Buyers must follow rates down or lose competitive edge

Despite acknowledging that pricing in parts of the reinsurance market is now unsustainable, buyers too are at the mercy of wider market dynamics and must seek rate decreases in line with market trends if they are available, or risk losing a competitive advantage, Amer Ahmed, chief executive of Allianz Re, told Baden-Baden Today.

Ahmed said that, as both a buyer and seller of reinsurance (Allianz Re manages Allianz’s reinsurance needs and retrocessional portfolio, and provides around €600 million of protection to other clients) he would prefer to see a sustainable, functional market with no surprises.

“As a buyer, we don’t want shocks and volatility in pricing; we want stability,” Ahmed said.

“As a seller, of course we want profitable, sustainable rates. But there is plentiful capacity still and it is a supply-demand dynamic. I have a feeling there is a little more softening to come. I thought the market would plateau two years ago, so who knows what will happen?”

He also stressed that, regardless of his own views on the sustainability of pricing, he too is at the mercy of the vagaries of wider market dynamics.

“It is a market and it does not matter what I think,” he said. “If the market softens then, as a buyer, I need to partake in that. As a seller, we can choose whether to write business or not but, as a buyer, I must take that advantage if I am to ensure we can compete.”

Ahmed also said that as long as so much capital sees opportunity in the industry, it is very difficult to imagine what could turn the market. Even a big loss would make little difference, he suggested, if more capital is simply waiting in the wings if prices increase slightly. “Perhaps only something very unexpected could change things,” he said.

Allianz was one of the first large insurers to overhaul and centralise its reinsurance programme in a process that began more than 10 years ago. It moved away from individual profit centres buying reinsurance to a group approach.

To put the extent of that transition in context, Allianz Re used to buy more than €3 billion of coverage in the open market; today, while it provides some €5 billion of coverage mainly to its parent Allianz, the amount it buys in the open market has been reduced to approximately €1 billion.

Ahmed is at pains to stress that, while this represents a significant decrease, measuring spend in this way can be flawed.

The nature of the reinsurance programme was completely different 10 years ago, he points out, and the numbers can be skewed by a switch from proportional business, which can involve very big premiums at low margins, to non-proportional business, which represents smaller premiums but higher profits.

He said Allianz’s key goal in recent years has been extending the protection offered by its reinsurance programme. He said that five years ago, it predominantly covered peak perils; now, it is buying protection for all perils, which serves to smooth volatility in its earnings.

“This decision to manage the volatility in its earnings is a conscious one made by management at Allianz,” said Ahmed. While the company has the balance sheet to bear big losses, it needed to decide how much variance it was willing to tolerate in its earnings and uses reinsurance to hedge this, said.