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Reinsurers design tailored deals in search of higher returns

Sunday, March 19, 2017 - 23:13

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Reinsurer Swiss Re, usually involved in mega-deals on natural disaster coverage, is branching out on its own to do individually tailored schemes to boost returns, such as one in China to protect farmers against floods or drought.

[ZURICH] Reinsurer Swiss Re, usually involved in mega-deals on natural disaster coverage, is branching out on its own to do individually tailored schemes to boost returns, such as one in China to protect farmers against floods or drought.

This tailor-made approach is part of Swiss Re's response to fierce competition in the reinsurance industry, where companies are being forced to find new ways to make money as their traditional model of clubbing together to backstop risks generates increasingly slim returns. "We feel very strongly that our ability to figure out solutions to the problems that our clients have means they will give us opportunities," the head of Swiss Re's core reinsurance business, Moses Ojeisekhoba, told Reuters in an interview.

Reinsurers usually pool resources in syndicates to underwrite the risk taken on by front-line insurers. But low interest rates and competition from a host of so-called"alternative providers" such as pension funds has eaten into their profits.

Up to 20 per cent of the reinsurance market is now occupied by alternative providers, insurance industry experts estimate, a trend that began to take off in the years following the 2008 financial crisis.

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Insurance rating agency AM Best has estimated US$75 billion in alternative - or so-called "convergence" - capital entered the business in 2016.

This has put pressure on the market. Industry prices for the traditional property and casualty (P&C) business, for example, fell again in January, the important policy renewals season, albeit at a slower rate than in the past few years.

To combat the difficult climate, Swiss Re, the industry's number two, has pioneered the concept of tailor-made reinsurance, negotiating on its own with insurers to offer bespoke deals.

Last year, for example, it set up deals with local Chinese insurers and provincial government to reinsure parts of two provinces against natural disaster risks. The schemes - which included China's first anti-poverty insurance deal to protect farmers against flooding and drought - use a combination of satellite and weather data to trigger payouts of up to roughly US$350 million in each province.

Swiss Re devised the pilot schemes and acted as sole reinsurer, rather than working in a syndicate to spread the risks.

But this specialised business is facing competition from rivals such as Munich Re, Hannover Re and Scor. "There are more people coming into this space," Mr Ojeisekhoba said.

Munich Re has emphasised tailor-made products in niche areas such as aerospace and cyber risk. It has also said it would step up investment into so-called "insurtech" start-ups like app provider Wrisk, which offers insurance via smart phones. Munich Re said this would help it to offer more customised products.

REUTERS

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