Swiss Re and other reinsurers are thinking small in the search for bigger returns.
Hoping to ride out squeezed margins and a hyper competitive market, traditional reinsurance companies are increasingly structuring smaller, client-specific programs rather than partnering on mega-deals to cover catastrophic losses with other reinsurers. Industry stalwart Swiss Re joined that trend recently when it devised a coverage plan to backstop Chinese farmers against drought and floods.
In the China deal, Swiss Re partnered with local Chinese insurers and two provincial governments — a definite break from the long-standing practice of forming a syndicate with other reinsurance organizations. Acting as the lone reinsurer, Swiss Re has set aside some $350 million for payouts in each province based primarily on satellite and weather data.
Swiss Re intends to rely on its risk modeling expertise to segway into this less traditional reinsurance space. “We are transitioning into a risk knowledge company that invests into risk pools with long-term growth potential,” Swiss Re Group CEO Christian Mumenthaler said in the firm's recent annual report.
Swiss Re is putting some serious dollars behind these efforts, too. According to a report in Reuters, Swiss Re has budgeted $250 million for the development of advanced and targeted risk profiles that could include estimating the cost of heavy rainfall in Malaysia to finding the industry’s next chemical scourge (like asbestos). The reinsurer is already reaping the benefits; it reported that recent premium growth was tied to these types of transactions, according to Reuters.
Big Returns in Small Packages
Swiss Re is not alone in its search for big returns in smaller, more customized packages. Munich Re has begun tailoring deals in niche areas such as cyber security and aerospace. Hannover Re and Scor have also done similar transactions, according to Reuters.
Spurring this shift is the current tight pricing market that’s compressing returns (along with low interest rates). Writing for SeekingAlpha.com, reinsurance expert Steve Evans summarized a report from Fitch Ratings on the Bermuda reinsurance market, noting that while pricing declines have slowed, the bottom of the market has yet to be reached. “With pricing already approaching the cost of reinsurers capital, any further material price drops could result in negative rating actions on Bermuda reinsurance firms,” Evans wrote.
Reinsurance companies face another challenge as well: an influx of “alternative” providers such as pension funds. A.M. Best estimates that alternative reinsurance capital and insurance-linked securities (ILS) — what it terms as “convergence” capital — accounted for 18% of the $420 billion of reinsurance capital spread across the globe in 2016.
In Evans’ view, this emphasis on innovation and risk modeling knowledge will be good for the reinsurance industry in the long run. “Major global reinsurers should be getting paid for their expertise, not just for warehousing risk on balance sheets,” he wrote. “It’s a far more healthy business model and one which could lead to a more sustainable position in the insurance and risk transfer value chain, as it continues to evolve into something much more efficient.”
In addition to traditional reinsurers, startups have entered this small new world. One such entity is the Microinsurance Catastrophe Risk Organization (MiCRO) that bases its policies on historic indicators such as a region’s rainfall and earthquake activity. MiCRO has helped property owners in flood- and hurricane-prone areas in Guatemala and Haiti. Interestingly, MiCRO’s business partner is Swiss Re.
So while traditional reinsurance will always be in demand — The Federal Emergency Management Agency (FEMA) recently completed a $1 billion reinsurance deal to shore up the National Flood Insurance Program — smaller, localized programs combining the industry’s risk-modeling expertise, data banks, and new technology may create a more agile, profitable business for reinsurers.