Reinsurance and the year ahead
With the top reinsurance firms’ financial results being made public after the end of the financial year last month, quite a few interesting outcomes have painted a thought- provoking picture of the year ahead.
The past year has been a tough one for the insurance industry, not only in Southern Africa but worldwide. Massive claims from extreme weather events and a global economy that still shows meager signs of recovery have put serious strain on insurers everywhere.
The reinsurance industry seems to have felt less strain this past year, with the big international houses like Swiss Re reporting substantial profits in their latest financial results postings. Most recently, Munich Re and Hannover Re reported record high results for 2013.
That said, the African reinsurance market was slightly less energetic than its European counterpart. While the global economic predictions for 2014 seem somewhat more positive, one big question is whether the reinsurance industry will continue to see positive growth, or if the delayed effect of a rough 2013 will carry over into the new financial year.
RISKSA spoke to a few industry insiders to find out what the past year might reveal about the coming one.
Infiniti Re is last year’s new entrant into the reinsurance market. Former MD of Africa Re, Paul Ray, heads the new firm and the company relies heavily on his extensive experience to get the company up and operational.
Having recently returned from his business tour of sub- Saharan Africa, Ray had some interesting insights to share. “Infiniti Re started in July of 2013. Since that time, when our retros were set up, our income has been about R5.5 million. We are hoping to end June 2014 on R10 billion or R12 billion, depending on what happens with the April renewals,” he starts.
For Africa there is not much in the way of April treaty renewals. Most of the renewals here take place during the course of December. “We would actually hope that 2015/ 2016 would be more positive from an African premium growth perspective,” Ray continues. “A lot of the business that we have at the moment, in terms of volume, is facultative business. I can count on one hand the number of treaties that we have. From that you can see that we’re very new to the reinsurance industry,” he states.
Larger South African insurance companies could be hesitant to support Infiniti Re, mainly because of the company’s rating. There could also be a perception of competition on the basis that Infiniti itself operates in the direct market. The company’s strategy has been to focus on the local reinsurance brokers and to write local business from the smaller companies. There is also local facultative business coming out of Namibia for the Infiniti Re.
“Firstly, the opportunities for the coming year are with small niche insurers in South Africa. Most of the larger reinsurers don’t display a lot of interest in them at the moment,” Ray says. “Secondly, reinsurance business out of subSaharan Africa will definitely pick up. In spite of South Africa’s lethargic economy at the moment, this is not the case for countries like Namibia and Kenya. Both countries are experiencing major construction and development and, interestingly, these projects are locally funded. The large reinsurers are aware of this, so we expect the competition for new business to be tough,” he says.
On the subject of opportunities, Junior Ngulube, CEO at Munich Re of Africa also weighs in. “Where the market has problems, it needs solutions. We have the expertise to address these problems and in so doing add value to our partners. For example, our global motor consulting unit is working with some of our clients to assist with getting their motor books in better shape. We are not there to merely provide capacity, but also to help solve our clients’ problems. If our clients are successful, we will be successful too,” Ngulube says.
He adds that Munich Re is not necessarily focusing on a specific line of business in 2014, but there will be an emphasis on infrastructure projects in the rest of Africa. “We are building our engineering team and bringing in expatriate skills,” he states.
Major challenges to come
Mark Finch, executive director or Willis Re London, says that globally, the issues faced by the industry over the last 12 months will remain on the table for 2014 and possibly beyond. That said, the reinsurance industry will need to adapt in the coming year, to face these issues head- on.
“The landscape for risk is undergoing substantial changes and the industry needs to find ways of providing solutions. Of the top 100 global corporates, a large proportion are technology companies. These companies have very different insurance needs from those covered historically such as construction, automotive, marine and manufacturing. Reinsurers need to find ways to remain competitive in the coming years, adapting to the changing market dynamic.”
“Traditional reinsurers face long- term competition in property catastrophe business for certain. But it is not all bad news as there are certain advantages in creating a well- diversified portfolio, be it geographically or product lines. The value of long- term relationships will favour the traditional reinsurer, as will having the ability to underwrite business outside of the model,” Finch continues.
Ngulube adds, “We will and should expect to see more extreme weather events. In all my years of participation in the insurance market, I’ve never experienced hailstorms like those we experienced in 2012 in Gauteng.” He says that an increase in extreme weather events, coupled with the growth in built- up areas, has increased the exposure faced by insurers and we should accept this as the new normal.
Rates under pressure
Finch points out that, globally, reinsurance rates are under pressure. An oversupply of capacity chasing the same amount of business has made competition fierce and opportunities few at the moment. “This is especially so in the peak territories where retentions are expected to continue to move upwards and there are no signs of wholesale changes in terms of buying more cover, as has been the trend in recent years in response to solvency or regulatory need,” Finch says.
“The current market environment should enable cedants to consider buying the reinsurance they want rather than what they can afford,” he adds.
Piers Sargent, treaty broker for Jardine Lloyd Thompson in London, agrees that there is a pressure on rates. According to him, diversification seems to again be on the agenda and reinsurers previously not involved in SA are showing an interest without knowledge and experience. He points out that this may add to the already fierce competition and keep rates thin.
“The increasing frequency and severity of weather- related claims worldwide force us to recalibrate models. The most difficult aspect is the education of single territory clients who may regard events in their own markets as oneoffs when the statistics from around the world would suggest they are part of an international trend. In South Africa, the remedial action taken by clients following the severe weather events in 2012 has varied from a mapping and re- evaluation of flood plains at one extreme to ‘ fingers crossed it does not happen again’ at the other. From our view, the number of these events will increase and we will judge clients on their course of action in addressing the underwriting implications of the same,” Sargent explains.
For Sargent, the rating picture is mixed. He states that prices in the US are under the heaviest pressure and perhaps historically have the largest margins. International rates have little or no room. “South Africa is a very cyclical market and there seems to be limited desire locally to take action to change that. If a company appears to have developed a profitable market segment or niche, the other companies start to compete and drag the prices down to uneconomic levels,” he says.
“There is a resultant withdrawal of capacity and a period of remedial action ( often undertaken by specialist UMAs) leading to increased original rates and tighter conditions yielding improved returns. This alerts the competition so the process starts all over again. The agricultural and corporate market segments are currently hurting; however, from what we can see the response of some local companies has been to write for market share. It is interesting to note the number of Lloyd’s cover holders has reduced recently with UMAs getting better terms from local carriers. This too may be an indicator of where we are in the cycle,” Sargent continues.
The year described by the experts is a tough one. On the other hand, Ray’s optimism for his fledgling company is heartening. After an interview where the industry veteran appears cautiously optimistic, Ray does not hide his confidence that this competitive market bears great opportunities for a newcomer with a battle plan.