Swiss Re: Capital market and ILS pricing has stabilised

The influx of third-party capital into the global reinsurance market via instruments like catastrophe bonds, insurance-linked securities, funds and other vehicles is affecting reinsurance pricing, but ILS pricing is now stabilising, according to comments made by senior Swiss Re executives.

First, Swiss Re’s Chief Financial Office, George Quinn, has been quoted by Bloomberg as saying that a growing catastrophe bond market will continue to put pressure on traditional reinsurance pricing, as alternative and traditional reinsurance protections compete over catastrophe risks.

“While the market is supplied with capital in this way, it will put pressure on prices,” Quinn is quoted as saying during an interview last week. He cited the high returns that investors can achieve in catastrophe and reinsurance-linked investments as particularly attractive, so driving inflows of capital.

Quinn feels that the inflows of capital have yet to slow and that the catastrophe reinsurance market needs the additional capital. He said that over time he expects to see further growth in supply of all types of capital, traditional and non-traditional, into the natural catastrophe market as it is needed.

At the recent mid-year reinsurance renewals, Swiss Re felt the impact of third-party capital as it saw prices 5% down overall compared to 2012 in its renewals. The price decreases have been largely in U.S. natural catastrophe business it said, lines of business “Where the supply of alternative capital is most significant.”

In its second-quarter 2013 report a letter to shareholders from Chairman of Swiss Re’s Board of Directors, Walter Kielholz and Group CEO, Michel Liès, says on reinsurance; “Interest is especially keen this year as pension funds, hedge funds and other sources of ‘alternative capital’ have entered the reinsurance market, particularly for short-term natural catastrophe cover.”

Swiss Re is clearly keen to stress its scale and long relationships with clients, as the letter to shareholders continues; “Our clients clearly recognise that Swiss Re is not simply a trader of re/insurance capacity. We are real partners to our clients, in business for the long term. We invest significant resources into understanding the perils we face — and have faced, and will face — together. This approach builds the kind of long-term value that is recognised by clients and helps us to achieve better pricing than the broader market.”

Swiss Re is not the first reinsurer at the mid-point of the year to seek to differentiate its offering from that provided by the new, alternative and ILS based forms of reinsurance capital.

In Swiss Re’s investor and analyst earnings conference call the reinsurer again discussed pricing and the influence of third-party capital and ILS.

Matt Weber, Swiss Re’s head of property and specialty, said that he felt that ILS pricing has now reached a point where it will not drop any further.

Weber commented; “If we look at the price level changes that are happening in the capital markets from the influx of additional capital that has happened over the course of the last six to eight months, we have indeed observed a stabilization. Price levels in the capital market right now are stable. They are not decreasing. And that is the current situation.”

So even the largest of reinsurers are not immune to the price impacts seen on traditional reinsurance renewals, caused by competition from the capital markets and ILS, but Swiss Re do appear to feel that pricing of ILS and non-traditional capacity has reached a natural floor.

The question is, of course, how long ILS, catastrophe bond and non-traditional reinsurance capacity pricing remains at the current low levels. Traditional reinsurance pricing is going to continue to remain under pressure to match, or even better, those price levels so the fact that ILS pricing is not dropping further does not take the pressure off reinsurance firms.