Allianz Re: sustainable rates will avoid kneejerk reaction

As reinsurers claim they cannot afford further price cuts in the year-end renewal, the boss of Allianz Re, which handles the reinsurance strategy of the Allianz Group, has stated he will not seek further rate reductions and is interested only in stable, sustainable pricing.

Allianz Re sells reinsurance protection to its parent company’s business units and then works with a panel of reinsurers to place a percentage of this business with third party reinsurers in the wider markets. Its placement is substantial: in 2015 Allianz posted gross written premiums of €5.4 billion ($6 billion).

Excess capacity and the subsequent competition in the industry have been driving reinsurance rates down, particularly in property/casualty business. But many reinsurers now claim they have reached a floor in terms of pricing and that they cannot endure any further pricing cuts as they look to protect their underwriting profitability.

Amer Ahmed, the CEO of Allianz Re, told Monte Carlo Today that he agrees that the market needs to bottom out and that any further reductions are unrealistic and unsustainable. He said he would prefer the market not to have the current fluctuations.

“I believe that we are at a point where the pricing in many areas is not sustainable,” Ahmed said. “I am keen to have a system that is stable and doesn’t have big swings.”

Allianz Re arguably has a different and somewhat unique perspective. Because it also writes a small amount of third party business itself, mainly in niches such as agriculture and capital management transactions which complement the group’s portfolio, Ahmed said, it knows just how tough the market is for reinsurers. He said Allianz Re is making some margin in the current soft market, “but it’s challenging,” he noted.

In terms of its main function as a buyer for its parent, Allianz Re keeps a portion of the business it receives from Allianz and buys reinsurance primarily to manage capital and manage earnings volatility, Ahmed explained.

“If there are attractive possibilities to buy reinsurance we are happy to look at them but they need to be sustainable and not this negative view of arbitrage—I don’t think this is going to serve us in the long term,” he noted.

“I would rather push for rates that are stable and economic rather than keep pushing the price to a point that, when reinsurers react, there is a big kneejerk reaction.”

He admitted that Allianz has pondered ways of taking advantage of the attractive reinsurance terms available but but stressed that price is not his main motivation. He said that big swings in pricing could be an issue because, as a large company, Allianz cannot easily change its reinsurance structures or strategy very quickly.

He would prefer pricing to be stable and added that in theory, sustainable reinsurance rates—as opposed to seeking cheap, short-term deals—should be in the interest of all buyers.

Ahmed agreed that very low reinsurance prices may persuade some primary insurance companies to buy more coverage, but he believes reinsurers will resist further price cuts. While there have not yet been any discussions about specific programmes, he has the impression reinsurers are determined not to deploy capital if rates continue to go down, he said.

The soft market has had an effect on Allianz’s strategy in another sense. Although it has previously used insurance-linked securities (ILS), Ahmed said the company sees little reason to tap this market again at a time that traditional capacity is so plentiful and cost-effective.

“There is no specific drive for us to do it now. There seems to be plenty of capacity in the traditional market.

“Traditional reinsurance is a more flexible instrument than a bond, but both have their benefits,” he said.

“Cedants just needed to be clear on which instrument suits their specific needs on the basis of flexibility, coverage and security.

“We use very traditional reinsurance, we use collateralised reinsurance, we have used ILS, we have done cat swaps. What is important to me is to keep an open mind to all the different instruments,” he said.