Bright future forecast for big four

The big four reinsurance companies in Europe—Munich Re, Swiss Re, Hannover Re and SCOR—have a bright future in the market, according to Stefan Holzberger, managing director of analytics in Europe, Middle East and Africa at AM Best.

The rating agency, which classes Munich Re, Swiss Re, Hannover Re and SCOR as the big four European reinsurers, believes the group is well positioned to continue to perform in line with their rating levels given by AM Best—despite the rating agency’s negative outlook on the reinsurance industry as a whole.

“This is due to these companies’ well-diversified businesses, both by product line (life and non-life, primary and reinsurance) and geographically, as well as their strong distribution platforms, best in class enterprise risk management, governance and capital management, and market-leading business profiles,” said Holzberger.

He added that the reinsurers had posted “excellent technical results for the second straight year in 2013”. In 2013, the aggregate combined ratio of the four hit 91.4 percent, compared with 91.3 percent in 2012.

One reason Holzberger believes these players will continue to perform well is because they are well placed to partner with the capital markets and harness alternative capital.

“These carriers currently act as transformers, issue cat bonds—both for retro protection and to provide additional cover to their clients—have formed sidecars, and are involved in the management of insurance-linked securities (ILS) funds,” he said.

Moving on to discuss dynamics in the London Market, Holzberger said some reinsurers are trying to leverage specialist expertise. Although most carriers performed well in 2012 and 2013, due to low cat losses, many are now feeling the competition from alternative capital—especially those with large books of US cat business.

He noted that the larger players, such as Beazley, Catlin and Hiscox, have partnered with alternative capital providers to manage special purpose syndicates and ILS funds.

“The smaller subscription market players are under the most pressure as reinsurance panels are shrinking and small line sizes are replaced by the larger players and cat bonds. Some of these smaller players have formed consortia in order to offer larger line sizes and broader coverage terms,” he explained.

But AM Best said it is seeing a continued level of underwriting discipline and a willingness to walk away from under-priced business among the London Market reinsurers it follows.

Regional matters

Regarding the Middle East, Holzberger said there has been an increase in the number of local or regional reinsurers participating in the market in recent years. But he added that international reinsurers continue to play a major role in providing capacity and underwriting expertise in the region, particularly for commercial and industrial risks.

“Efforts are being made by local companies to improve risk management and governance,” he said. He explained that AM Best is currently seeing stricter policy wording and coverage exclusions, the introduction of event limits, sliding scale commissions, and better aggregate exposure management.

The picture does not appear as bright in Africa, as political unrest and economic instability have dampened potential growth in some countries.

“The Sub-Saharan African markets are characterised by a relatively weak regulatory framework and a lack of transparency. Many countries exhibit softening market conditions and economic instability. Despite these challenges, most local insurance markets report strong technical profitability,” said Holzberger.

In a number of African countries, growth has been driven by hydrocarbon discoveries and investment in infrastructure as well as legislation which seeks to retain premium and profits within the respective countries, explained Holzberger.

“Overall, AM Best sees low levels of retention and a reliance on international reinsurers for high value risks. It may see increased mergers and acquisitions among the local reinsurance players as they seek growth and look to employ excess capital. This is considered a risk as many local reinsurers exhibit weak or marginal risk management capabilities,” he said.