Reinsurance centralisation is a ‘one-way ticket’
The trend for large insurance companies to restructure their reinsurance spend by managing it centrally is a permanent industry feature that reinsurers must swiftly adapt to, delegates at the Guy Carpenter Baden-Baden symposium heard yesterday (19 October).
Speaking at the traditional curtain-raiser to the reinsurance gathering in the German spa town, Amer Ahmed, CEO of Allianz Re, told more than 550 delegates gathered in the Kongresshaus that the "trend is undeniable", adding that it is a "one-way ticket".
"What we're seeing is a shift towards reinsurance as a capital tool to manage reinsurance at a group level," he explained.
Allianz has been at the forefront of this trend. Ahmed told attendees yesterday that over the past six to seven years the Munich-headquartered firm had reduced the amount it ceded by EUR1.5bn - equivalent to a 60 percent reduction.
However, he added that premium spend was a dangerous metric for measuring the amount of reinsurance cover purchased.
Under Ahmed's stewardship, the firm is continuing the centralisation process.
For example, at the beginning of 2014, it initiated a new regime where all business was placed through Allianz Re and then ceded - where appropriate - to a small panel of competing reinsurers.
But other insurers are following suit with similar initiatives. For instance, earlier this month The Insurance Insider revealed that Liberty Mutual was poised to rationalise its outwards reinsurance spend for specialty and international business, in a move that some estimate could squeeze $300mn-$400mn from the traditional market.
According to sources, the Boston-based insurance heavyweight has informed its counterparties that it is cancelling or non-renewing a slew of treaties across the two units, instead reinsuring geographical subsidiaries and business lines internally at the corporate level.
It will then buy what are effectively group global multi-line retro covers in a strategy aimed at securing balance sheet protection, rather than buying down to attritional losses that it believes can be managed and retained within its growing surplus.
Other major insurers that have instituted centralisation initiatives in recent years include AIG, Axa and Generali, while Ace is in the throes of creating its own in-house captive reinsurer and a major multi-year follow-form reinsurance facility.
But Ahmed warned cedants that the value of local knowledge and expertise should not be overlooked.
Reinsurance should be "globally coordinated, rather than centrally managed", he explained, adding there has been a massive shift in reinsurance buying habits since he entered the market 20 years ago, when each line underwriter typically bought their own coverage.
Nick Frankland, the head of Guy Carpenter's EMEA operations, agreed on the importance of understanding local markets.
On the sidelines of the Symposium, he told The Insurance Insider that one of the services that a global broker like Guy Carpenter can offer is benchmarking, where it is able to evaluate the quotes and markets available on both a local and global level for insurers that are centralising their buying.
According to Brian Duperreault, CEO of Hamilton Insurance Group and the man who build Ace Ltd into a global P&C powerhouse, there was another reason for insurers' to centralise other than efficiency: growth.
"Investors like to see growth," he pointed out, but this is difficult when market conditions are soft.
One of the benefits of cutting back reinsurance spend is that it provides net growth, he added.
Duperreault, who launched Hamilton Insurance Group late last year after leading a buyout of SAC Re, also pointed out that the boundaries between insurance and reinsurance are continuing to break down.
"The company that [now] only writes reinsurance is rare," he explained, adding: "In the end, we will all be doing the same thing... matching risk with capital". Following that theme, he added: "The confluence of less purchasing will naturally lead to more M&A."
Frankland also noted that excess capacity and capital, combined with sluggish demand, means reinsurance rates continue to be under pressure - which presented opportunities for Guy Carpenter's clients.
"The wide variety of supply means choice for our customers. So we must become expert in and able to advise our clients on all that is available, helping to create solutions that exploit this cornucopia," he told delegates.
But Frankland concluded by saying that it was incumbent on all components of the industry to work together to create new demand. "We must also work with the reinsurers and insurers to stimulate demand by filling known insurance gaps and proving solutions for the new breed of risks."