CEO and Chairman of the Board of the world’s largest reinsurance firm Munich Re, Nikolaus von Bomhard, said in a speech today at the reinsurers AGM that the current pressures on reinsurance margins look set to continue, with “no sign of this changing.”
Munich Re is itself not immune to the pressures created by reductions in pricing across many reinsurance lines, caused by the well-capitalised traditional reinsurance industry and growing competition from efficient sources of third-party and alternative capital.
von Bomhard hinted at the effect that low interest rates is having, pushing investors to look for new asset classes and yield, saying that “The liquidity thus created also has a secondary effect of generating very intensive competition in the reinsurance markets.”
Liquidity across the capital markets and financial markets means that primary insurers have more capital, so reducing their demand for reinsurance protection. Meanwhile, of course, primary insurers have been centralising their reinsurance purchases, taking an opportunity to rationalise and make reinsurance buying more efficient.
This has also reduced demand, but also provided more opportunity to insurance-linked securities (ILS) players, who have been brought into the mix at an increasing number of primary players reinsurance programmes.
Reinsurers are also well-capitalised, von Bomhard said, meaning that they can become more competitive and reduce their prices.
Of course we also know that reinsurance firms have been providing more coverage, even at these lower prices, with expansion of terms and conditions in order to create a more compelling offering for cedents, in an effort to put capacity to work.
Finally, von Bomhard commented on third-party reinsurance capital, saying; “Other investors, like hedge funds and corporate pension schemes, are muscling into the reinsurance market in their search for investment opportunities.”
The result of all of these factors is that demand for reinsurance has fallen and supply is at record levels. The combined effect of which is ongoing price reductions and increasing pressure on reinsurer margins.
“At the moment, there is no sign of this changing,” von Bomhard warned.
With this in mind and no sign of these market conditions changing, von Bomhard said that he doesn’t believe Munich Re can match its financial performance from 2014 this year.
“Price pressure in reinsurance is also unlikely to ease much in 2015,” the CEO said.
Low interest rates, no repeat of one-offs seen in 2014 and ongoing reinsurance market pressures make a fall in income unavoidable, unless Munich Re was willing to take on more risk. But that is something the reinsurer is not prepared to do, von Bomhard explained.
As a result the reinsurer remains on track for just breaking into its forecast profit range of EUR2.5 billion to EUR3 billion, however von Bomhard noted that this is “an ambitious but realistic target.”
von Bomhard said that Munich Re would not be drawn into underwriting business if “prices are not risk-commensurate,” adding “It is the profitability of a business that is decisive, not the volume. This was why, at the January renewals for reinsurance in particular, we withdrew from a considerable volume of business.”
At the same time von Bomhard said that Munich Re does now want to noticeably increase the risk it takes on the investment side either, explaining; “We are not going to turn into yield chasers in the capital markets, and make up for our lost income in other areas. Our strategy is and remains to primarily earn our profits from insurance business, and not from risky investments. Insurance is our business.”
On potential acquisitions, von Bomhard said; “Of course, we check out possible acquisitions, and we do it regularly. And we also have the will and the capacity to invest the necessary capital. But every acquisition has to make sense, both strategically and financially.”
von Bomhard discussed growth opportunities around emerging markets, its Risk Solutions business and insisted that innovation was vital to ongoing success. He cited weather risk transfer, business interruption and cyber risk as just come of the areas of focus.
When the world’s largest reinsurance firm says pressure is set to continue you know it likely will. Munich Re is setting out its stall as an innovative player, ready to create new opportunities for itself to enable it to continue to perform for its shareholders.
In a reinsurance market that has structurally changed this is the sensible approach. Embrace change and innovate, focus on what you are good at, avoid the under priced business and don’t take too much additional risk. Munich Re seeks to show that it is a stable and prudent reinsurer, with an ability to perform even in the hardest of times.