Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Risk knowledge key, as reinsurers shift to become less traditional: Swiss Re


“We are transitioning into a risk knowledge company that invests into risk pools with long-term growth potential,” explained Swiss Re Group CEO Christian Mumenthaler in the reinsurance firms recent annual report.

Swiss Re logo and buildingIt’s a statement that demonstrates Swiss Re’s ambition to no longer be seen as just another reinsurance company as it looks to position itself for a long-term future in a market that has seen significant change and flux over recent years.

It’s also a statement that aligns Swiss Re with the mission of the ILS fund management sector, as this is exactly what your average ILS fund is seeking to achieve, long-term appreciation of assets invested into pools of insurance linked risk.

How thing’s have changed in the last decade, as it’s not so many years ago when major reinsurers were impressing on their clients the importance of deep balance-sheets and relationships, where as now it is their ability to be innovative and agile, as well as their depth of expertise.

It’s actually refreshing though, as major global reinsurers should be getting paid for their expertise, not just for warehousing risk on balance-sheet. It’s a far more healthy business model and one which could lead to a more sustainable position in the insurance and risk transfer value-chain, as it continues to evolve into something much more efficient.

“I would like to see Swiss Re positioned differently than just as an ordinary traditional reinsurance company,” Mumenthaler wrote in his letter to shareholders, reflecting the fact that reinsurers are moving to embrace new business models.

It’s almost like the traditional reinsurers are reacting to the ILS market, as they look to add efficiency, get closer to the original source of risk and break down barriers in the value-chain. Swiss Re has itself stated in the past that it was ready to disrupt the market and itself where necessary, as it adjusts its business model to fit the current status quo.

Interestingly, Mumenthaler identifies risk pools as “the original risks, both people and goods, that can be insured,” adding that “As a reinsurer, we only access a fraction of the risk through our clients, so building access to risk pools is a key part of our strategy.”

He goes on to discuss the way Swiss Re is moving along the value-chain, accessing increasing amounts of insurance risk via its Corporate Solutions division and targeting the retail life insurance pool with its Life Capital division.

Through large transactions direct with insurance buyers, or backing retail insurers with capital linked to their portfolios of risk, Swiss Re is adding efficiency to its own underwriting capacity, as well as disrupting the traditional broker-driven market hierarchies.

In exactly the same way as the ILS market has been doing, Swiss Re is bringing its risk capital closer to the source of risk, which generates higher margins although also results in different kinds of exposures being assumed, loss frequencies being experienced, and business processes being required to manage it.

Here Swiss Re benefits from its depth of expertise, its scale and the deep knowledge it is building up, although those factors do all still weigh on underwriting capacity efficiency as well, compared to a leaner, capital markets backed strategy.

Why is Swiss Re going to these lengths to differentiate itself as a less traditional reinsurer, and increasingly moving along the chain where it risks being perceived by clients as also a competitor?

Profits are waning in reinsurance and the margins on underwriting business are not always able to support large organisations anymore. Swiss Re’s own metrics of profit, its Economic Value Management (EVM) income and profit, both plummeted in 2016, signaling an even harder time extracting sufficient profit out of some traditionally syndicated and brokered reinsurance business.

For example, EVM profit for property and casualty reinsurance in 2016 was just $562 million, a long way below 2015’s reported $1.7 billion. The P&C reinsurance EVM profit on new business written in 2016 was just $280 million, compared to $1.2 billion the year before, which suggests the contribution at end of year will also be lower.

This is during a year when global catastrophe and disaster losses have come in at average, not a year with any particularly outsized impacts for the reinsurer and at a time when its capital levels are high.

These figures truly reflect the impact of the softened reinsurance marketplace and show that the pain created by the evolving reinsurance cycle is being acutely felt.

They show that moving to a strategy that enables greater margin to be extracted from business underwritten, more direct access to risk to be secured, and for the company to be paid for its expertise and services (rather than just its balance-sheet) have to be the way forwards for all in reinsurance.

And if Swiss Re is feeling this profit and margin pain, causing it to need to make significant adjustments to its business model, everyone else is going to have to either follow-suit or find another way to add efficiency to their offerings.

Once again, and as we have written many times before, reinsurance is increasingly shifting to a model where you have to get paid for the value you deliver, rather than just for bearing someone else’s risks.

Swiss Re is taking proactive steps to move this way, it will be interesting to see how it delivers over time, as shifting a large corporate strategy is no easy task.

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