Reinsurers adapt business models to challenging environment
As scale and diversification remain key for reinsurers grappling with pricing pressure, players are adapting their business models, according to Moody’s Investors Service.
The outlook for global reinsurance in 2017 remains negative due to abundant capital meeting tepid demand from cedants, pricing pressure and challenging terms and conditions, said Brandan Holmes, vice president senior analyst, Moody’s.
“Prices will continue softening through 2017 and possibly even 2018, with reductions spanning between flat and minus 5 percent,” Holmes said. On a positive note, the industry is unlikely to face an acceleration of rate decreases as players are reluctant to accept much lower rates, he added.
“Driving the slowdown in price decreases is reluctance on the part of reinsurers as well as investors in alternative capital to concede more on price,” he noted.
The challenging environment is not affecting all players in the same way.
Particularly under pressure are monoline reinsurers focused on catastrophe property reinsurance, but also smaller capacity players which might have a broader reinsurance portfolio but without the same franchise required to take on a lot of long-tail exposure, Holmes said.
Best positioned to cope with the difficult business environment are larger and more diversified players with broad property/casualty portfolios and life reinsurance business but also good franchises in primary commercial insurance, he added.
Larger reinsurers are able to offer the higher levels of sophistication increasingly required by primary insurers as these are growing their intelligence through big data and data analytics.
“AXA has probably more information on the French property market and its geography than some reinsurance companies,” Moody’s associate managing director Antonello Aquino said.
Bigger players are capable of offering tailored, private structured transactions where they can extract higher pricing; not all reinsurers can do that, Holmes noted. This could mean that reinsurers take a whole cross-section of a written portfolio or a particular chunk of a portfolio, but it could also mean underwriting future quota shares, he explained.
“The big companies have C-level access while capacity providers go through the reinsurance department,” Holmes said of the advantage that top tier reinsurers have in complex transactions.
American International Group (AIG), for example, announced in March that it had entered into a two-year reinsurance arrangement with Swiss Re, under which a share of AIG’s new and renewal US casualty portfolio will be ceded to the reinsurer. Players such as Swiss Re and Munich Re see such deals as opportunities to grow their business, providing a tailored package to a primary insurer to address some of its potential concerns regarding certain risks of business lines or about capital pressure, Aquino said.
Offering primary insurers some capital relief may represent an important growth opportunity for reinsurers, Holmes suggested.
Some reinsurers are becoming very active in the US mortgage arena as regulators are forcing primary players to improve capital levels, Moody’s associate managing director Stanislas Rouyer noted.
Reinsurers may also find opportunities to support profitability in cyber insurance, where there is little data available, higher barriers to entry and higher pricing, Holmes added. Reinsurers will try to identify and address underinsured segments in developing as well as in developed markets, he said.
