Centralised buying: a one-way ticket
The relationship between cedants and reinsurers has changed in fundamental ways in recent years—and the dynamic will continue to evolve as pressures on the market play out.
That was one of the key conclusions of panellists speaking at the annual Reinsurance Symposium hosted by Guy Carpenter in Baden-Baden yesterday (Sunday).
Amer Ahmed, chief executive officer of Allianz Re, offered a buyer’s perspective. He stressed just how much the dynamic has changed. Twenty years ago, he said, individual underwriters would handle their own reinsurance protections. Now, most insurers have centralised this process.
“There was a certain charm in the old method and it encouraged an entrepreneurial spirit,” Ahmed said. “But it also had many shortcomings. The focus was only on net results and no-one really assessed what the true value of that reinsurance was.”
He said there are three reasons to buy reinsurance: to protect capital, to manage earnings volatility and, on some occasions, to arbitrage against reinsurance. He said Allianz assesses every reinsurance transaction based against these three factors.
In the past seven years, Allianz has rationalised its own programme and reduced the amount of coverage it buys externally by about €1.5 billion.
“Some groups have gone further than we have and some faster—but let’s be clear: this is not a short-term trend, it is a one-way ticket. Reinsurance is now being seen as a strategic tool to manage capital and earnings from a group perspective, and not as a trading activity done at the level of individual lines,” Ahmed said.
Ulrich Wallin, chairman of the executive board, Hannover Re, also covered the theme of change at the event, focusing specifically on the differences between the traditional reinsurance model and the types of instruments and protections offered by capital markets investors.
He stressed the value of the “promise to pay” used in the traditional model, which both allows traditional players to leverage their capital bases to a greater extent and relies on and values long-term relationships.
Wallin contrasted this with collateralised deals where the provider requires the capital back as quickly as possible to write the next deal.
“But, unfortunately, claims do not always materialise quickly,” he said. He noted that claims were still emerging from the 2011 earthquake that hit Christchurch, New Zealand, four years after the event.
He also noted that traditional reinsurers are also far more willing to underwrite hard-to-model risks, such as cyber, as part of a wider portfolio, while also investing in better understanding these risks.
Nick Frankland, chief executive officer, EMEA, Guy Carpenter, introduced the theme of change. “If you keep running, your competitors will bite you. If you stand still, they will swallow you. It is a serious Darwinian point. No business can survive by standing still,” he said.
