Global reinsurance firm Swiss Re has purchased less retrocession for the year, despite the retro market conditions being described as very attractive, as the firm follows a different strategy to other major reinsurers.
Some companies have been describing the retrocessional reinsurance market as the most attractive it has been in years, with pricing declining sometimes more rapidly in retro than in the primary reinsurance market, which has even opened the door to arbitrages.
Despite the very attractive retro market conditions, which even Swiss Re itself described as featuring significant price declines, the reinsurer has not taken advantage to boost its own protection. Swiss Re senior executives discussed this during the firms earnings conference call last Thursday.
Matthias Weber, Swiss Re’s Group Chief Underwriting Officer, explained the reinsurers retrocession strategy, beginning with the fact it doesn’t feel the need to react to pricing as it doesn’t purchase much in the way of retro anyway.
“We buy very little hedges and very small amount of retro capacity to begin with, so any changes in relative terms are small in absolute terms, compared to other companies in the market, Weber explained.
Then he explained why Swiss Re might buy retro, saying; “There are a number of reasons to buy external retrocession, and here I include also insurance-linked securities and ILWs and swaps and sidecars, so all type of protection. The most important reason for us is our U.S. Hurricane exposure, to protect us in case of a U.S. Hurricane event.”
However, as we wrote regarding Swiss Re’s results the other day, the firm has been reducing its natural catastrophe reinsurance premiums written and so its exposure is lower than before.
“Since we reduced our nat cat exposure overall over the last one and half years and this trend continued to be the case also at the most recent 1/1 renewals. We actually reduced our loss exposure and with this we were actually in a position to also reduce the protection we need to have in order to bring our gross exposure down to our net risk appetite,” Weber continued.
“Please understand that, you might ask yourself okay if the price levels in the retro market are going down so significantly, why is it that Swiss Re does not take advantage of it and increase the hedges, which some of the other players in the market are actually doing,” he said.
Swiss Re has a very different strategy to other reinsurers that have been upsizing on retrocessional purchases and also ceding increasing volumes of business to third-parties through sidecars and other vehicles. In fact the firm feels that it can extract more value out of the business it has underwritten by keeping it on its balance-sheet, up to the firms risk appetite level.
Weber explained; “Our thinking is the following, despite the rate increases we find this retro capacity still expensive, in the sense that if we buy or if we bought more capacity we would have to cede more margin to other players.”
“We decided it makes more sense for us to keep the business up to our net risk appetite and since at the same time we reduced our gross exposure that actually allows us to reduce our hedging.”
The differing strategies between reinsurers is becoming more apparent as market conditions become more challenging, causing opportunities for those that would rather hold less risk, as well as for those that would rather extract every possible bit of value from it.
Retrocessional reinsurance buying strategy is one thing, but differences also emerge in reinsurers usage of third-party capital. Swiss Re for example has treated its Sector Re sidecar, where it ceded a portion of its risks to third-party capital, as a source of retrocession over the years and Sector Re shrank in 2014.
Other reinsurers have been increasing their usage of sidecars to bring third-party capital into their businesses to enable them to underwrite business which they would prefer not to keep on the balance-sheet and to acquire fee or profit share income as well.
Swiss Re here is seemingly going it alone among the world’s biggest reinsurers, with almost all others reporting increased retro purchases due to the attractive market conditions as well as an increased use of third-party capital.
Differences in strategy such as this provide an opportunity to see how the reinsurers perform over time. However, by managing up to its risk appetite and tolerances Swiss Re may find that while losses continue to not be exceptional that its strategy does in fact allow it to realise the maximum margin from the business it has underwritten.
For the others, who are being more expansive with their use of retro and third-party capital, the additional growth this is providing could make the difference as well.
Time will tell whether any one strategy is better than another and it will likely need a return to higher levels of catastrophe losses for that to really show through in any firms results.