EMEA will not escape the fallout from the US storm losses: Swiss Re
Pricing in Europe, the Middle East and Africa (EMEA) will be influenced by the heavy losses in the US stemming from hurricanes Harvey, Irma and Maria despite the fact that the capital bases of most large reinsurers are likely to be unaffected and competition in the region remains robust.
That is the view of Jean-Jacques Henchoz, chief executive officer of Reinsurance for EMEA at Swiss Re. He said that while the true extent of losses in the US is still developing, the losses are expected to change the global dynamics of the reinsurance market, thereby having an influence in many other markets.
“There will be a spillover and I don’t believe any region will be spared what is happening globally. Bear in mind there have also been many other loss events, although not on the same scale in Asia and in Latin America, and the market will react on a global basis.
“It does not seem at this stage that this will be a capital event for the industry, although some players could be hit harder than others. But I’m convinced it will influence pricing for reinsurers,” Henchoz said.
He added that while new capital will likely enter the industry in the aftermath of the losses, he believes this will not be available as quickly as some think, and it will also enter with specific return expectations. “I don’t see this offsetting the likely development in the market,” he said.
Speaking of the EMEA region before the recent loss events in the US, he said it has remained competitive across all lines of business, leading to continued pressure on pricing.
“EMEA has not suffered any major catastrophic losses in recent years and new players have been taking an interest in the region. That has added to the available capital.”
In the Middle East specifically, he said, high cession rates have increased the attraction of this market, leading to increased competition.
“Along with the UK, it has been one of the most competitive regions in recent years,” Henchoz said.
But, he stressed, high levels of competition are less of a problem for the bigger incumbent players such as Swiss Re, whose cedants value stable, long-term relationships. Pricing competition exists away from this, and in this sense, the market is more tiered than it has ever been.
“European buyers want tier 1 players on board. What you find is that there is intense competition on price on the lower tiers, and in the tier 3 segment in particular. In contrast, the larger, incumbent players tend to keep their market presence.”
He notes that tier 3 reinsurers offer capacity but little in the way of a value proposition so they are forced to compete on price. “In contrast, we build deep relationships based on knowledge and expertise,” he said.
This is also how Swiss Re tends to find growth. “We can find pockets of growth in expanding our scope with our closest customers and help them in their strategic aims,” Henchoz said. “They could be expanding into new lines of business or geographies or looking at consolidation. We can help them achieve those things.”
He added that another area of opportunity has emerged on the back of the introduction of Solvency II. Many insurers have changed their capital requirements as a response to its implementation and more are using reinsurance as a flexible tool to manage their capital more efficiently.
“That has brought a new dimension to some of our relationships as we are now also often engaged in direct discussions with the chief financial officer and chief risk officer as a result,” he said.
The greatest potential growth in the region, however, comes in the form of helping to close the protection gap—the difference between economic and insured losses—in many regions.
Although a small market, Africa as a continent is of great interest to Swiss Re because of this. “We have a long-term view on this market and we see huge potential,” Henchoz said.
“The challenge is how to close this gap and capture new business. The numbers globally—the size of the protection gap—are staggering. Whether you look at earthquake risk in Italy or flood in many countries, or life and health lines, the potential is enormous.”
“We team up with our clients on solutions that help solve this problem. The real key is how to expand the size of the cake,” he concluded.
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