While still characterised by a process of rationalisation, the dynamic between reinsurers and cedants seems to be approaching more of an equilibrium—albeit with fewer traditional players and, in many cases, in the ILS markets. Bermuda:Re+ILS reports.
For several years, the talk in the market has been of the big international cedants rationalising their panels of reinsurers. A mixture of their greater sophistication and understanding of risk and increased regulatory oversight, driving a greater analysis of each counterparty risk, has made such a process largely inevitable in the long term.
The rhetoric has been in general terms—until this year. And to some extent, the process of rationalisation has been happening regardless of their direct action. In any case, consolidation in the reinsurance industry prompted, in part, by the perceived strategy of buyers, has created a smaller number of reinsurers competing for business.
This year, the messages from some cedants got tougher and more tangible, however. Insurers are under pressure in their own business and any available savings on reinsurance must now be realised.
This culminated in Zurich Insurance telling sister publication Monte Carlo Today that it would cut 20 reinsurers from its panel in this renewals. The statement sent shockwaves of anxiety through the market as companies wondered which would make the cut—and which would not.
Paul Horgan, global head of group reinsurance at Zurich Insurance, explained that as market conditions continue to soften, the company must reduce costs and access new capital where possible, resulting in the reduction of the number of carriers it will work with.
“We’ve been talking about having preferred partner relationships for a few years now, but this is the year when it’s going to start to bite. We’ll be reducing our panel by about 15 to 20 carriers. The panel will still be well over 30 strong, but it is going to come down significantly,” he said.
“We don’t think the market’s softening will be as soft as prior years, but there’s tremendous pressure on us to continue to lower our reinsurance spend. So we’ve worked with our brokers to work out what are more efficient ways to buy.”
Horgan stressed that Zurich will look to protect its relationships with its core carriers—but at the expense of others, which it will cut completely. Horgan said spend with these core partners may reduce by just a couple of percent but he is hoping to keep spend with these consistent.
“For some of our core carriers—we have about 10 of those—we try to keep them on a consistent spend,” he said. “For others that are less important, they might see some level of reduction. We just can’t afford to keep the smaller carriers that are on with 1 or 2 percent lines with us,” he says.
Tip of the iceberg
Horgan may have been blunter than his peers but he has been far from alone in describing this trend and what it means. While some smaller reinsurers deny such a phenomenon, many of the bigger players seem to be embracing it.
Manfred Seitz, managing director of international reinsurance at Berkshire Hathaway, says his company has benefited from this trend. “As larger insurers have become ever-more sophisticated in their programmes, it has meant opportunities for us because we are often a starting point for companies that want to structure these large, complex programmes,” he says. “We are a natural partner on those.
“The market could continue to evolve to a similar structure that we see in the life reinsurance space." Denis Kessler.
“They want to work with a large, strong company with a stable capital base and a global reach. We are clearly in that top tier of reinsurers able to offer all those things. The rationalisation that has taken place has been a much bigger problem for the smaller mid-tier players. Some will inevitably miss the boat and that is partly driving consolidation.”
Five years ago the idea of tier 1 reinsurers had not yet been coined. The person who is happy to take credit— both for anticipating the way the reinsurance landscape would change and for the phrase itself—is Denis Kessler, chief executive of SCOR.
Based on his prediction for how the market would change, Kessler says SCOR’s main goal in recent years has been to ensure it does, indeed, occupy this coveted tier 1 position—something further growth and several recent upgrades seems to have achieved.
He argues that it is more important than ever to be a tier 1 reinsurer—and those that have achieved this now occupy an elite and very powerful position in the market.
He adds that it is becoming increasingly hard for smaller players to compete, and that once a company has lost its place on an insurer’s panel, it will be very difficult to regain it. “Once you are off a panel, it is very difficult to get back on,” he says.
Kessler and Seitz agree that the gap between this top segment of players and the rest was growing. “The gap is widening; it is becoming more difficult to achieve,” Kessler says. “The market could continue to evolve to a similar structure that we see in the life reinsurance space where there are only half a dozen serious players worldwide.”
Seitz agrees. He envisages further consolidation in the industry and claims the bar to becoming a tier 1 reinsurer has been raised in recent years.
“Maybe it used to be that with $2.5 billion in capital you were considered tier 1; now, I would say it is closer to $5 billion,” he says.
He also notes that a growing number of companies are aspiring to become top players in the industry, including some based in Asia including GIC Re, China Re and Korea Re. “Getting to be a top five player is becoming a crowded space,” he said. “There are many companies with that ambition—we could have a top tier of five with 20 companies claiming to be in it.”
While Zurich is clearly taking radical steps this year to adjust its reinsurance programme further, many reinsurance buyers seem to be entering a period of relative stability in their approach to risk management. Indeed, many seem more interested in structuring their programmes in a way that takes maximum advantage of the ultra-competitive market at the moment and availability of relatively cheap coverage as a result.
Wolfgang Wopperer, global head of retrocession business at Allianz Re, the company responsible for the Allianz group’s retrocession portfolio, for example, says he is seeking more protection in this year’s renewals, especially per-event cat cover for emerging regions.
“Final decisions have not yet been made, but as a trend we plan to enhance our protection level rather than to reduce it. One area for additional purchase could be per-event cat cover for emerging regions,” he says.
"We have very clear risk tolerance metrics and they cascade through the organisation informing us of the reinsurance need." James Slaughter.
This represents a departure from last year when Allianz Re purchased more comprehensive, traditional coverage.
Wopperer’s strategy is partly based on the fact that he expects the buyer’s market to continue through the renewals, although the pace of rate declines will start to slow, he believes.
“We expect that the rate decrease will slow down, but do not yet expect a market hardening for the January 1 renewals,” he says.
Beyond its desire to scale back its panel of reinsurers, Zurich is also looking to tweak its approach in other areas. Horgan says the insurer is also interested in securing a better use of facultative reinsurance.
“We’re very interested in how to utilise facultative reinsurance more efficiently. There are products in our portfolio where we either don’t have the pricing right or we don’t have the capacity—but we want to do that in an efficient way,” he says. “We’ve always been very treaty focused, but we think this is the right move for Zurich.”
Markus Meier, Zurich’s head of insurance management, stresses that the company will not be reactive to market conditions but he adds that the company is continually reshaping its portfolio to ensure the best match for its risk transfer needs.
“Reinsurance is used strategically—not opportunistically—at Zurich and it is not a crutch for poor underwriting. We continuously reshape and enhance our reinsurance treaty protections,” Meier says.
“Over the past few years this led a significant reduction in reinsurance premium spend with a corresponding smaller panel of reinsurers.
“In 2016 we will continue to expand our business relationship with those strategic reinsurance partners who are committed to invest in a long-term strategic relationship and where we are very familiar with the financials, the management and the strategy.”
Meier adds that while the percentage of reinsurance purchased in relation to gross written premium will be fairly stable year on year, it will make further refinements to a number of reinsurance programmes, in particular natural catastrophe protection.
He adds that the influx of capital markets money has combined with strong reinsurance results and the fact that many cedants including Zurich are buying less treaty and facultative reinsurance compared with a few years ago, to make the market extremely competitive.
“Coming through the July renewals prices continued to go down albeit at a reduced pace compared to previous years,” he says.
A two-way street
Anthony Day, chief executive officer, commercial insurance, Suncorp, Australia’s largest general insurer and largest personal injury insurer, says he plans to increase the top of its reinsurance programme to A$6.9 billion ($4.8 billion) following an extensive review of the portfolio.
The company, which ceded around A$1 billion of business in the 2013/2014 period, has made a number of tweaks to its programme compared with the year before, he says.
“Annually Suncorp reviews its modelling in response to changes to exposure, risk appetite and assumptions,” Day says. “This leads to changes in the limit of the main catastrophe programme and potentially the retention. This year the detailed review led to an increase in the top of the programme, to A$6.9 billion.”
Suncorp is also increasingly unusual in the market in that it relies almost exclusively on traditional placements for its coverage, as opposed to using alternative risk transfer techniques such as insurance-linked securities (ILS).
Day says there will again be no big move away from traditional reinsurance this year, despite the growing number of options available, although he says the company does work with a small amount of alternative capacity.
“Each year Suncorp reviews its counterparties, taking into account the strength, relationships and available capacity. At this stage, we utilise a small number of alternative capacity providers,” he says.
James Slaughter, senior vice president and director of global reinsurance strategy at Liberty Mutual, says he believes this is shaping up to be a relatively uneventful renewals season for seasoned reinsurance buyers content to stick by tried and tested strategies.
“I don’t think buying behaviour will change much at January 1. In the main I think it will be a fairly straightforward renewal season for those with mature and sophisticated buying strategies,” he says.
Liberty is also edging back towards using more traditional reinsurance having previously complemented this with ILS and other forms of collateralised reinsurance.
It has completed three cat bonds previously but decided not to renew Mystic Re this year after finding better value in traditional reinsurance.
“We continue to find better value in the traditional marketplace,” Slaughter says.
He adds that Liberty does not forecast any major upheavals at the January 1 renewals and added that its strategy will be determined by pre-set risk tolerance metrics.
“We don’t use price as the determinant of purchasing. We have very clear risk tolerance metrics and they cascade through the organisation informing us of the reinsurance need,” he says.
Italian insurer Generali is another cedant which has developed the flexibility to alternate between different risk transfer strategies, especially since it launched its first ILS deal last year.
Franco Urlini, group head of reinsurance, Generali, says the company will continue to access the ILS market, especially to offset European windstorm risk due to the attractive terms available. It will balance this with traditional reinsurance, seeking the most effective mix for its portfolio.
Urlini says that having monitored the ILS markets for many years, the use of cat bonds was made possible when the company centralised its reinsurance purchasing programme.
Before this, a concentration of Italian earthquake risk in its portfolio made such a deal less viable. Because reinsurers see this risk as an “attractive diversifier” on their books, it was already benefiting from very competitive rates in the traditional market.
Expanding on Generali’s reinsurance-buying habits, Urlini says that these have changed over time as a result of soft market trends and Solvency II requirements. He believes the company’s challenge going forward will be balancing the risk transfer techniques it uses in the most cost effective way.
“Reinsurance buyers have found opportunities to improve their protection by enlarging the scope of cover, with both higher capacity and improved terms like wider hours clauses or pre-paid reinstatements,” he says.
He added that quota share protections aimed at providing capital relief have become more popular and widely offered by the big reinsurers.
“Buyers have also created more structured reinsurance programmes which use a combination of traditional reinsurance and ILS.
“The challenge for Generali, as a buyer, will be that of achieving the most attractive terms and conditions by keeping a high level of quality and maintaining the consolidated relationships with the key players in both the traditional and the ILS markets.”
The trend of consolidation has extended to all corners of the market and this has also meant buyers joining forces post-deal.
One example is in the case of Antares and new owner Qatar Insurance Group, which plan to re-examine their approach to buying reinsurance in an attempt to manage their exposures more efficiently.
Richard Anson, head of ceded reinsurance, Antares, says the combined entities will look to leverage their position as part of a larger group in order to buy more effectively and manage the group more efficiently.
“We’ve been carrying out a project over the last couple of months looking at group reinsurance, which would include multi-class covers,” he said. “This is the start of more of a group approach.
“While this will go more quickly in some areas than others, reinsurance is one of those areas that can work quite quickly and efficiently.”
Anson says he is looking closely at the value he is gaining from coverage—not just price. “The key thing for me is value and that isn’t just about price. Of course price is a large part of that, but it’s also about managing our exposures as economically as possible within the current market environment,” he says.
“Whatever I save on the price, we’re going to lose more through the front door, so it’s all about buying the right programme—and that’s always been my mentality.”
Zurich Insurance, Paul Horgan, Manfred Seitz, Berkshire Hathaway, Bermuda