Changing with the times

It is a fast-changing landscape for reinsurance buyers with changes in the market forcing them to re-think strategies and invest in expertise and technology. But this adjustment is not that recent for some—for some of the bigger players it is more a continuum of a process kick-started almost a decade ago.

"We now have a framework in place that we can activate whenever suitable to contribute to the achievement of the group’s targets." Mirko Sartori

A combination of regulatory measures, rating agency requirements and an ever-increasing array of options around reinsurance structures and the types of coverage available has meant the process and skills required around buying reinsurance and other forms of risk coverage has changed beyond all recognition in recent years.

Part of this change has seen insurers and other cedants invest heavily in bigger departments and better back-office support systems to ensure they can make better decisions when choosing how to best cede their risk.

No longer is it enough simply to understand the traditional markets. No longer can deals be done on the basis of long-term relationships and trust alone—even if terms and conditions and the price are quibbled over in the run-up to the renewals.

"it was inevitable that we would also start to get a better handle on the way we would buy and structure reinsurance across the company as a whole." Wplfgang Wopperer

Now, a company’s reinsurance programme and/or alternative risk transfer programme, as is increasingly common, will also have a direct impact on its internal capital management processes and its own ability to do business. It has increasingly complex implications around a company’s compliance with various regulators and the way in which rating agencies consider its risk.

But what might appear to be a relatively recent phenomenon has actually been under way for much longer. “It is more an acceleration of a trend that has been apparent for more than a decade,” says one broker speaking on this topic.

“The industry might still be perceived as unsophisticated in some quarters but many buyers kick-started a process of change internally some 10 years ago. In that sense, the industry has been getting ever more sophisticated for some time now.”

Start of an overhaul

One company which made this type of renovation of its operations almost a decade ago is Allianz. Until 2007, when it made the decision to restructure the way it was doing things, the company effectively did not have a department responsible for buying reinsurance. Instead, the purchase of outwards reinsurance was an additional task which was taken on by a department which was mainly responsible for inwards reinsurance —after some time, it was realised that two very different skillsets were needed for outwards and inwards reinsurance.

"External treaties and spend went significantly down, and in the end profitability improved for both Zurich and our reinsurers.” Paul Horgan

“Only at the end of 2007 did we first have a buying department in its own right,” says Wolfgang Wopperer, head of retrocession business at Allianz Re, which is responsible for the group’s retrocession portfolio. “Before then, outwards reinsurance was considered more as an add-on to inwards reinsurance.”

The change was driven by the company’s becoming more technical in terms of its risk management and better at analysing its needs across the group. “As we started to understand our expected losses better and therefore our pricing it was inevitable that we would also start to get a better handle on the way we would buy and structure reinsurance across the company as a whole.”

Wopperer says the central driver was a change in Allianz’s operating model combined with a different approach to corporate governance.

This was only partly driven by regulatory changes which were then on the horizon but which have since evolved into regulations such as Solvency II. Its management of capital relief in relation to both regulatory requirements and the rating agencies did play a part. “It was a steep learning curve,” Wopperer admits.

Other buyers for large, global insurers tell a similar story. Paul Horgan, global head of group reinsurance at Zurich, says the change in his business dates back to 2006. Before then, the company had no centralised purchasing strategy. The shift in strategy at Zurich was the desire that its best people should be focused on customers rather than the dynamics of offsetting risk.

“Prior to 2006, reinsurance at Zurich had no centralised purchasing. This obviously has created certain complexity and inefficiency—too many different brokers, carriers, and commissions,” says Horgan.

“Business units had to focus on reinsurance instead of spending that time with the customers, and the underwriting results had some space for improvement. In the year 2006, the decision was taken to centralise the reinsurance, which was quite a big change both internally and externally.”

It took several years of incremental change before the company had set up a truly global function. “But the results are more than rewarding,” he says.

“We managed to take an extra burden from our insurance business, allowing it to focus 100 percent on its customers. We have now a truly global function of professionals focused on reinsurance, working on a task with clear governance and controls. External treaties and spend went significantly down, and in the end profitability improved for both Zurich and our reinsurers.”

Another big buyer of coverage which has shifted its strategy in a similar way in recent years is Generali. Franco Urlini, head of group reinsurance and R&D at Generali, says the business now designates its retention as a group according to its risk appetite, class by class.

It has also moved from a country-specific perspective to a group perspective. The change has led to a big decrease in its reinsurance expenditure.

People drive change

To enable this evolution, however, these companies have also had to restructure, invest and often recruit the right people with a background in this field.

Wopperer says that Allianz now has a department comprising some six people dedicated to reinsurance buying and a number of support staff working in other departments who provide insights around things like catastrophe modelling and management and research & development.

While some were recruited, the majority are existing personnel who have changed their roles to facilitate the new structure. “Most were internal appointments,” he says. “They were already experts working elsewhere within Allianz. One was looking after inwards reinsurance within a specific unit while another was responsible for research around catastrophe exposures.”

He also stresses that it has become a top-down approach at Allianz. The strategy taken on this front is ultimately determined at board level. There is also a committee that coordinates the group’s retrocessional programme.

“The process of change was a learning curve for us and we started needing dedicated people to understand the structures we were looking to put in place,” says Wopperer. “We were also starting to use alternative methods of risk transfer such as insurance-linked securities (ILS) and other forms of collateralised coverage as well as plain vanilla reinsurance.

“We were also starting to look at things such as second event covers and different types of triggers. Things evolved quickly for us and it is important to have the right team in place using the right systems that can manage that level of complexity. But the mandate from the board was also that we needed to develop lean and easily understood structures. We could not get too complex.”

Liberty Mutual has also invested in expertise in this area in recent years, although the process of change has been less marked. James Slaughter, senior vice president and director of global reinsurance strategy at Liberty Mutual Insurance, says he has also noted many cedants doing the same.

“The dynamics in the market are changing. In reinsurance, cedants have become much more sophisticated in the way they buy coverage,” Slaughter says. “Many have recruited very experienced people who have previously worked for reinsurers or brokers and that has resulted in much more balanced peer-to-peer relationships between buyers and sellers.”

While this has undoubtedly been a trend in recent years, specific examples are harder to find and, interestingly, the companies doing the recruiting are often loath to explain their reasons for hiring in this way.

Two notable examples in the London Market, for example, are Aspen Re, which recruited Robin Clark from Benfield as head of risk redistribution back in 2007 (when many of the big buyers were restructuring), and Channel Syndicate 2015, which hired Nick Pomeroy, previously of Guy Carpenter and Miller, as head of outward reinsurance just last year. Both companies declined to comment on the hires.

A changing landscape

The nature of any recruitment going forward will surely be influenced by the rapid acceleration of the ILS markets in terms of both their size and their influence on the wider reinsurance markets as a whole.

Wopperer says Allianz was one of the early adopters of ILS structures to transfer its risk. Around a third of its US reinsurance purchase is now from alternative capital, while for its wider global book it accounts for 10 to 15 percent of coverage.

Wopperer says it is important to keep pace with changes in the market. “We were an early user of ILS and we have now seen others follow. But it is such a fast-changing market, our perspective on it can get outdated quickly as well.”

In fact, its use of ILS is also a reflection of these more fundamental changes to its strategy. As well as using the capital markets as it does, Allianz has also made changes to its reinsurance panel in recent years, being more selective over which, and how many, companies it does business with.

He says the firm’s reinsurance programme is almost completely global in its scope, it has a defined risk appetite and it continually monitors its counterparties. The upshot of all this is that it focuses its business on what he calls a stable panel of between 10 and 15 reinsurers which support its activities across all territories. Wopperer added that Allianz has also moved towards a bundled approach towards buying, which helps it better leverage its purchasing power.

“We look to enhance our relationships every year and continually speaks with all of our reinsurers and brokers to try to achieve this,” he says. “We meet them between five and seven times a year to exchange ideas—the process is no longer compressed into the renewals season as it used to be.

“We are also looking for value-added services. From brokers we seek good analytics and a broader perspective. Overall, we want stable partners who can offer us both flexibility and good ideas; offering capacity alone is not enough anymore.

“While we use models and see them as very important, we don’t want to get caught by surprise. We are always interested in ideas that can close the gaps in our portfolio. We believe we have done much of that but we are constantly reviewing our needs as a group and how we can better mitigate our exposure.”

Wopperer said that on Allianz’s core catastrophe programme—SuperCat, which provides coverage in Western Europe, New Zealand and Australia and has been in place for 10 years—the insurer has sought to avoid drastic price or panel changes to its programme, in order “to show our reinsurance partners consistency and continuity”.

Much of the way that Zurich now manages reinsurance ties in with this, Horgan notes. If anything, Zurich goes further. Horgan adds that reinsurance buying is just one of many functions that Zurich now manages globally including investments, catastrophe management and product line underwriting.

“Zurich operates in over 200 countries and territories globally but in reinsurance we optimise one balance sheet at the group level,” Horgan says. “We define clear appetites for risk globally, utilise internal reinsurance to pool risks on central balance sheets and syndicate the risk to the reinsurance markets centrally.

“With this approach we focus on internal reinsurance to satisfy all local capital requirements. Reinsurance has become a strategic tool controlled at the group level with full access to and engagement from senior management of the company.

“It allows us to manage volatility at the group level, reducing need for local solutions, facultative, or regional covers, which are now solved through internal reinsurance and management view of risk.”

As a result of these changes Zurich, like Allianz, has shifted its relationship with reinsurers over the years. “Initially we were working with numerous reinsurers and brokers in many countries. We’ve optimised the amount of providers we deal with on treaties, which led to more efficient costs,” says Horgan.

“We track all the premium we cede globally and track P&Ls for top 10 providers. We are reviewing the relationship in totality, not by transaction but in terms of ceding volatility to the market. As a result, external treaties went down by 40 percent and external spend is down by 50 percent.”

Diversification versus quality

Generali has a rather more diverse panel, of around 60 markets. Urlini says that the company has a relationship “with all the main providers of reinsurance globally”. Its catastrophe programme, its largest, uses European continental reinsurers, players from the London Market including Lloyd’s, and players from Bermuda and the US. “Nobody is missing,” Urlini says.

Generali seeks diversification as well as quality in its panel of reinsurers. This helps it manage its counterparty risk as it constantly monitors the financial strength of the companies to which it cedes business.

It does not rely on rating agencies alone, however. “The rating of reinsurers is important although it is a simplification and just a part of the analysis that we perform when selecting the counterparties,” Urlini says.

“We have developed a relationship with many players to get the best spread. It means we are not in the hands of just a few reinsurers; we are not dependent on a few top names of the industry. The whole market is backing us based on the quality of our underlying portfolio, which is very high and being improved continuously.”

Urlini adds that the insurance group assesses counterparty credit risk on a global basis in terms of the parent companies, regardless of local relationships. “So if we have a relationship with a regional representative, then we look to the group of the counterparty as a whole.

“If the regional entity is backed by the support of the parent group, this increases our confidence in the reinsurer,” he explains.

A first for Europe

It was partly this approach that prompted Generali to launch its first catastrophe bond earlier this year. It entered the ILS sector with the first European wind indemnity-based 144A catastrophe bond.

Lion I Re, as the bond is known, was a €190 million bond covering European windstorm. It was also the first European wind indemnity-based 144A catastrophe bond, making it something of a landmark for the ILS markets as a whole.

Mirko Sartori of the capital management team at Generali, says that one of the reasons for doing the cat bond was the greater diversification it delivers.

“It was important for us to broaden our reinsurance panel accessing capital markets capacity. This has allowed us to decrease the concentration of risk that we otherwise have with traditional providers,” Sartori says.

The deal also came after many years of the company’s monitoring of the market. Ultimately, the company now sees traditional coverage and ILS as being complementary to each other.

“We realised there’s no gap between the two any longer which suggested that a cat bond would be a good option for us. In the meantime, we also had time to manage the risk of the Generali Group in a more centralised way, allowing us to better leverage the ILS market opportunities,” Urlini says. “We had a number of external and internal situations which strongly recommended us to issue our first cat bond.”

Sartori adds that a change in personnel also helped drive this change. “Generali changed the top management team a couple of years ago, so we had within the group a new strong commitment towards these innovative alternative ways to transfer risk and optimise the capital.

“It was a really important step for us also because we now have a framework in place that we can activate whenever suitable to contribute to the achievement of the group’s targets,” he says.

Urlini adds that with the first deal done, ILS is likely to remain an increasingly important part of Generali’s risk transfer strategy.

“The ILS market will represent in the future an important part of our overall risk transfer strategy and implementation but at the moment, in absolute amount, it is not the most important part.

“We have much larger risks which we manage through reinsurance, such as Italian earthquake risks. This is a much higher exposure, so the ILS market involvement would be an integration of the existing reinsurance protection and—depending on market conditions—could play an important role in the future.”

Not all companies have used the ILS route yet, but buyers not leveraging this market can still benefit. Anna-Kitty Ekstam, head of reinsurance at If P&C Insurance, notes that one of the consequences of the rise of ILS has been a keener sense of service by reinsurers more generally.

“As one of the largest and most stable reinsurance buyers in the Nordic region, we expect to see both an increased appetite from the reinsurers and a continuous downwards pressure on rates.

“We do not see the current state of things necessarily as a threat to reinsurers, but rather as an opportunity to demonstrate their loyalty towards cedants by offering more favourable terms and increased capacity, thereby investing in long-term relations.”