Reinsurance in Europe: take your positions

As reinsurers and buyers head to Baden-Baden this October for round two of renewals negotiations, an interesting picture is emerging in terms of the different strategies players are adopting—one that could make for some interesting dialogue at the German conference.

The message coming from the incumbent industry behemoths such as Munich Re, Hannover Re, Swiss Re and SCOR is one of underwriting discipline and that they are getting increasingly closer to their existing clients and looking to accommodate their needs. They are stressing that they have done the hard yards with clients in very different market conditions and should therefore continue to benefit from their business now.

Torsten Jeworrek, member of the world’s biggest reinsurer Munich Re’s board of management, stresses that the firm has a clear focus on maintaining a profit-oriented underwriting policy, accepting risks only at commensurate prices, terms and conditions.

“We are currently experiencing unrelenting competition. On the one hand, given their good capitalisation, primary insurers are ceding fewer risks to reinsurers. On the other hand, reinsurers are able to provide ample capacity, since their capital base has also steadily improved thanks to the good results posted over the last few years,” Jeworrek says.

Keep a level head

Mo Tooker, head of global property and casualty business at Gen Re, has a similar approach. He emphasises the importance of keeping a level head in such a competitive environment and making underwriting decisions based on numbers, not a desire to maintain market share.

“Maintaining a level head in this market is incredibly difficult. Different parts of the market are staking out their positions and hoping that they can sway markets with frequent and colorful messages,” Tooker says.

“We have been talking a lot about bias and the role it can play in our decision-making, especially in a soft market. We will be working hard to focus on the facts of each renewal and new piece of business and trying not to get caught up in the raucous market chatter.”

“We will talk about the customer’s specific issues rather than getting caught up in where the market says a certain line of business is or is not heading.” Mo Tooker

Tooker believes that it will be more beneficial for reinsurers to add value to their clients in other ways in these market conditions. He cites recent reinsurance market research in which around 70 percent of European buyers said they value discussions with reinsurance companies as their most important source of information about reinsurance.

“That speaks right to the core of our direct business model: risk carrier talking to risk carrier,” he says. “We are optimistic that our unique direct, value-added model will be a vital differentiator for us during the 2015 renewals.”

He adds that good reinsurers will also reap the rewards for supporting their clients historically in these market conditions.

“This is a time in the market where the work you have done over the many prior years will be especially important. A differentiated and valued position is created over many years and will be a critical factor in an increasingly crowded marketplace.”

He says Gen Re will be homing in on the issues that are important to each specific client—differentiating itself from the crowd. In such a competitive environment, he believes, this will set the firm apart from its peers, allowing it to deal with the specifics of clients’ needs rather than being concerned about wider market trends.

“We will be trying to cut through the market chatter and get to the issues that are specific to each customer,” he says. “We believe that our direct distribution coupled with our underwriting, claims and enterprise risk management expertise offers a unique perspective in this crowded market.

“We will talk about the customer’s specific issues rather than getting caught up in where the market says a certain line of business is or is not heading.”

“Reinsurers are able to provide ample capacity, since their capital base has also steadily improved thanks to the good results posted over the last few years.” Torsten Jeworrek

Jean-Jacques Henchoz, CEO of reinsurance EMEA at Swiss Re, also highlights the importance of offering value-added services to clients when competition is so tough. He says Swiss Re’s approach prioritises getting to know clients very well as opposed to having a transactional relationship.

“There is an increasing need to differentiate,” says Henchoz. “At one end there are more transaction-oriented players; at the other end, there’s the more partnership-oriented players, such as us.

“The main players are very strong and well established but you always have smaller players and entrants trying to access the European market. This creates choice, which means competitive pressure.”

Henchoz said that the way reinsurance is now viewed is more important than ever, attracting interest from the boardroom.

“Over the years reinsurance has increasingly attracted the interest of the C-suite. This is in contrast with 10 years ago when you might have seen a small reinsurance department dealing with renewals,” he said. “Today it’s being seen as a capital management tool and talked about in the boardroom.

“We interact with our clients throughout the year, so we know exactly what they need from us. This allows us to identify opportunities early on and work jointly with clients, which brings us sources of new growth,” says Henchoz.

This idea of using reinsurance as strategic capital is increasingly important in the European market and presents a big opportunity for reinsurers, says Eric Paire, head of EMEA Strategic advisory for Guy Carpenter.

“We are seeing clear bifurcation,” he says. “On the one hand reinsurance in Europe is more and more commoditised—there are more players, and there is more capacity. The challenge there is purely about efficiency, pricing and responsiveness.

“However, what people forget to talk about is that at the same time insurance groups realise that reinsurance is a very attractive form of capital. This may not be discussed by the reinsurance buyers, but at board level reinsurance is being seen as a valuable complement to debt and equity.”

Rock the apple cart

For newer entrants into Europe, however, the dynamic is different. Instead of being focused on retaining historic client relationships, they are concentrating on disrupting the status quo.

To these players, Europe looks and feels very much like a land of opportunity—especially to players with an established presence elsewhere (and therefore a depth of expertise, systems and models that can easily cope with a new market).

These reinsurers see substantial growth prospects in the market yet have also come to appreciate the truth that Europe is a market in which it takes a long time to build trust and establish a presence.

“Over the years reinsurance has increasingly attracted the interest of the C-suite. This is in contrast with 10 years ago.” Jean-Jacques Henchoz

The term ‘newcomer’ should be used with caution in relation to Europe. Catlin, for example, first established its operations in Europe almost eight years ago. Catlin’s CEO Stephen Catlin, says the business is now gaining real traction in the market, but it has been a long road to get to that point.

“Europe has been dominated by the big players—Munich, Swiss Re, Allianz,” he says. “The issue is less one of competition and more to do with the preparedness of the buyer to decrease his relationship with existing carriers.”

Catlin believes that there is a drive for that to happen.

“The buyers of reinsurance are increasingly not sure that they want so few eggs in one basket—they’re looking for a bit more spread. It isn’t an accident that when we went to Zurich there were only two or three reinsurance carriers. If you go to Zurich today I think there are 23, and that’s happened in a five-year period. Zurich has become a reinsurance hub for Europe.”

However, it is not enough to simply be there. In order to win business, you need to be perceived as having made a long-term commitment to the region.

“You have to be trusted and that does not happen overnight. To obtain the presence in any new market you need to be there for five years before you can move the dial—it takes that long to get the trust and for people to think you are there to stay,” he says.

Tokio Millennium Re has a similar view on the market in Europe. The company redomiciled to Zurich in 2013 but Tatsuhiko Hoshina, the former CEO of Tokio Millennium Re who stepped down in October but remains vice-chairman of the board, understands progress will be slow but steady.

“Having re-domesticated from Bermuda to Zurich, the company is now looking to deepen its footprint in Europe. It’s a very tough market—the upside is that they are very loyal to their reinsurers so once you’ve built a relationship it’s a long one; the downside is that it can be hard to get your foot in that door.

“However, we take a long-term view; it has always been TMR’s approach that we are not here for the fast buck, we are here for the long term—so we are very patient in penetrating the European market.”

Another relative newcomer is Aspen Re, which first set foot in Europe at the end of 2007, attracted—like most players—by the sheer size of the market.

“The buyers of reinsurance are increasingly not sure that they want so few eggs in one basket— they’re looking for a bit more spread.” Stephen Catlin

Jacopo D’Antonio, MD of Aspen Re, points out that Europe represents just 7 percent of the world’s population yet is responsible for 23 percent of its GDP and no less than €450 billion of non-life premiums. Around 33 percent of overall insurance premiums in the world are written in Europe.

“Even though the European economy is a bit challenging it is still the largest insurance market in the world,” says D’Antonio. “With that comes demand for reinsurance and Aspen Re recognised real potential to grow.

“What is important is to go into the core of this region to access these large volumes of premium income,” he says.

Not that it has been easy for the newcomers. D’Antonio is keenly aware of the strength exerted by the long-established players in the market.

“It is a very competitive market because here in Europe we have the longest established reinsurance companies, and we also have a very conservative client base,” he says.

Opportunity knocks

All this also leads to a natural hunt for new opportunities as well as targeting established relationships. Paire believes there is some market growth to be found in bringing risks that were previously uninsured or managed by state schemes into the private insurance and reinsurance market.

“That’s true for risks such as flooding in countries that have state schemes, it’s clearly true for terrorism and it’s probably true in the more medium term for some of the emerging risks like cyber.

“It means you have to play at two levels—you have to be very good on the day-to-day execution of a very competitive product and you have to project yourself with something more strategic,” Paire says.

He adds that cyber presents a particularly attractive area for product development in Europe because a great deal of emphasis is placed on data privacy in the region.

Another area ripe for development is life reinsurance.

“Life reinsurance is currently a bit left behind in terms of innovation. There is potential to provide better capital efficiency and make life insurers more competitive. That is why we are jointly developing in Europe our life and strategic advisory operations.”

Paire adds that strategic advisory capabilities will become an increasingly important complement to brokers’ traditional capabilities.

“We want to develop the two sides of the broker’s brain, one being execution and placement, the other being more strategic thinking and conversations with clients which are linked with all these new opportunities.”

Munich Re sees growth in similar areas. “As competition is increasing in the commodity business, the industry must develop innovative products which expand the existing market boundaries and therefore create an opportunity for profitable growth,” Jeworrek says.

“Technology and the globalised economy are also evolving very fast. Just think of digitalisation. The insurance industry has to keep pace with these developments and offer solutions for emerging risks.”

He explains that Munich Re leverages the know-how from the whole group in order to develop new products within dedicated units. “Examples of key areas we look at are energy risks, cyber risks, supply chain risks, non-damage business interruption risks and reputational risks. We focus on direct industrial/commercial business and niche segments and tailor our insurance solutions to the needs of each individual client,” Jeworrek says.