Reinsurance giant Munich Re said that it forecasts that its traditional reinsurance business has “sustained growth potential” highlighting its considerable ambitions to grow its profits over the coming years, but at the same time acknowledges the need for it to simplify its operations and become more efficient.
The company recently revealed that its start to 2018 will put it on the right track towards its profit targets this year, as a lower incidence of major catastrophe losses meant that the reinsurance firm is ready to report a bumper first-quarter profit.
The reinsurer is particularly bullish this year, having come through the major losses without a significant capital impact and feeling satisfied with the rate increases it achieved at the January renewals.
CEO Joachim Wenning said, “Munich Re is again poised for growth. For the first time in five years, we are once again able to increase our profit guidance compared to the previous year. We will continue to pursue this positive result trend in future. By 2020, we intend to raise our result to around €2.8bn.”
Wenning explained that three factors are set to help Munich Re towards this goal, an increasing in the reinsurance firms earnings power, digital transformation and also complexity reduction.
On earnings power, Wenning explained, “Our business ambitions are considerable. Traditional reinsurance business has sustained growth potential, and the ERGO Strategy Programme is also progressing well. With their growth initiatives, reinsurance and ERGO will contribute in equal measure to increased profits in the coming years. Our strong balance sheet allows us to grow organically, and through acquisitions.”
On digital transformation and innovation initiatives, he continued, “Munich Re is perceived by the market as an innovation leader, and rightly so. We use digital elements to strengthen our existing business and open up new business opportunities. We are developing new digital business models – such as for the Internet of Things. Munich Re is already a market leader in cyber insurance. Digital transformation will enable us to secure our earnings power for the future.”
On reducing the level of complexity in the business, Wenning commented, “We will simplify our structures and processes in reinsurance and Group functions – and even do away with some of them entirely. As a result, we will be able to run a growing business with fewer resources. We expect to achieve savings of over €200 million per year before tax. And, with natural fluctuation, semi-retirement and attractive and fair redundancy packages, we will be cutting around 900 jobs worldwide, some 480 of which in Munich.”
The job cuts had been announced previously, covered back in March by our sister site Reinsurance News.
It’s clear that while Munich Re is bullish about its growth prospects, it recognises that in order for the business model to deliver the levels of profit required by shareholders over the longer-term, it needs to become more efficient.
The fact the largest reinsurer forecasts ongoing growth for reinsurance, suggesting it also sees increasing demand ahead, is positive for both traditional reinsurers and the ILS fund market or alternative sources of reinsurance capital.
The question that remains unanswered, is whether over the longer-term the traditional reinsurance company model will be able to sustain the lower pricing that is becoming the norm in many reinsurance lines of business, or whether certain areas of risk may no longer sit as well on an equity-backed balance-sheet.
Another re/insurer, AXIS Capital, also went into some detail on the changes it is making to enhance its efficiency this morning, as also detailed by our sister site Reinsurance News.
These efforts and other re/insurers efficiency initiatives, are all designed to reduce expense cost through simplification, as both insurance and reinsurance players recognise the need to make their capacity as capital efficient as possible.
It’s becoming increasingly difficult for major reinsurance players to undercut ILS players these days, with the low-cost of ILS capital firmly established in the marketplace.
For years now the ability to diversify their books, and discounting for diversification sake, has enabled reinsurers to keep footholds in some markets, or keep ILS out of others. But that can only continue while the loss ratios are low and as soon as they become elevated the traditional market players will need to charge a more reasonable price for the cover, diversifying or not.
ILS players can continue to eat away at share anyway, maintaining their growth rate and strengthening their partnerships with ceding clients.
All of this makes it ever more urgent that traditional reinsurers find a way to enhance the efficiency of their capital, if they are to remain as competitive in all areas of the marketplace over the longer-term.
Munich Re is taking positive steps here, we expect others will do so as well. But whether the traditional company business model will always be the best structure for matching certain peak risks with efficient capital is something we’ll find out over the coming years and the answer may not be the one the traditional market wants to hear.