QBE vows to protect margins by being less reliant on brokers and Lloyd’s
These were some of the revelations made at a first-half results briefing in London on August 17.
“Rates are pretty competitive in most spaces and we don’t anticipate and we’re not planning for a significant change or improvement,” said Richard Pryce, CEO of QBE’s European operations.
Rate reductions in the reinsurance space have slowed, “that’s encouraging,” but “so long as you continue to have this imbalance in supply and demand then you’ll always have some pricing pressure,” Pryce said.
Due to the low interest rate environment, investors have been pouring money into the reinsurance space, significantly contributing to a prolonged soft market.
Reinsurers like Munich Re or Swiss Re have started to shed business due to adverse pricing, but Pryce does not expect this to result in lower capacity and revert the cycle.
“At the moment, in any underwriting decision that people make, the gaps are being filled. I don’t see that changing in a hurry,” Pryce said.
QBE’s gross written premiums shrank in the first half reaching $8.1 billion, a 6.9 percent decrease from $8.7 billion for the first half of 2015.
The company’s net profit was $265 million for the six-month period ending June 30, a 45.7 percent decrease from $488 million for the same period in 2015.
The fall in profits was driven by lower bond yields due to the UK’s vote to exit the European Union, according to the company. This contributed to an adverse discount rate adjustment of $283 million to QBE’s pre-tax profit for the half year.
While there is not much carriers can do about the negative effects of the low interest rate environment on their financial performance, hopes for improvement concentrate on the liability side which is being squeezed by the existing excess capacity. But in addition to low rates, re/insurers now face higher fee demands from brokers.
“When there is excessive supply over demand then there’s an ability for brokers to extricate out of it the best that they can. Across the board you will see commissions creep in different shapes or form,” he said.
This trend is stronger in and around London where a lot of broker facilities are concentrated, he noted.
In order to be able to reject brokers’ demands and therefore avoid margin reduction, QBE wants to strengthen its relationship with customers as this can support the carrier’s negotiating power.
“If you have a strong relationship with a customer, that helps to deal with the situation a little bit more easily,” Pryce said. It will, however, “create at times some tense conversations,” he admitted.
QBE wants to stress its value to customers and make sure that it’s noticed and understood. “If you have that presence with a customer then that helps deal with some broker conversations,” Pryce explained.
QBE is concentrating on winning business in multiple lines. It is using data analytics to select customers and the lines of business in order to match the customers’ needs. Cross-selling activity and a proactive approach has been helping business performance, Pryce says.
“It’s not going to be extreme growth, but it’s just enough to keep the business pleasantly ticking up,” he noted.
QBE’s reinsurance arm is writing more short-term life business, and in the retail business the carrier sees opportunities by strengthening distribution outlets to underwrite and develop a strong local presence. “That’s what customers want, that’s where growth is,” Pryce said.
At the same time, opportunities are less obvious around Lloyd’s. “There’s less good quality new business coming into Lloyd’s, therefore you have to rely pretty heavily on your distribution outlets,” Pryce said.
The cost of doing business in Lloyd’s, be it the operating costs or the brokerage, is higher than outside, he explained. “When the margins get tighter with rate reductions you got to look at where you connect with the business in the best operating environment. Sometimes that will be away from London,” he said. QBE is focusing on “not becoming too London-centric,” he said.
