Cedants wary of conflicts where reinsurers compete on primary business

Cedants are becoming increasingly sensitive to reinsurers competing with them on primary business, and new fintech insurers in particular prefer partners with no such conflicts, Michael Pickel, member of the executive board at Hannover Re with responsibility for reinsurance in property & casualty target markets including North America and Continental Europe, told Baden-Baden Today.

Pickel argued that where reinsurers operate on the primary side of the business—a trend that has become more prevalent in recent years as they seek growth away from their own stagnating sector—it can lead to conflicts of interest and inconsistencies in pricing.

Pickel said the fact that Hannover Re does not complete on the primary side is a competitive advantage for the reinsurer.

“This is a decisive and distinctive difference between us and some of the other big reinsurers we compete with,” he said.

“Clients are becoming more sensitive to it, which is resulting in more pure-play reinsurance models emerging.”

Other reinsurers have highlighted this dynamic in recent months including PartnerRe which, free from the pressure of quarterly earnings and growth targets now that it is under private ownership, has abandoned building a primary operation in favour of operating as a pure-play reinsurer.

Hannover Re is cautious of the primary side for other reasons—it has endured some negative experiences. In 1998, seeking diversification, it acquired Clarendon National Insurance, a US speciality insurer.

It sold the specialty insurance business to QBE in 2006 and the rest to run-off specialist Enstar Group in 2008.

Pickel said the reinsurer learned lessons from the experience including that, compared with running a reinsurance business, a very different set of skills and expertise is needed to run an insurance company.

“It is tricky and we now avoid it, which also means we do not compete with clients,” he said.

Hannover Re does write facultative reinsurance, covering single risks, which are unique or complex. He said that in this sphere in particular reinsurers can run into problems if they have a primary unit competing with cedants. In some instances, the reinsurance arm of the same company may argue the price their client has quoted is inadequate, despite its being comparable with a quote offered by the same reinsurer’s primary arm.

He stressed that fast-growing, ambitious fintech insurers are also sensitive to this issue. “They understand that their ideal partner is someone who won’t compete with them or steal their ideas or business model,” he said.

Being a pure-play reinsurer also fits nicely with another trend—that of reinsurers forming deeper relationships with cedants and operating as a capital provider as much as a reinsurer. Pickel said insurers have become more sophisticated in the way they use reinsurance and Hannover Re is doing more large, one-off, bespoke transactions as a result.

The company takes these relationships to the next logical step in many cases, taking strategic stakes in certain companies. It owns minority stakes in a number of German mutual insurers, and German run-off company Heidelberger Lebensversicherung and, most recently, it made a strategic investment in Bermuda-based Somerset Re, which provides risk management solutions to the life insurance and annuity sectors.

In terms of the pricing of transactional forms of reinsurance, Pickel said he believed the market had now reached a plateau, and predicted some hardening in the European market as reinsurers grapple with continued low interest rates.

“Reinsurers made some concessions last year and nothing has really changed,” he said. “I think the bottom has been reached. Most reinsurers have now realised that with interest rates as they are, they need a combined ratio of between 92 and 95 percent, which few are achieving at the moment. That dynamic could start to lead to some hardening as a result.”