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.

RISKSA Magazine - - CONTENTS - Do­minic Uys

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.

African po­ten­tial

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.

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