Perserverance is the message of Swiss Re CEO
“What is quite clear is that the whole P&C value chain is not earning its cost of capital. That’s true on average for the primary companies and reinsurers.
“Brokers are under pressure too. The whole value chain has a problem in the current soft market and it is similar to soft markets in the past. It is maybe not as bad as in 1999, but at that time the sector benefited from higher investment returns. But overall, it’s a similar situation.”
That is how Christian Mumenthaler, the chief executive of Swiss Re, sums up just some of the challenges facing reinsurers right now.
These are not easy times to be leading a reinsurer such as Swiss Re, he admits. The rates in property/casualty (P&C) are under pressure and investment returns are not able to compensate in a historically low interest rate environment.
The rates in the P&C business have come under pressure as alternative capital poured into the reinsurance sector seeking better returns in the low interest rate environment. Rates came under additional pressure due to the absence of large losses, leaving reinsurers wanting to raise rates in a weak position.
The P&C business is the most important operation for Swiss Re. In 2016, 51 percent of net premiums and fees earned from a total of $33.2 billion came from P&C reinsurance, according to the company’s 2016 annual report. But the business profits are declining: in the first half of 2017, net income from the P&C reinsurance operations fell to $546 million from $870 million in the same period a year ago, according to the half year 2017 results presentation.
Lower demand
Market conditions are not the only problem Swiss Re faces. At the same time as excess capacity is pressuring rates, large primary insurers have changed their buying strategies. Many have restructured reinsurance programmes which used to be allocated on a regional basis, bundling and centralising it, and buying less reinsurance as a result.
In addition, large insurers are trying to retain more risk, supported by more sophisticated management tools and risk models. Large insurers see higher risk retentions as an opportunity to grow. This trend is also resulting in lower reinsurance demand.
“Assuming that they are well capitalised, in theory they can withstand significant hits and buy less reinsurance,” Mumenthaler says. But he believes that this is a short-lived trend.
“What usually happens is that when you have an event causing actual losses, even if the capital is not touched and it is just a big earnings event, it is so unpleasant and maybe so unexpected for the shareholders of the insurance company, that they tend to buy more reinsurance after the shock.”
Meanwhile, Swiss Re is shedding business in P&C in order to avoid writing risks which may not be profitable.
“That’s the only lever we have at Swiss Re. We want to underwrite good business, and if we think it’s getting below technical rates we have to separate from that business,” Mumenthaler says.
For several years, reinsurers have faced tough negotiations with cedants in renewals—this is not likely to be different in the upcoming January 1 renewal.
“I expect tough discussions in the upcoming renewals season,” Mumenthaler says. “Some clients have renewed flat this year already, sometimes because they couldn’t get a better price, sometimes because they thought it wouldn’t be reasonable to push the price further.”
While lower rates may benefit cedants at first glance, it may also have negative consequences for them.
“Clients are actually worried because they know the rates they get will also translate into more pressure on the primary side of the business.
“We are all in the same boat and we know the right thing to do would be to stop this trend, but obviously every client is worried about not getting the best reinsurance deal, which keeps rates under pressure,” Mumenthaler says.
Change is close
Mumenthaler believes that pressure on reinsurers to either shed business or at least keep prices stable is rising.
“What we will increasingly see is that reinsurers will be under pressure because the underlying results are not as good any more. Within management teams, there will be discussions on good underwriting practice.
“The question is: at what time will supply and demand balance each other out? Predicting that time is very hard. Reinsurers have to take some measures which will benefit the whole value chain,” he says.
Already registered?
Login to your account
If you don't have a login or your access has expired, you will need to purchase a subscription to gain access to this article, including all our online content.
For more information on individual annual subscriptions for full paid access and corporate subscription options please contact us.
To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.
For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk
Editor's picks
Editor's picks
More articles
Intelligent Insurer
Newton Media Ltd
Kingfisher House
21-23 Elmfield Road
BR1 1LT
United Kingdom