European buyers seek deeper dialogue with tier 1 reinsurers

Many of the large European buyers have ‘tiered’ their reinsurance panels in recent years and as a result are forming much deeper business partnerships with their bigger ‘tier 1’ reinsurance partners that transcend risk management and are also heavily entwined in capital relief.

That is the view of Jean-Jacques Henchoz, chief executive officer reinsurance EMEA, Swiss Re. He says that many insurers are now seeking much broader relationships with their bigger reinsurance partners that include discussions around capital management and capital relief under Solvency II.

“The difference is the chief financial officer is in the room now,” Henchoz says. “There is a much broader dialogue, with the C-suite taking a close interest in the potential of reinsurance. It is not so much that Solvency II has changed buying behaviour but it has put its use under close inspection and the possibilities are being discussed at the highest level within our clients.”

He adds that this approach is part of a natural evolution within Europe where buyers are less transactional in their approach and prefer to build long-term relationships with reinsurers.

“They want a good deal but there is a greater focus on quality and added value,” Henchoz says.

“That has always been the case but there is an increasing dialogue that goes way beyond merely reviewing the book of business once a year and negotiating on price.

“They want a different value proposition, which includes conversations about legacy business, regulatory capital, and capital management in a wider sense. Reinsurance is a very flexible tool with many dimensions beyond just covering cat business. For tier 1 players, such as Swiss Re, this is increasingly the way clients want to work with us.”
“Insurers are facing some very disruptive technologies and threats to their business models.”

The nature of such relationships should mean much-needed growth opportunities for the bigger and more sophisticated reinsurers against a backdrop of an elongated soft market and challenging investment returns.

Henchoz also sees other growth opportunities for companies such as Swiss Re which are big enough to make a difference at a national level. He notes that the protection gap—the difference between insured and economic losses—should be a keen focus of the reinsurance in general.

He stresses that while this lack of coverage is often associated with emerging markets, the lack of insurance in Haiti following the devastating recent hurricane being a prime example, it can also apply in some more surprising areas. He notes that in the aftermath of the earthquake that hit central Italy in August, it emerged that less than 2 percent of homes were insured.

“There is a fundamental problem when you see a statistic like that. There needs to be real dialogue between the public and private sectors,” Henchoz says.

He adds that the protection gap is also emerging in other areas where insurance is lagging behind the needs of society. Companies that are victims of cyber crime, for example, may find that only a fraction of economic losses are covered, even if they have cyber insurance in place.

“Fundamental gaps exist in the world of insurance, but we should also see these as opportunities for growth,” he says. “Even where technology is changing aspects of society very quickly, we should see the opportunity as well as the threat.”

A prime example of this is in motor insurance. The increasing sophistication of telematics—one end result of which is driverless cars—will result in a sharp decrease in traffic accidents, potentially lowering motor insurance premiums in developed markets by as much as 20 to 40 percent by 2030.

While on the face of it this is bad news for insurers and reinsurers, Henchoz stresses that the industry should also remember that such a trend will also drive more demand for insurance for the companies developing the software guiding these vehicles.

“Plus we anticipate high growth in emerging markets,” he adds.

Reinsurers should also remember that many of the pressures they are facing, including how to respond to such disruptive technologies, are also being borne by primary insurers, which can often benefit from support and advice from their reinsurers.

“Insurers are also grappling with tough market conditions,” he says. “They too are operating in a competitive environment with low investment returns while their clients, the corporates, are also being tough on budgets and putting rates under pressure.

“It is therefore natural that some of that pressure gets passed on to reinsurers. On top of this, insurers are facing some very disruptive technologies and threats to their business models. Technology-based solutions are changing the value chain and the bigger players are facing a prolonged state of tough market conditions.”

Henchoz is also clear that discipline is now needed on rates for insurers and reinsurers alike. He says most of the big reinsurers portrayed a tough line in Monte Carlo but this must now be followed through in Baden-Baden.

“Rates need to be sustainable and it has come to the point where further decreases would make them unsustainable,” Henchoz says. “We must ensure we are around in 10 to 20 years to pay claims—that is why our clients use us."

“Our view is that further softening is unwarranted and unfeasible. A line in the sand has been drawn and Swiss Re will stick to it.”