22 October 2014 Insurance

Good reinsurance means results diverge

The results of reinsurers and insurers will diverge more in the future if other cedants follow the lead of some of the large insurers and only cede their more volatile business, Amer Ahmed, chief executive officer of Allianz Re, which is responsible for the group’s retrocession portfolio, told Baden-Baden Today.

He said that if the results of reinsurers and insurers are too similar then the industry is not achieving its aim.

“It is increasingly likely that insurers will buy reinsurance as risk transfer only where it is taking out volatility. We hope that reinsurers will be OK with that but be rewarded more for taking that risk on. If reinsurers take on more risk, they should receive more reward,” said Ahmed.

A natural consequence of this dynamic, he said, is that reinsurers’ margins will be higher during years when losses are low but much worse when losses do occur—in contrast to the fortunes of their clients.

“When there’s a large catastrophe event, you would expect reinsurers’ results to be significantly impacted. When you see a catastrophe-free year, you would expect reinsurers to have fantastic results and insurers to have slightly better than expected results.

“But the range of results that insurers will expect will be much narrower than that of reinsurers,” he said.

Ahmed explained during the opening symposium in Baden-Baden that over the past seven years, Allianz Re has rationalised and centralised its processes for buying reinsurance. Previously, reinsurance was purchased by individual underwriting units.

This process cut its spend by 60 percent, which equates to about €1.5 billion, and it now uses fewer reinsurers as well. As a group, he said, its risk appetite and risk tolerance are substantially higher now than they used to be.

“It’s about taking advantage of the larger group capital base and also taking advantage of diversification. While you may have losses in one territory, it’s unlikely that you’ll have losses in every territory,” he explained.

He said there are three reasons to buy reinsurance: to protect capital, to manage earnings volatility and, on some occasions, to arbitrage against reinsurance. He said Allianz assesses every reinsurance transaction based against these three factors.

Although the change it has implemented has meant higher retentions, he added that a lot of what the company has retained does not have an effect on the group’s risk profile.

Yet he also stresses that, despite this shift to centralisation, the company still values local expertise and understands the importance of understanding the vagaries of different markets in relation to buying reinsurance.

“It’s very difficult to do everything remotely,” he said. “When I mention global coordination, it is to say that even though you need local expertise to understand local portfolios, reinsurance decisions should be made in the context of the global portfolio.”

In his speech in the opening symposium, Ahmed also stressed just how much things have changed in the industry. Twenty years ago, he said, individual underwriters would handle their own reinsurance protections. Now, most insurers have centralised this process.

“There was a certain charm in the old method and it encouraged an entrepreneurial spirit,” Ahmed said. “But it also had many shortcomings. The focus was only on net results and no-one really assessed what the true value of that reinsurance was.”

He added that while he is comfortable with the changes Allianz has made to its reinsurance programme, the company could go further, as other insurers have.

“Some groups have gone further than we have and some faster—but let’s be clear: this is not a short-term trend, it is a one-way ticket. Reinsurance is now being seen as a strategic tool to manage capital and earnings from a group perspective and not a trading activity done at the level of individual lines,” Ahmed said.

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