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10 November 2016 Insurance

Reinsurers with primary carriers may face conflict with cedants

While ‘diversify’ has been the mantra of many large reinsurers in recent years as they seek growth in stagnant markets and enhanced profits outside the elongated soft market in reinsurance, some strategic plays could rapidly become a double-edged sword for some players.

A number of big pure-play reinsurers have stressed during this renewal season the merits of the fact that they do not compete with their clients. While many reinsurers have launched or expanded primary operations in recent years, the natural consequence of this is starting to wear a bit thin with some clients and the cycle is starting to reverse.

Large reinsurers that have aggressively expanded into primary insurance in recent years could start to face a backlash from their clients, warns Jed Rhoads, the president and chief underwriting officer for Markel’s Global Reinsurance Division.

“We are starting to hear grumblings from cedants that reinsurers, especially those with large shares of reinsurance placements, are not welcome to compete directly with them on the primary side,” he says.

Rhoads believes that there are winds of change in the industry, which may see some of the biggest players lose market share if they are perceived as ‘changing their stripes’ and becoming a threat to original insurance business.

“While many reinsurers, including Markel Global Re, have insurance operations that compete with clients, it’s an order of magnitude issue,” he says. “It’s one thing to have small shares of a programme, and quite another to control/lead with big slugs of placements.”

Cedants are starting to show interest in mutual trading relationships with reinsurers, but not going ‘toe to toe’ with them on their core primary business, Rhoads adds.

“Today, cedants are beginning to question if they can extract more than just good security and capacity from their reinsurers. What else can they do to help cedants grow their business?

“The notion of a more circular food chain with their reinsurer, providing more diversification or to gain strategic advantage, is becoming increasingly attractive in this market, but they certainly don’t wish to lose income to their reinsurers,” Rhoads says.

Private and pure-play

The message seems to be hitting home in some cases. PartnerRe, which was acquired by Italian investment fund Exor last year and is now privately owned, announced that it has dropped its aspirations of building a major primary business and is refocusing as a pure-play reinsurer.

Charles Goldie, head of specialty lines at PartnerRe Global, says the business has settled on a new focus under its new ownership, and has identified two things that set the reinsurer apart.

One of these is its move away from primary business, although it will retain some of the small niche direct business it already has. But Goldie stresses that the company will not compete with its clients going forward and will focus on supporting cedants only as a pure-play reinsurer.

“The old PartnerRe had started build out primary operations and had launched PartnerRe Wholesale but we are moving away from that,” Goldie says. “We don’t want to compete with our clients going forward. That is not comfortable for us.

“The primary side was still in its infancy but I believe it is tough for reinsurers to move into primary business. It is a different orientation. We are going to stick to what we are good at.”

The second distinguishing factor that will set it apart, Goldie says, is the fact it is now privately owned. This means it does not endure an interrogation of its results every quarter by analysts and shareholders, allowing it to plan longer-term and take on more volatility in the risks it underwrites.

“Public companies have a lot of earnings pressure and have very short-term goals, and they can’t cope with volatility in their earnings,” he says. “The fact that we have a shareholder with a long-term vision means that not only do we not have that but we can help our clients manage.”

Non-compete clause

Hannover Re also made this point during a press conference at the Monte Carlo Rendez-Vous. Ulrich Wallin, its chief executive officer, says the business is not interested in pushing into the corporate market, in contrast to its main competitors, because it does not want to compete with primary insurers. He also thinks that corporate business faces the same challenging pressures as the reinsurance business.

“The corporate market has exactly the same challenges as the reinsurance market,” Wallin says. “If you look at the large corporate risks, it’s a competitive market subject to the same rate pressures as the reinsurance market.” Developments in the corporate market are correlated to the reinsurance market, he notes.

Most of the other big reinsurers have units dedicated to large corporate and industrial risks. Structured deals with corporate clients can generate higher returns than in reinsurance but Hannover Re says it will not participate in this market.

The company notes that engaging directly with corporates could mean competing with primary insurers—its clients. Wallin confirmed that where the company does write insurance it is only on a limited basis.

“We do write some insurance as well but we see that as complementing our reinsurance activities because we write it only on some large corporate risks such as aviation, energy, marine, large property and some casualty business,” he says.

The same point has been made by Gen Re and TransRe in recent months in the context of their new joint venture, in which the latter will write broker-driven business on behalf of the former, a traditionally direct player.

As Ken Brandt, president of North America, Trans Re, reiterates in our cover story, Gen Re has an advantage over many reinsurers: because it is a pure-play reinsurer, it does not compete with its clients on insurance lines.

“There are existing holes in some programmes but some clients are ready for a change. These insurers are tired of their reinsurers competing with them and are ready for a change. The fact is that for both Gen Re and TransRe, we are not companies that support an insurer on a Monday and then compete with it on a Tuesday, as some companies do,” he says.

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