Reinsurers design tailored deals in search of higher returns

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By Brenna Hughes Neghaiwi and Paul Arnold | ZURICH

ZURICH Reinsurer Swiss Re, usually
involved in mega-deals on natural disaster coverage, is
branching out on its own to do individually tailored schemes to
boost returns, such as one in China to protect farmers against
floods or drought.

This tailor-made approach is part of Swiss Re’s response to
fierce competition in the reinsurance industry, where companies
are being forced to find new ways to make money as their
traditional model of clubbing together to backstop risks
generates increasingly slim returns.

“We feel very strongly that our ability to figure out
solutions to the problems that our clients have means they will
give us opportunities,” the head of Swiss Re’s core reinsurance
business, Moses Ojeisekhoba, told Reuters in an interview.

Reinsurers usually pool resources in syndicates to
underwrite the risk taken on by front-line insurers. But low
interest rates and competition from a host of so-called “alternative providers” such as pension funds has eaten into
their profits.

Up to 20 percent of the reinsurance market is now occupied
by alternative providers, insurance industry experts estimate, a
trend that began to take off in the years following the 2008
financial crisis.

Insurance rating agency A.M. Best has estimated $75 billion
in alternative – or so-called “convergence” – capital entered
the business in 2016.

This has put pressure on the market. Industry prices for the
traditional property and casualty (P&C) business, for example,
fell again in January, the important policy renewals season,
albeit at a slower rate than in the past few years.

To combat the difficult climate, Swiss Re, the industry’s
number two, has pioneered the concept of tailor-made
reinsurance, negotiating on its own with insurers to offer
bespoke deals.

Last year, for example, it set up deals with local Chinese
insurers and provincial government to reinsure parts of two
provinces against natural disaster risks. The schemes – which
included China’s first anti-poverty insurance deal to protect
farmers against flooding and drought – use a combination of
satellite and weather data to trigger payouts of up to roughly
$350 million in each province.

Swiss Re devised the pilot schemes and acted as sole
reinsurer, rather than working in a syndicate to spread the
risks.

COMPETITION

But this specialised business is facing competition from
rivals such as Munich Re, Hannover Re and
Scor.

“There are more people coming into this space,” Ojeisekhoba
said.

Munich Re has emphasised tailor-made products in niche areas
such as aerospace and cyber risk. It has also said it would step
up investment into so-called “insurtech” start-ups like app
provider Wrisk, which offers insurance via smart phones. Munich
Re said this would help it to offer more customised products.

Large, tailored transactions drove Munich Re’s P&C premium
growth in 2016, representing 23 percent of just under 18 billion
euros ($19.36 billion) in the P&C division’s gross written
premiums, the German company said in annual results earlier this
month.

But Ojeisekhoba, who took over Swiss Re’s reinsurance
business last July, said the tailored business was set to keep
growing this year despite the competitive pressures.

Reinsurers are also using bespoke deals to help insurance
companies to manage tougher capital requirements under Europe’s
new Solvency II regime. These deals allow the insurers to free
up capital they must hold under the new rules to buffer against
unexpected claims and financial losses.

Demand for Hannover Re’s bespoke offerings, particularly
capital relief, helped the group to book 7 percent premiums
growth in January.

Swiss Re does not break out figures for the amount of
so-called large and tailored business it writes, but has said recent premiums growth was driven by such transactions.

The reinsurer has committed $250 million in annual R&D
spending to develop advanced risk models that help it to
estimate risks ranging from the potential cost of heavy rainfall
in Malaysia through to predicting what might become the
industry’s next ‘asbestos’.

These modelling tools also enable Swiss Re to construct
specialised deals to help a customer estimate exposure and
locate new risks, protect against earnings volatility and free
up capital to pay dividends or buy back shares.

“It’s not something you simply take off the shelf and apply
to a particular situation,” Ojeisekhoba said.

“You require deep skill sets. You require strong balance
sheets. You require relationships and knowledge of the
counterparty’s portfolio and their financials, and you clearly
require an unambiguous understanding of the regulatory regimes.”

But with little disclosure from the reinsurers on how they
define bespoke business, Mediobanca analyst Vinit Malhotra said
it was hard to assess how it will help to shore up individual
players’ profitability.

Some relief may come from an inevitable uptick in standard
business as prices drop below profitable levels. “I
think we are not that far away from the bottom. Nobody wants to
push their luck that much,” Malhotra said. ($1 = 0.9300 euros) (Additional reporting by Carolyn Cohn in London)



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