Swiss Re ready to disrupt risk for reinsurance capital value chain


Global reinsurance player Swiss Re released its own earnings performance measure today, reporting declining revenues and earnings from Economic Value Management (EVM) in 2015. But, this which is perhaps more interesting, the company also noted its willingness to disrupt and bypass traditional channels to access risk. .

Like other large reinsurers, as witnessed by Munich Re this morning, Swiss Re reported a decline in its own performance indicators in 2015, which we will begin with. The angle of disturbance is lower, for those who want to go through it.

Economic Value Management (EVM) is Swiss Re’s own valuation framework, measuring assets and liabilities consistently to provide an economic view of its profits, without the influence of accounting standards.

In today’s announcement, the reinsurance company reported annual EVM revenue of $ 3.7 billion for 2015, up from $ 5.2 billion in 2014. EVM’s profit was $ 480 million, which Swiss Re said was supported by strong new business, lower than the $ 1.3 billion in 2014.

Swiss Re attributes this decline to the acquisition of Guardian Financial Services (Guardian) by its Admin Re® division, which resulted in an estimated economic loss at the start of transactions.

The net economic worth of reinsurers (ENW) also suffered, to $ 37.4 billion at the end of 2015, against $ 38.4 billion at the end of 2014. The ENW per share stood at $ 110.6 (CHF 110, 7) at December 31, 2015, compared to $ 112.1 (CHF 111.4) at the end of 2014.

Swiss Re also missed its net economic value per share (ENWPS) target of 10% average annual growth, reaching a rate very close to 9.6% for 2015.

Capital intensive transactions like the acquisition of Guardian took a toll on Swiss Re’s EVM measures in 2015, but the reinsurer posted an impressive performance during the year with a net profit for the year. of $ 4.6 billion and net income of $ 3 billion in its property and casualty reinsurance. division.

Now on to the interesting part of the story.

Swiss Re remains focused on a number of initiatives, one of which puts it in potential conflict with its intermediaries, as the reinsurer seems happy to recognize how disrupted the reinsurance market is and notes its willingness to access the market. risk in the most efficient manner for its capital.

This is something that the ILS market has actively embraced, with ILS managers positioning themselves closer to the source of risk, or in markets such as Lloyd’s, in order to have better access to risk and, in some cases, to disintermediate the market to some extent.

It is increasingly recognized, both within insurance or reinsurance and outside, that the risk -> insurance -> reinsurance -> retrocession capital value chain is too long and convoluted, with too many points where value is extracted through intermediation and therefore there are many opportunities to disrupt this process.

The ILS players have been active in this trend, bringing the direct financing of the capital markets of their institutional investors as close as possible to the source of disaster risk, the trend of fronting and the business program gaining ground.

Now we are seeing tech start-ups looking to improve the value chain as well, with many looking to replace levels of intermediation in the process and the growing buzz around fintech (financial technology) and insurtech (financial technology). insurance) ensuring that this will not speed up the pace.

But reinsurance companies, like Swiss Re, are also active here. With their business risk solutions type units providing large and complex coverages directly to large companies, governments and organizations around the world.

In a letter from the president of Swiss Re, Walter Kielholz, published this morning, he explains that reinsurers traditionally access risks through intermediaries (brokers, direct insurers or others).

However, Kielholz notes that things may not stay the same and that the status quo is disrupted, explaining this; “Today more than ever, some of these intermediaries run the risk of disintermediating themselves as soon as possible because they are unable to adapt their business model, disruptors enter their markets or technology changes the entire industry. “

For Swiss Re, this makes something vital, Kielholz wrote; “Don’t let traditional distribution channels make efficient allocation of capital impossible. “

And this is the key to the secular and structural changes observed in reinsurance, they all concern an efficient deployment of capital. To enable this efficient deployment of risk capital, it is essential to disrupt the value chain.

The emergence and growth of alternative reinsurance capital, insurance-related securities (ILS), catastrophe bonds and ILS fund managers, is a matter of the effectiveness of the capital-risk match. Taking the most efficient source of capital, pooling risks effectively and syndicating in a liquid market was the ultimate goal.

This has of course developed in the more recent trends of ILS fund managers to deploy capital in structures allowing them more direct access to insurance risks, removing the effects of a syndicated renewal market and allowing them to directly reinsure disaster risk portfolios.

Swiss Re is clearly following a similar path.

“Swiss Re must have access to the risks that it wishes to underwrite,” explains Kielholz, describing initiatives such as global partnerships, which develop opportunities with governments and supranational institutions, and its Life Capital Partners, which access the risks of life through distribution. or by buying closed books, as examples of this trend.

We also add that the business solutions of reinsurers work as an example of a company seeking to access risk more directly and deploy its capital more efficiently.

Swiss Re could therefore take a similar path to the ILS market, with tech start-ups targeting re / insurance and other new business models that seek to match risk and capital more effectively.

Insurance technology initiatives are expected to dramatically disrupt the insurance and reinsurance market, although many are missing out on the greater opportunity to replace the value chain rather than the only points of intermediary.

But don’t overlook the efforts of major global reinsurance players like Swiss Re, who, with their capital, reach, expertise and experience, could seek to disrupt risk to the capital value chain just as effectively (can -be more), and in doing so, they could secure a much larger share of the market.

Insurance and reinsurance is an activity where domain knowledge is essential and here, the large incumbent operators, such as Swiss Re, have a significant advantage.

Of course, sometimes the downside is inheritance, scale and a strong tendency to innovate too slowly, which Swiss Re, along with others like Munich Re, have actively sought to avoid with its work with start-ups. technological ups and its use of alternative capital. also.

The first question is: will a Swiss Re go out of its way to disrupt the risk to the capital value chain, or are its relationships with intermediaries just too important because they still hold the keys to much of the risk?

The second question is: Can Swiss Re innovate quickly enough to deal with ILS capital growth, technological start-ups and new generations of business models?

Questions that the reinsurer will undoubtedly discuss at the highest level and that upstarts and competitors will try to question.

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