Euler Hermes de-risks portfolio, mulls ILS

Euler Hermes Reinsurance has de-risked its portfolio in the last 24 months in a bid to enhance its profitability. It has reduced its total exposure by around 4 percent as a result, to €860 billion ($966 billion) from €890 billion ($1,000 billion) previously, Benoît des Cressonnières, chief executive officer of Euler Hermes, told Monte Carlo Today.

He said the company took action because of pricing pressure in the market, concerns about the global economic outlook and because he felt the company needed to be proactive to protect profitability.

“There was no one catalyst but we felt we needed to act,” des Cressonnières said. “There are signs the economy is weakening. We had to look at the price versus the level of risk we were taking. The impact on our portfolio is small but the impact on our profitability should be positive.”

He said the company’s reinsurance agreements have been stable, although the business has benefited from some rate decreases. He understands why reinsurers are under so much pressure, with so much capital entering the industry.

“There is trillions invested in negative interest rate bonds so entering the real economy via insurance is naturally attractive,” he said.

But he added that cedants are the beneficiaries of this dynamic and the competitive rates it results in.

Des Cressonnières said the company has considered using alternative risk transfer methods including insurance-linked securities (ILS) and collateralised reinsurance. But he said that for trade credit risk, he finds traditional reinsurance more flexible and better suited to its needs at the moment.

“We have looked at it but it was not right for us at this stage,” he said. “The key is sustainability and we fear that if investors get better options they could withdraw from the market. That would not happen with traditional players,” he said.

He added that, although it would offer diversification, because the company has an internal capital model approved by the regulator, it would also have to carefully consider the implications of using alternative structures. But he also noted that some reinsurers are presenting packaged solutions that offer a mixture of coverages.

“More and more, reinsurers seem to be offering full service capital management instead of simply covering specific risks,” he said.