This is why there is a growing need for structured and strategic reinsurance
Reinsurance and insurance markets are changing rapidly. As risks become more global, we see a growing demand for larger, structured and more strategically focused reinsurance contracts.
Insurers around the world need to become increasingly sophisticated in managing their capital and risks. Some of them are moving away from lines of business such as risk sharing on a specific region or line of business, for example, to integrated, comprehensive solutions that de-risk their whole business. This allows for tailored covers, leveraging the insurers own diversification and transferring 'tail risk' to reinsurers.
This trend is partly driven by industry consolidation and increasing solvency regulations. But it is also part of a wider move towards enterprise risk management which is seeing insurers and large companies looking to buy centrally.
Our opportunity as Swiss Re is to meet this demand, allowing our clients to strengthen their balance sheets and grow their businesses in these uncertain times. That’s where I believe my team – and its work on strategic reinsurance solutions –makes a real difference for clients and brokers.
Market trends in the current environment
We have observed an uptick of inquiries and business activity, which can be clustered into a few phases. The regions and individual clients are in different stages.
De-risking as the first phase: This is to tackle confluence scenarios, addressing tail risk outside of COVID-19 related losses, and can include additional Cat purchases (tailored or traditional), Fac placements, and Special Lines. This comes in conjunction with strengthening original rates in many segments to bring it to sustainable levels, especially with the decrease of yield curves.
Capital management is the most important second phase, including capital relief to strengthen balance sheets, both prospectively (tailored Cat coves and premium risk relief) and retrospectively (reserve risk relief). Also, insurers are taking a hard look at potentially divesting non-core business or upstream capital from local subsidiaries or business units to group companies.
A diverse third phase a bit further out: We may see more divestures and potentially M&A activity, which also leads to capital management related reinsurance.
Balance sheets in the spotlight
From an insurance perspective, the risk landscape can seem to be darkening and becoming more complex. But the need to cover new risks, plus the widening global insurance protection gap, present a tremendous opportunity for our industry.
The latest analysis from the Swiss Re Institute puts the global insurance protection gap – that’s the difference between the value of all insurance cover versus the total likely liabilities - at USD 1.2 trillion, a record level. With the right reinsurance solutions and Swiss Re's expertise, that’s a huge, addressable market for our industry.
To capitalise on that, we need to align our reinsurance offering to the broader corporate strategy of our clients. It’s about understanding their capital management and risk management goals, as well as their strategic management objectives.
In the era of COVID-19, capital has become a precious commodity as insurers cope with the contraction of economies caused by the pandemic. Swiss Re has a strong balance sheet and leverages capital markets for hedging peak exposures, helping our clients maintain their targeted capital ratios. Especially in times of uncertainty, the robustness, strength and resiliency of the balance sheet for insurers is critical.
Of course, insurers can issue shares or debt like any other business. But reinsurance goes beyond regular financial instruments and becomes an integral part of capital management, helping meet capital adequacy rules or releasing capital for use elsewhere in the business. In fact, protecting capital has become an important driver of demand for structured solutions.
Adding portfolio insights and new products to the mix
On top of this, we can help our clients with portfolio insights and with growing their business by developing new products for them to take to market. Finding new ways to cover existing and emerging risks is an integral part of what we do in our Solutions teams. And we are able to do this even more effectively because we work hard to understand the strategy of our clients.
It’s particularly important for us to provide an innovative edge so that brokers can stand out. Brokers are our partners as well and they need a reinsurer with first-class innovation capabilities. In the latest market survey, Swiss Re has ranked #1 in this dimension across various regions.
Actively engaging with and listening to clients and brokers
I am a strong believer in the importance of teamwork, listening, being approachable, whether that’s within our own team, across Swiss Re as a whole or with our external partners. Strong long-term relationships are vital to devising the optimal solutions.
My team was one of the first in the industry to roll out Microsoft Teams to enable people to work together more effectively, especially during the phase of lock downs. In addition to one-to-ones or virtual meetings in smaller groups (for example, we did a virtual pub quiz with our key broker partners), we initiated local webinars with over 1,000 clients and brokers participating.
Swiss Re's Structured Solutions team is decentralised and embedded with both clients and brokers in order to nurture the relationship and foster a deep understanding of their strategy, context and motivation. This is the most effective way to find the best fit to meet their goals.
Change for the better
I believe that one of the lasting impacts of the current pandemic will be a flight to quality. Finding reliable and sustainable reinsurance partners – ones who will withstand another crisis - may well become more important than shopping around in the face of such uncertainty.
We are all coping with a systemic contraction of world economies. Who knows how fast the recovery will be? Will it be V shaped, U shaped or a different letter altogether? Scenario-based stress tests for capital positions over the next 12-24 months support clients to understand potential outcomes, develop their strategic responses and expand the management options. At the same time, digitalisation will accelerate, with contactless sales and contactless claims becoming the norm.
Tomorrow will bring many changes. But the combination of product innovation, strategic structured solutions and a focus on teamwork will help make sure those changes are good ones.