CEO Forum: buying habits

Do you believe the buying habits of cedants have changed in recent years? If so, how? And how have you responded to this?

Amer Ahmed, CEO, Allianz Re: “The buying behaviour of cedants had changed significantly over the last few years, and we at Allianz have been at the forefront of this. Not so long ago reinsurance was often bought by individual lines of business and reinsurance was a risk management tool for individual portfolios.

There has been a marked changed towards reinsurance being purchased across lines of business and looking at the risk profile of the ceding company in total, rather than individual segments, and with a focus on managing overall earnings volatility and capital position.

As a reinsurer we fully understand and appreciate the rationale and we are happy to work with our clients to develop structures which fit their objectives. Overall, there’s been a substantial reduction in ceded premiums but the profile of the risk being transferred to reinsurers is very different—there’s much more risk per unit of premium.

So, all other things being equal, expected profitability on these ceded premiums should be higher albeit on a smaller base.”

Eric Andersen, CEO, Aon Benfield: “As a general trend, cedants have become more sophisticated over the years, demanding a greater level of risk and analysis from their intermediaries, and also a global service offering. Aligning to this trend, Aon Benfield has expanded its services and solutions in order that we can continue to deliver value.

There is also a cyclical nature to client buying habits and demands, in that in a soft market clients’ demands might be weighted more towards consultancy services and risk analysis, whereas in a hard market it becomes more about having market-leading transactional capabilities, negotiating power and relationships.

With the aforementioned influx of alternative capital, more clients are considering a greater range of capital solutions, and are exploring options wider than the traditional reinsurance programme. We have always been able to upscale our capabilities quickly in response to client demands due to the talented workforce we have within our firm, but it is also about anticipating client challenges and developing capabilities before clients are even aware they will require them.”

Dr Arno Junke, CEO, Deutsche Rück: “The old-school relationship business model declines to the extent that a risk-based approach and economic perspective on reinsurance as required by Solvency II takes over. Actually, ever since 9/11 we have entered a new level in our industry. Traditional buying patterns and trade practices have come under scrutiny. Transparency in the industry has been increased.

Reinsurance is increasingly understood as an important production factor of the primary insurer’s service proposition and, more than in the past, whether we like it or not, as a transaction-driven process as well. With our core competence in underwriting, we are able to meet expectations to conduct a meaningful technical-based dialogue in our client relationships exceptionally well.

Our proposition to the markets is to offer continuity in a client relationship based on consistency with regard to our underwriting judgment. And our underwriting judgment is based on sound actuarial skills and experience.”

Nick Frankland, CEO, Guy Carpenter, EMEA operations: “In general buyers have looked to increase retentions, combine exposures and rationalise the number of layers and programmes bought as they have sought to retain more profit against stronger balance sheets. For large multinational and global groups this has typically been achieved through an increased focus on centralised buying and the greater use of internal reinsurance vehicles.

Further consolidation will likely see this trend continue among the larger groups, especially as decision-making now sits much higher up the management chain and is assessed against a wider array of options than ever before. However, medium to smaller sized buyers are still highly dependent on reinsurance as a source of capital acceptable to regulators, and as such, tend to be more focused on accessing the efficiencies available in a hungry reinsurance market than in reducing the overall amounts purchased.

The alternative market has also created its own interest through ILS transactions, which will extend into non-cat classes within the next 12 to 24 months; and the opportunities to improve capital optimisation available through reinsurance mechanisms has seen increased activity in portfolio management protections.

It is a marketplace undergoing fundamental evolutionary change but a marketplace full of opportunity, and Guy Carpenter intends to be leading that change by reinventing the broker proposition.”

Torsten Jeworrek, CEO, reinsurance, Munich Re: “Of course, buying habits change depending on market, regulatory and overall economic conditions. Some changes are just cyclical in nature and others are more structural. To give you one example: under Solvency II, insurers are taking a much more economic view. In some cases this means that they are buying more reinsurance, especially mid-size or monoline companies, but others are buying less. So there is an up and down, but it is a structural change.

Cedants now prefer to place the bulk of their treaties with two or three anchor markets at different terms and conditions. This creates a split into (i) a first tier of quoting markets that deliver value beyond pure capacity; and (ii) an increasing variety of following markets trying to get a share of what is left. This split is increasing, but it is difficult to say whether this is already structural.

We feel it is important to follow each development closely, to think ahead wherever possible and to bring new solutions to the table in this quickly changing environment. We have the financial means, and the width and breadth of intellectual potential, to be close enough to understand and react in time.”

Ulrich Wallin, CEO, Hannover Re: “Following the financial crisis risk became expensive, so the demand for reinsurance increased. Ever since, the price for risk has come down and the demand for reinsurance has also decreased. We’ve seen more centralised buying, and higher retentions—in both large and medium-sized companies, as well as the larger reinsurance buyers looking to mix non-traditional reinsurance into their programmes.

Over the last few years, the demand for the traditional reinsurance product has come under pressure. For us, we are well diversified, so we still find areas to grow. We have opportunities in agricultural business and in Asia and some Latin America markets, as well as our life and health business.

For a large group, when they reduce their reinsurance spend, they also usually reduce the amount of reinsurers that they want to work with to keep relationships at a reasonable level. For a vast majority of the programmes that our clients buy, they work across class. Historically, we weren’t that heavily involved as a big group, so our market share as a big group has actually increased rather than decreased.”

Ingrid Carlou, CEO, Patria Re: “We have noted that there is a tendency to use reinsurance more as a commodity. But there are other factors at play in the current market:

1. Regulation is also calling for new products and changing the concerns and costs of opportunity for cedants. In this context reinsurers with healthy balances that can support the increase in the capital requirements of their clients will be at an advantage.

2. Large groups have in many cases, but not always, decided to increase security levels and reduce to a handful the number of reinsurers they will use, in order to simplify the placement of their cessions and reduce transaction costs. In some cases the use of a local expert is considered beneficial as a sort of thermometer of the regional market.

3. More interestingly, broking firms are starting to think along the same lines, and this is something to keep an eye on, even if we have not yet seen clear indication that they are actually acting upon these ideas.

We are fortunate enough to have a very healthy balance sheet, so we have worked over the past five years to develop the expertise implied in the new regulation, so we can service the needs of the markets where we operate. We have also identified potential strategic partners in order to do this as well as we can by recognising our own shortcomings and areas of opportunity.

When we repositioned the company a couple of years ago, it was not with the intention of becoming another company trying to be everything to everyone, but really with the intention of becoming the most relevant operator for Latin America.

Last but not least we are now part of a conglomerate of operations in the insurance and reinsurance sectors. All the companies in our group are designed to generate synergies between one another, even if they each need to be self-sustainable.

This means that as a group we are much larger than the sum of each individual company and we intend to use this potential to bring additional advantages to our clients and partners.”

Denis Kessler, CEO, SCOR: “It is a fact that there has been a change in the principles on which cessions are based. Large insurers retain more risks and select a restricted number of reinsurers with whom to concentrate their cessions. This is what I call bifurcation.

Global reinsurers such as SCOR, with a higher share of global insurers’ cessions, will benefit from this trend more than the smaller, more opportunistic reinsurers, who cannot fully serve global insurers’ needs.”

Michel Liès, CEO, Swiss Re: “Because of the stronger balance sheets as a result of financial markets recovering, in combination with relatively low losses from catastrophes in recent years and the low interest rates, clients have been able to retain more risks. Some of this is cyclical and some of it structural.

Fortunately, we at Swiss Re don’t just deliver capacity, we are a partner that offers a wealth of expertise across all our business units and have valuable tools. We have very strong relationships with our clients and with brokers.”

John Cavanagh, global CEO, Willis Re: “Buying practices for most cedants have changed beyond recognition from a product line view to a centralised and consolidated view. This has been driven by a number of factors, but largely the ability of cedants to measure risk more efficiently and better understand the dynamics of different product lines in terms of capital and results management.

Regulators have also pushed very hard in recent times for clients to raise more capital for proportionately less risk. This has translated into clients carrying as much risk on their balance sheet as their capital will tolerate, which means less reinsurance will be bought.

Centralised reinsurance management has had a profound effect on reinsurance-buying habits and I would say that most of our clients now operate buying strategies controlled by the most senior executives in the firm.

Willis Re’s response has been to adopt a more analytical approach. We look at the reinsurance product holistically in terms of the impact on capital risk management and profitability of our clients. We have models now that interpret every moving part of a client’s business and we use this to overlay reinsurance structures to determine the potential financial outcomes.”