CEO forum: market outlook

As the lines between insurers and reinsurers become increasingly blurred, what does that mean for the market in the long term?

Amer Ahmed, CEO, Allianz Re: “I would characterise our business in three main components: distribution, risk intelligence and risk-taking capital. Capital is coming from different sources and certainly there’s a blurring between capacity providers. Ultimately risk will find itself to the most attractive capital. Risk intelligence is where insurers and reinsurers have unique knowledge, capabilities and expertise and to be successful this is where differentiation will be key.”

Eric Andersen, CEO, Aon Benfield: “I have used this analogy on a couple of occasions recently, but I think it holds true—the different forms of capital are no longer staying in their own swim lanes. Capital is continually pushing to be closer to the ultimate buyer—to trade further down the chain, which is both a challenge and an opportunity for the broker. For Aon, it is important that we are able to operate on all sides of the equation—from retail to reinsurance, retrocession, and alternative capital—in order that we can introduce capital to clients as and where it is needed. We are optimistic about these changes. This type of market disruption, when capital is pushing to get to the ultimate buyers of our products and services, creates an environment where, if we are smart and nimble, we can accomplish great things for our customers. It does challenge the traditional roles of our business but those that are flexible and keep an eye on the benefits should do well in this market."

Dr Arno Junke, CEO, Deutsche Rück: “Blurred lines between primary insurance and reinsurance are by no means a new phenomenon and I see no reason why this should not continue to be the case. One must ask, however, for what reasons and motivation. The reinsurer being part of a product development process in primary insurance certainly does not fall into that category. Neither does the setup as a re-/insurance company as long as core competencies within the corporate setup remain clear.

As history has shown many times, the line should be drawn when reinsurers view themselves as the better insurer and vice versa. It’s all about humbly staying within the bounds of your circle of competence.”

Nick Frankland, CEO, Guy Carpenter, EMEA operations: “This really follows on from the consolidation theory that sees composite insurance and reinsurance businesses as providing the most attractive efficiency, diversity and profitability propositions. While this does not mean an inevitable journey towards oligopoly, it does mean that monoline, mono-class, and separate insurance and reinsurance companies of any great size will become unusual and become the domain of entrepreneurial specialists in looser corporate constructs such as managing general agents (MGAs) or within the more capital-friendly Lloyd’s environment.

The progressive blurring of these historic divides does of course raise a number of questions: is diversification just cross-subsidisation by another name; are insurers becoming reinsurers of themselves; and how to judge the balance between capital-intensive reinsurance and the less demanding insurance classes?

The answers will play out over time and will differ business by business as each tries to find a blend that will deliver an enhanced result. And therein lies the perennial struggle, and the opportunity for clients and brokers alike.”

Torsten Jeworrek, CEO, reinsurance, Munich Re: “The lines between insurance and reinsurance have indeed become blurred. This is especially true for commercial and specialty lines of business, but less so in private lines. But it is not entirely new. Reinsurers have always been involved when large and complex risks requiring major capacity have to be insured.

Today we face continued fierce competition, which is being fuelled by excess market liquidity. In this situation, it is essential for insurers and reinsurers to make use of their risk know-how to generate growth and improve diversification. Focusing on innovation is particularly important for commercial and specialty lines.

Examples of new products are insurance solutions for cyber risks, energy, supply chain and business interruption, and protection of reputation. To be successful in innovation, it is important to have direct contact with insureds. This access can be achieved either via primary insurance models, or via strategic partnerships between reinsurers and insurers.”

Ulrich Wallin, CEO, Hannover Re: “To some extent it means that the competitive pressure on the pro/cat specialty and commercial business will be quite similar. As we see now, we see a soft reinsurance market and immediately see an increase in softening in the specialty and pro/cat insurance market. The only area where we’re seeing an insulation from market conditions is in personal lines, which is significantly different.

From my point of view, it would mean that the entities in the market would see pro/cat specialty insurance and commercial insurance quite similarly to the way that they look at reinsurance.

At Hannover Re, reinsurance is our core business and the majority of our core business would remain as reinsurance; we wouldn’t be looking for a 50:50 split.”

Ingrid Carlou, CEO, Patria Re: “This is another subject we have also dwelt upon on other occasions. Reinsurance in a sense, was an industry invented at a time when capital in the insurance market was scarce and portfolios demanded some form of sharing scheme in order to reduce volatility. The idea was that what an insurer could not diversify at a local level a reinsurer could at an international level. However some insurance companies are now larger than reinsurers, and have a global presence.

Capital scarcity or size is no longer an issue and therefore the original reason for reinsurance is now fundamentally questionable. It is obvious that reinsurance is becoming a commodity and the industry is being relabelled as the re/insurance industry.

Some other trends are also increasing the blurriness and reshaping the market segments. The industry has now been very successfully breached by the bank insurance sector. In the beginning the bankers were very risk-averse and therefore they were very neat packagers of personal line risks for reinsurers.

Alas they have woken up, grown up and learned the trade, so they are now retaining the risk and ceding the statistical deviation probability, such as cat exposure. Medium-sized and large industrial commercial risks are easily retained and controlled by large global insurance players, and ‘jumbo’ risks with a global distribution, plus the intermediate layers of catastrophe risks, are the bread and butter of collateralised deals.

This means that traditional reinsurers and smaller insurance companies need to live off the crumbs that fall off the table or look for their own space in the game.

In this context we feel you could pose two scenarios:

1. Risk carriers become bigger and bigger and they rely more and more on cover holders and MGAs to access the risks; and

2. Smaller and medium-sized players find the segments and niches where they are relevant and you end up with a mixture of players servicing the markets that require them.

Both options seem to call for specialisation of roles and a clear understanding of what it is each one wants to offer and who they will be offering it to.”

Denis Kessler, CEO, SCOR: “The behaviour of insurance companies has changed, and the way in which reinsurers and insurers interact is certainly evolving: insurers expect more technical expertise, more added value and more ‘capital relief’ capacity from reinsurers than in the past.

The growing concentration of cessions by large insurance groups within a single entity charged with negotiating the group’s reinsurance purchases contributes to this dynamic. But, despite all the consolidations in the reinsurance industry, insurance and reinsurance remain two separate activities with specific purposes.”

Michel Liès, CEO, Swiss Re: “These developments come and go in phases. Essentially the distinction between clients and competitors is becoming less clear. At the same time the market is becoming more polarised: there is a smaller number of large players on the one hand and niche companies that are smaller and more focused on the other. So you need either to have the size or be very good at one thing, or both. We offer a strategic partnership in which we want give our expertise in bearing and managing risks, by providing the right solutions and helping fill protection gaps.”

John Cavanagh, global CEO, Willis Re: “We view our business as matching wholesale risk with wholesale capital. We’re agnostic as to whether this is insurance, reinsurance or other hybrid structures. We’ve never strictly been a treaty reinsurance broker and view the crossover of risk and capital between the insurance and reinsurance sectors as something that we’ve always dealt with as a matter of course.

What does that mean for the market long-term? It means different things to different markets. The London Market and particularly Lloyd’s will gravitate towards much more portfolio underwriting rather than individual risk underwriting.

I cannot see the point in perpetuating the traditional ‘shoe leather’ approach to broking and the London Market particularly has to move towards a more efficient means of syndication and distribution. This will be driven by more efficient use of capital and an attempt to reduce cost of capital by managing distribution more effectively.”