Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Swiss Re sees “agile capital” as an answer to re/insurance pressures


Global reinsurance firm Swiss Re held its investors day today in Zurich, at which it has released an update to its strategy which sees the firm place great importance on being able to manage its risk, asset and capital allocations in an agile manner.

Announcing a new four-pillar strategic framework, which the reinsurance firm says builds on the successful strategy it has implemented in recent years, Swiss Re expects this approach will enable it to “move to the next stage of its transformation to be an agile capital allocator in insurance and associated asset risks.”

It’s interesting as it demonstrates that even the largest reinsurers are adapting business models to be more flexible to combat challenging insurance and reinsurance market conditions, as well as more responsive to the insurance and reinsurance cycle, while also enabling them to take advantage when opportunities present themselves.

Swiss Re has outperformed in recent years and while it has lowered its return targets for the years ahead, it maintains an ambition to provide its shareholders with a market-beating return on their investments.

Capital allocation, how and where it is allocated, is to be at the center of the reinsurers strategy going forwards. Risk selection is going to be key, both on the underwriting side and also on the investment side of the business for Swiss Re, which suggests a number of possibilities.

Firstly, Swiss Re is going to more actively manage its assets, something the company had begun to do in the last year or so. The firm has been allocating more to alternatives and riskier assets, as has been seen at many re/insurers, but the new strategy of intelligent or agile capital use perhaps hints at more of a hybrid approach.

Capital is set to be deployed based on expected return, with extensive research aiding in underwriting risk selection, while at the same time the portfolios (on both sides) will be actively managed to ensure hurdle rates are met.

At the same time allocations are to be actively monitored and liabilities will be hedged to ensure returns, while the asset portfolio will also be optimised to maximise economic profit.

To us this sounds like Swiss Re adopting an agile approach to capital deployment and management, across both sides of its balance-sheet, a strategy that to also sounds a little like an asset management approach to running an insurance and reinsurance business.

The new strategic pillars perhaps hint at the ongoing mid-set change at Swiss Re, as the re/insurer comes to terms with the challenging reinsurance market, new threats in insurance such as technology start-ups and the world of emerging and less well-understood risks.

Embracing more of an active or agile management approach to capital, both how it allocates it to underwriting and how it invests it, brings its strategy into line with some of the more innovative business models being seen in the market place.

This makes a lot of sense. It will provide flexibility, allow the re/insurer to quickly shift capital allocations from one opportunity to another based on market factors, risk appetite, return expectations and other key business drivers.

It suggests that Swiss Re may become a little more like the hybrid reinsurance companies, that look to outperform on underwriting when the market is conducive, but which are happy to allocate more to investing and seek to outperform there when that is a better driver of their target returns.

This doesn’t mean that Swiss Re is looking to add undue risk on the asset side, rather that it is looking to become more intelligent in its management and allocation of capital to both risks and assets, a sensible response to the more competitive and challenging insurance and reinsurance market, as the firm looks to secure returns for its investors.

The strategy will also give Swiss Re an enhanced ability to optimise its assets across different business segments more efficiently, we’d imagine. Particularly important as it seeks to grow its P&C reinsurance, Corporate Solutions and Life insurance and reinsurance businesses into new markets and classes of risk.

The strategy could perhaps also give Swiss Re greater flexibility in using different sources of capital in future as well, which might make its overall platform more conducive to allowing greater amounts of third-party capital in.

In order for firms like Swiss Re to embrace third-party capital from ILS investors more, an agile model of capital allocation will be well-suited, as it would allow capital to be brought in and deployed more speedily, while the amount of capital from different sources could be flexed more efficiently as well, we’d suggest.

Of course there are no guarantees that a re/insurer with a balance sheet as strong as Swiss Re’s would look to welcome more alternative capital within its business, but the new strategy does seem more suited to that possibility in the future.

Swiss Re does say that it intends to access more sources of contingent capital in future, which of course can involve similar investors to the ILS market. Swiss Re has already secured an innovative contingent capital structure, which featured both a solvency ratio trigger and a catastrophe loss trigger, which could make the structure attractive to some ILS investors.

Contingent capital and hybrid capital look set to play a role in the company’s future, Swiss Re said it expects to continue on this roadmap focusing on putting in place contingent capital structures at the group level.

The other source of contingent capital that Swiss Re can leverage, which could assist with its agile approach to optimising its risk portfolio, is of course ILS and catastrophe bonds.

With the reinsurer back in the ILS market right now with an extreme mortality catastrophe bond Vita Capital VI Limited (Series 2015-1), its first ILS issue in a number of years, it perhaps suggests that the reinsurer will look to the capital markets more regularly as it looks to optimise its risk portfolio using new sources of capital.

Retrocession is another capital lever that Swiss Re will be able to pull, as it adopts this agile approach to capital allocation and management. With retrocessional reinsurance able to help the firm protect itself from peak risk exposures, as well as provide capital support for growth, we may see it play a bigger role in future.

There are of course no guarantees that anything will change at Swiss Re, in terms of leveraging alternative capital, issuing risk to the capital markets, or its use of retrocession. However by changing its strategy to one where capital use aims to be more agile and efficient, opportunities to welcome more efficient capital into its business could increase as well.

Swiss Re is also open to growth through acquisition, if the right opportunities emerge. However CEO Michel Lies said today at a media briefing that this was most likely in its Corporate Solutions unit and probably in emerging markets.

Swiss Re aims to grow by embracing new regions, working to narrow insurance protection gaps, developing products to address emerging risks and growing its relationships with key large clients. The agile capital approach it wants to adopt in its insurance and reinsurance business can only assist.

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