Against a background of uncertain macro-economic conditions and a firming insurance market, more insurers are turning to structured reinsurance solutions to protect their balance sheets and to help facilitate future risk strategies, according to Swiss Re’s Peter Liebwein.
In 2019, Swiss Re helped 160 clients in 35 countries to release more than $1.8bn of capital for their property & casualty (P&C) businesses through structured reinsurance solutions, according to Liebwein, and his unit is seeing continued growth in 2020.
“We are seeing an uptick in enquiries but also in actual binding of business,” says Liebwein, who is Global Head of P&C Structured Solutions. “The contraction of economies and the reduction of yield curves has placed more emphasis on capital management and insurers’ strategic options for strengthening balance sheets.
“From a portfolio perspective, the existing client base renewal rate has increased. But we are also seeing engagement with new clients who are looking for structured solutions,” he adds.
The structured reinsurance team at Swiss Re is fully embedded around the world and locally: “We have 50 people in all of Swiss Re’s hubs and that allows us to be very close to the market and to the clients. But also to support key brokers and help them differentiate.”
Drive to quality
Liebwein believes Swiss Re has benefitted from a drive to quality because of the elevated uncertainty in the market. Execution risk is a concern for reinsurance buyers, as is continuity, and Swiss Re is viewed as a longterm partner.
The term structured solutions encompasses a range of tailored reinsurance tools that are at Swiss Re’s disposal. In the context of capital management, for example, capital relief can be provided via tailored quota shares, loss portfolio transfers or adverse loss development covers.
In other cases, the objective is to mitigate tail risk to earnings against a background of increasing catastrophe frequency and the potential confluence of loss events. Insurers want to be prepared for more underwriting years like 2017 when hurricanes Harvey, Irma and Maria struck, in addition to the extensive wildfires in the US that year.
Higher excess catastrophe aggregate covers across multiple lines or multiple regions are one means of managing tail risk.
In some cases, the desire for a more cost efficient reinsurance solution is causing larger cedents to change risk strategy. One answer is to leverage their own diversification, or accept higher risk tolerance, Liebwein explains.
“Beyond these three main buckets we see an evolving demand for services that address developments in the primary markets - such as parametric covers or digitalisation, for example. This could result in quota share or more tailored solutions,” he says.
Liebwein says growth in the structured reinsurance segment means it is now a significant share of Swiss Re’s overall business at around 20-25% of overall P&C volume. But importantly the portfolio is well balanced in almost all dimensions:
“It’s about 50:50 Property (including Specialty) and Casualty; in terms of regions it is 40-50% Americas, 25-30% EMEA and 25-30% APAC. We have a dedicated approach for global companies, which represent around 50% of structured business, the remainder being regional and smaller insurers. In terms of distribution channels, the portfolio is evenly split between brokers and direct.”
Structured solutions and COVID-19
The COVID-19 pandemic and the ensuing lockdown has raised the profile of structured solutions, Liebwein relates: “It’s about addressing the potential knock-on effects of a systemic event on cedents. That includes effects across LOBs, the decrease of yield curve and widening credit spreads, uncertainty around economic recovery.”
Liebwein reckons there are three distinct phases for insurers to consider. First there’s derisking with additional cat reinsurance purchases, and an uptick in the use of Facultative and Specialty Lines protection.
Insurers also need to implement capital management measures as buffers in solvency ratios and rating capital come down; this could involve prospective reinsurance purchases to address premium and reserve risk.
A less certain, longer term outcome could be an increase in M&A and restructuring as some companies find it difficult to continue and others see opportunities to grow.
The momentum for a sustained harder market is further shaping primary carriers’ strategies. Many companies will divest legacy products and at the same time push harder on digitalisation in product development in the post-COVID era, Liebwein believes: “It is a very challenging time for clients and we at Swiss Re recognise that our clients and their brokers need us to stay close.”
Counter-intuitively, the lockdown and home working has brought Liebwein’s team closer to many clients, developing ideas together instead of in isolation, he says: “These are very uncertain days for many of our clients and it is more important than ever for clients and brokers to engage with Swiss Re at a strategic level, with close technical support. In a way, lockdown has reinforced the fundamentals of our business and the importance of strong relationships.”