Finance & Risk Executive Roundtable

It’s no secret that these are turbulent economic times.  At Swiss Re, risk is our business and we find new and innovative ways to handle risk – whether by trading or transformation. 

At the recent Swiss Re Finance & Risk Executive Roundtable held in Toronto, company executives examined the challenges and opportunities arising from recent developments in the financial markets. 

Many of Swiss Re’s prominent Canadian clients were in the audience, composed mainly of Chief Financial Officers, Chief Risk Officers and Chief Investment Officers.  They were hosted by Sharon Ludlow, Swiss Re Chief Financial Officer for Canada; Brenda Buckingham, CEO of Swiss Re Life & Health Canada and Jean-Jacques Henchoz, CEO of Swiss Re Canada. 

Featured speakers were Benjamin Meuli, Chief Investment Officer of Swiss Re; Alan Badanes, Head of Financial Markets Origination; and Allen Binder, Managing Director, Financial Markets.  They are on the cutting edge of managing the portfolio and risk of a global reinsurer, and they shared some of the major trends and challenges and solutions of the 21^st century risk enterprise. 

Alan Badanes addressed the current economic crisis, which began last year with the subprime meltdown and spread to the rest of the housing market, eventually resulting in a liquidity crunch and the threat of inflation.  Badanes noted that in this environment insurers cannot afford to rely on the investment markets to offset poor underwriting.  Also, he said, insurers and other financial institutions with the best liquidity positions will have a comparative advantage.  

Badanes pointed out that risk-bearing entities need to look beyond traditional mechanisms and embrace the capital markets to protect their balance sheets and satisfy investors.      He described Swiss Re’s approach to providing tailored risk and capital solutions, combining the firm’s capital markets and reinsurance expertise.  Some of those solutions include:

• Insurance risk trading and syndication
• Insurance linked securities
• Environmental and weather hedging
• Credit and rates
• Longevity
• Credit protection
• Equity and equity linked
• Variable Annuity hedging programs
• Equity linked financings
• Private equity/private debt

Allen Binder followed with a discussion of how a great number of financial institutions are increasingly finding new and innovative ways to handle risk – whether by trading or transformation.  He chose insurance-linked securities (ILS) to prove his point, noting that total ILS capacity provided directly by the capital markets in varying formats is estimated around USD60 billion, of which approximately USD25 billion represents natural catastrophe risk.  He said investors find securitisation of peak insurance risk attractive because it is largely uncorrelated with the rest of their portfolios. 

As for Swiss Re’s position in these markets, Binder said last year the firm placed USD3.4 billion out of total non-life issuance of approximately USD7.7 billion, a 44% share.

He described some of the scenarios in which insurers and governments would choose to access the capital markets to transfer non-life risk – such as hurricanes, earthquakes and windstorms.  He described the features and advantages of securitisation and contingent capital arrangements.

Binder commented that cat bonds as an asset class are performing well during the current sub-prime crisis, demonstrating their diversification and return value to investors.  More investor capacity is expected to flow into insurance securitisations over the next few years as knowledge of the benefits becomes widespread.

Benjamin Meuli then addressed the guests and described how Swiss Re's investment strategy has evolved over the past few years in response to the development of its own internal capital model starting in 2003.  He noted this has entailed a move away from the classic strategic and tactical asset allocation towards an approach that seeks to maximise risk adjusted economic returns, subject of course to some constraints imposed by external reporting and regulatory requirements.

In particular, this has meant a reduction in the core exposure to traded market equity and credit risk, both of which correlate with elements of the liability profile.  In its place, he said, Swiss Re seeks to move the portfolio more actively over the cycle to exploit dislocations in markets as they occur reflecting the very strong liquidity position of its large globally diversified reinsurance business.

Meuli explained that consistently earning a liquidity premium from markets in this way will enhance value for the firm's shareholders.  Amongst other things, this will eventually lead to an increased allocation to alternative investments as well as to private equity investments in insurance companies as a way to capitalise more effectively on the group's institutional skills, particularly in growth markets.

In addition to the speakers and Q&A session, guests enjoyed a lunch and time to network and socialize. 

“Today’s presentations and discussions were comprehensive and robust and we trust our clients benefited from this sharing of expertise,” said Sharon Ludlow, CFO of Swiss Re’s Canadian operations.  “(Re)insurance is critical to the functioning of the economy, and our speakers made it clear that in today’s complex world successful risk management must involve a greater mix of willing and intelligent partners.” 

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