2013 losses drive negotiations in Germany

While it is definitely a buyer’s market at the moment, cedants in different regions are behaving differently in terms of their willingness to take advantage of the intense competition for business, said Frank Reichelt, managing director for Germany and the Nordics, Swiss Re.

There are marked differences between the two regions he covers.

In Germany, he said, the dynamic in the market is very much driven by the high natural catastrophe losses experienced in 2013 as well as traditional loyalties in a market where a lot of business is still conducted directly.

“Adjustments to pricing were made in 2014 and this loss experience will keep the market pretty stable in terms of pricing in 2015,” Reichelt said. “There is competition but clients in Germany are very loyal. They feel reinsurers responded well to the 2013 claims and pricing is sitting at a fair level. Some will test the water but I do not feel there is big pressure in this market.”

The Nordic region is a different story, he said. With few significant loss events in recent years, there is more pressure on rates and more competition for business. The situation is exacerbated by the fact that this is a very broker-led market, with intermediaries seeking the best deals for clients.

That said, Reichelt believes many cedants feel they secured good deals a year ago and most want to ensure they keep their panels intact—certainly in terms of the bigger players on their programmes.

“They understand that it can be a fine line between pushing for a better deal and the reinsurer walking away,” Reichelt said.

He added, however, that in the Nordic market cedants are more likely to be willing to experiment with using risk transfer solutions provided by so-called alternative capital on the programmes.

“Not in the form of full ILS deals but in the form of some other collateralised products. Cedants are certainly aware they have options,” he said. “If you have 10 players on a programme, they might look hard at some of those they consider to be only capacity providers. They can be easier to change. But they are unlikely to disrupt their longer-term relationships.”

Future health

Overall, he is optimistic about the health of the markets he covers. “After a few days in Baden-Baden I am pretty optimistic,” he said. “There may be some difficult and lengthy discussions still to come but I feel there is some restraint and rationale in the market—I don’t think cedants will overdo it.”

Against this backdrop of competition, however, he does forecast consolidation. “There is a certain minimum level of cost associated with doing business now and companies that fail to achieve a minimum critical size will need to consider mergers or acquisitions. And not just on the reinsurance side, but among insurers as well, I believe.”

He also believes that the reinsurance industry should not complain about the effect this influx of alternative capital is having on the market. He points out that it is simply a function of an open economy that such money will target opportunities where returns are potentially superior to those they can achieve elsewhere—a dynamic magnified during a period of very low interest rates.

“People complain but if we are honest the reinsurance market has had a relatively cosy time in recent years,” Reichelt said. “In some ways this competition can be good for us—it creates a pressure and forces us to develop new products, innovate more and become more client-centric.”

He added that in many ways reinsurers are getting much closer to their clients than they used to be. While some insurers in Germany, boosted by their own stronger balance sheets, are retaining more, they are also working with reinsurers in more complex ways.

“If a client doesn’t want coverage because they feel they can retain it, that is fine. We would rather work with them in more complex ways long term and for the right reasons,” Reichelt said.

“A few years ago, reinsurance was just about risk transfer—now it is more a capital management tool and we are dealing with CFOs a lot more. There has been a big shift in that sense.”