Zurich cuts panel; mulls direct relationship with ILS investors

Zurich Insurance is buying less reinsurance as it seeks to actively deploy its own internal capital, according to Paul Horgan, global head of group reinsurance at the insurer.

“We are buying less reinsurance but it’s not a cost issue; it’s a capital equalisation strategy for Zurich,” he said.

“We have an abundance of capital and we’re a gross line underwriting company. We’re confident in our results so we’re looking to use our own capital. That is the driver. We want to use our capital and get a return on that first, and then use reinsurance capital to tick off the peak perils in the portfolio,” he said.

Horgan agreed the market is favourable to buyers but said that despite this, Zurich is offering a fair price.

“I agree it is a buyer’s market but we believe we offer a fair price; we can’t arbitrage the market, because once there is a loss, we’re back to square one. We are taking advantage of the market, but recognise that reinsurers need to make a profit.”

Horgan also spoke of the company’s buying strategy more generally and how it has reduced the panel of reinsurers it works with.

“We continue to have a pretty consistent buying pattern,” said Horgan. “We’ve tended to look to fewer reinsurers and ask them to commit to playing across broader lines. Those which responded have bigger and more consistent line sizes. Those which did not have had a hard time maintaining what they had.

“People talk about the alternative capital but there’s also the carrier’s capital; our capital base is getting stronger and we’re looking to deploy it. We still want to be meaningful in the market, so as our spend goes down it makes sense to consolidate. You can either cut everyone by 20 percent or cull those that just can’t be meaningful.”

Zurich is also a long-term user of insurance-linked securities (ILS) as a risk transfer tool, a trend Horgan says will continue as long as the situation works.

“We’ve been involved in ILS for 10 years and it’s been very consistent. In terms of the overall programme, it is mid to high teens in the Zurich portfolio, so I expect us to continue with this,” he said.

But he added that as this sector matures, new ways of structuring such deals may become attractive. He suggests that it has considered working with investors directly instead of issuing a bond.

“We’re starting to see consistent players now; those guys have proved themselves and paid their cheques, coming back the next year with capacity. We’re getting more and more comfortable with the consistency of their capital,” he said.

The insurer has also been approached by alternative capital willing to cover long-tail lines, but Zurich is uncomfortable with this.

“We have not heard a lot of success stories in that area,” he said. “From our perspective, we’re trading insurance risk for credit risk. It’s been interesting to have people ask, but we’re not comfortable with that.”

Horgan added that he has heard some interesting approaches from new markets recently. “Some of those have surprised me. I thought Hamilton Re has an interesting pitch. I was expecting the hedge fund angle and I got a technology pitch,” he said.