is differentiating itself with its expertise and technical ability, helping it to avoid too much of the competitive pressure other reinsurers may face.

“When it comes to competition, Swiss Re as a risk knowledge company has a completely different business model,” Mumenthaler explained.

“We can offer large and tailored solutions, structuring, claims management and have strong direct client relationships which alternative capital providers and other competitors cannot match,” he continued.

The resilience of larger reinsurance firms to the pressures posed by efficient capital has been well-documented, but even Mumenthaler acknowledges that ILS has become a force to be reckoned with in certain areas of the market.

He commented, “Within the natural catastrophe markets, ILS has become an established force and we believe some of the capital will stay.”

However the CEO of Swiss Re remains unsure whether investors are aware of the adequacy of reinsurance pricing right now.

“I’m not sure whether everybody in the capital markets value chain is completely aware of how adequate current pricing levels are, because in contrast to us, they don’t have diversified capital and they have to completely collateralise the cover they provide,” he told Artemis.

Adding, “So I have doubts if they really operate in sustainable territory right now.”

Mumenthaler has questioned whether the understanding of underwriting risk has become decoupled from those who provide the capital to back it before.

But the adequacy of reinsurance pricing in the eyes of a major global reinsurance firm is not really the same as the adequacy in the eyes of institutional investors, we would say.

What matters is the ability of the capital, of whatever form, to sustain pricing as it is today, so covering loss costs, enterprise expenses (management fees) and cost-of-capital.

If it doesn’t, then for either side, traditional or alternative, they should not be underwriting the risk at all.

Price adequacy is not the same for everyone, as different business models allow for different levels of capital efficiency and it will be interesting to see how it plays out over time.

One thing is certain, in our experience, that ILS end-investors are generally happy with the risk-adjusted returns their investments in the ILS asset class generate for them over the longer-term.

Of course pricing is much lower now that it was a decade ago, so a better measure may be whether ILS investors entering the market today are satisfied with the risk adjusted returns they can produce over the next decade.

And the value of the asset class is much more significant than many give credit, in terms of how institutions appreciate the low correlation and diversifying aspects.

Mumenthaler also discussed value-chain compression with Artemis, something that the ILS market is making headway at and major reinsurers like Swiss Re are able to deliver on through their broad ability to provide services as directly to the customer as possible.

Importantly, Mumenthaler noted that the efficient delivery of products and satisfaction of clients is key here, which is perhaps a better lens for the ILS market to look through at its own efforts to shorten the risk-to-capital value-chain.

“I think it is more a question of how we can best meet our clients’ requirements. It’s only by working closely together that we can identify their precise needs and offer them the most suitable solutions. At the same time, it’s important that we deliver our products in an efficient way. We need to get both of these elements right to ensure we generate returns in line with our targets,” the Swiss Re CEO said.

That’s good advice that anyone looking to access risk from closer to the source should bear in mind, traditional or alternative market.