14 September 2014 News

Competition tough; cedants retain more

Competition in the reinsurance market is unrelenting with only rising interest rates or an end to reserve releases likely to stabilise pricing, according to Torsten Jeworrek, member of Munich Re’s board of management. What is more, despite the cheap capacity available, many insurers are also ceding fewer risks.

In such an environment, Jeworrek said, Munich Re has a clear focus on maintaining a profit-oriented underwriting policy, only accepting risks 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 said.

He said this has led to there being appreciable surplus capacity on the supply side. This is further boosted by the fact that insurance-linked securities (ILS) and other forms of reinsurance-like transactions are also increasingly being favoured by institutional investors such as pension funds in their search for a reasonable return.

“This capital is mainly being channelled into non-proportional catastrophe business such as covers for hurricane losses in the US, while reinsurers that previously focused on this segment are seeking to diversify into other segments,” he said. “The prices, terms and conditions for reinsurance cover have therefore come under increasing pressure. This was apparent during the 2014 renewals.”

But, he believes, the low interest rate environment as well as the regular release of reserves by players will come to an end sooner or later. “This may put some pressure on rates to stabilise again,” he said.

He identifies low interest rates and the wider macroeconomic environment as among the biggest challenges facing reinsurers.

“The prolonged low interest rate environment has led to a gradual reduction in investment earnings and has increased the importance of underwriting results. Furthermore, the alternative capacity in the market is fuelling competition in some business segments. That is why we are steering our business with a focus on stable profitability,” he explained.

One positive that is emerging from these market conditions is that more innovation is taking place in the industry. Munich Re’s size means it is well positioned to develop new products and move into new areas of risk,  Jeworrek said.

“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,” he said.

“But 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 explained 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 BI 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 said.

At this year’s Monte Carlo Rendez-Vous, Jeworrek believes there will be considerable discussion about reinsurance prices, terms and conditions. But, he said, Munich Re’s main message is clear.

“Munich Re is maintaining its clear, profit-oriented underwriting policy and accepts risks only at commensurate prices, terms and conditions. Furthermore, I expect that the challenging market environment due to the slow recovery of the global economy will be a driver of the discussions, as well as the influx of alternative capacity. And I am sure we will also discuss topics like digitalisation, cyber risks and regulation.”

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