Challenge and its variations are words used frequently in the Swiss Re annual results documents and letters to shareholders. The reinsurance firm clearly feels the market pressures, as all reinsurers do, but it feels well positioned to meet one challenge in particular, that posed by abundant capital.
CEO Michel M. Liès comments in his letter to shareholders; “If you follow the industry closely, you will know that capital in various forms in the reinsurance market is abundant these days.”
It’s true that coverage of reinsurance is not complete in the media these days without a mention of the core topics Artemis is interested in, of capital markets entry and growth into the space, convergence and alternative or third-party reinsurance capital.
For CEO’s like Liès this must be tiresome, but the fact is that lower-cost alternative capital, more efficient insurance-linked securities (ILS) business models and the structural change in reinsurance, are perhaps the biggest challenges that a firm like Swiss Re faces.
However, Swiss Re continues to feel well-placed to deal with this. “We are equally well positioned to rise to meet challenges such as the abundance of capital or the more over-arching challenges of climate change and the insurance protection gap,” Liès explained.
Liès goes on to explain that the added value that Swiss Re provides, beyond pure capacity, is what gives the reinsurer the edge. Its expertise and capital strength, working alongside clients to create customised solutions and large transactions is where the biggest reinsurers can really excel.
Walter B. Kielholz, Chairman of the Board of Directors at Swiss Re, also commented; “We all have read a lot about alternative capital forcing its way into reinsurance and trying to substitute for traditional reinsurance.”
An interesting comment given that it was reinsurers such as Swiss Re that welcomed the capital markets into reinsurance with the first catastrophe bonds and other similar transactions. At the time they felt that the capital markets were the natural home to transfer these peak catastrophe risks to.
Has that changed? Likely not. But the growth and penetration of the capital markets and alternative capital into the reinsurance market through collateralized reinsurance in particular is increasingly eating into business that was once core for firms like Swiss Re.
Kielholz continued; “I do not think that Swiss Re is particularly vulnerable to such market forces and that the market available to us remains as large as it ever was.”
Kielholz explains more of the added value that firms like Swiss Re provide, helping them to stay client relevant in areas where it is harder for ILS and alternative capital to penetrate, such as the firms Corporate Solutions arm.
This corporate business also helps Swiss Re to avoid the trend of large insurers retaining more risk and ceding less, Kielholz says, as it can work with large non-insurers to deploy capacity instead.
Additionally Swiss Re feels insulated from the abundance of capital thanks to its shift towards high growth markets, which it believes will make up as much as 25% of its premiums by the end of 2015.
In P&C the firm notes; “Natural catastrophe prices have come under increasing pressure due to benign loss experience and abundant capacity.”
However, despite this growth in capital in the reinsurance space, Swiss Re believes catastrophe risk remain attractive.
“Despite an increase in alternative capacity, particularly in the US, we believe we will continue to achieve attractive returns on the property business we write,” the reinsurer explained.
The firm expects to grow its natural catastrophe business globally as well, seeking to narrow the gap between economic and insured losses as Liès explained.
And despite the challenging January reinsurance renewals, the firm says; “We observed further softening of property reinsurance rates for all regions due to the absence of losses and to abundant capital. Swiss Re maintained large shares of catastrophe business at profitable levels.”
It’s true, the size and scale of Swiss Re, and other globally active and diverse reinsurers, protects them from the biggest impacts of the current (super)abundance of capital in the reinsurance market. Also their ability to shift business mix, grow into new markets, work more directly with large corporates and maintain signings on existing programmes all positions them to navigate the markets challenges.
However, some reinsurers like Swiss Re are being increasingly defensive on alternative capital and ILS, at a time when it still only makes up approximately 15% of reinsurance capital. What if that grows to 30% over the next two years, will their efforts to adjust their business be able to protect them then?
What if ILS grows considerably? The capital markets show no sign of losing interest. What if ILS and alternative capital finds ways to work directly with corporates, then impacting that area of reinsurers’ businesses as well? What if ILS and alternative capital continues to become increasingly innovative and builds on its own client relevance, becoming a mainstay of the majority of reinsurance programs?
It seems that reactions to ILS and alternative capital are diverging among reinsurers, with some embracing it, discussing it increasingly positively and finding ways to bring in additional income from their work with it. Swiss Re does this too, in fact it has an industry leading practice in ILS and the capital markets, but consistently at the top-level also talks about challenges and has been almost negative on ILS at times over the last year or so.
Some might say that challenges present opportunities. Abundant capital is a challenge for firms like Swiss Re, that cannot be disputed and it needs a response. But, perhaps Swiss Re could focus more on finding opportunities for it to profit from the alternative capital and ILS trend and all this abundant capital (as there will be a number of them) rather than the challenges it presents?