Sometimes Monte Carlo is wrong, says Kessler - Don’t let sweeping generalisations distract you
GR: What are the biggest challenges facing the global reinsurance industry and what is Scor doing to manage these?
Kessler: The reinsurance industry is currently facing two main challenges. The first is managing the very low interest rate environment. Rates may have moved slightly recently but remain at a very low level. The decision of central banks to keep rates down has meant that the financial contribution of assets to the bottom line of reinsurers is at an historic low. Unfortunately, the industry is paying a high price because of the monetary policies being led by the US and the European Central Bank, and this will ultimately contribute negatively to the profitability of the reinsurance sector over time.
The second main development is the influx of alternative capital. As far as Scor is concerned, we are less fixated on this than our peers as our cat business – the main area impacted by alternative capital – represents only a small proportion of our entire portfolio. We estimate that less than 5% of the group’s premium income is directly concerned by the pressures on rates due to the development of alternative capital. Compared to some of our peers, who are bigger players in the US cat field, Scor is not worried by the speed of recent developments, even though we see today ripple effects: some (re)insurers reallocate capacity from cat lines to other lines of business, hence exerting pressures on rates.
These two topics are linked. The rise of ILS has been driven by volatility in monetary policy and reinsurers are the sideline victims of this.
What is your take on the rise of alternative capacity?
When it comes to the ILS phenomenon, I pay attention to the trend but it is most definitely not a mortal risk to the business. To date, I have chosen to be quite agnostic with regard to this influx. We see it as an opportunity. We benefit from it because we issue instruments such as cat bonds, which in turn reduces the cost of protecting the group. As a result, we now are in a situation where we have a 50/50 split between traditional retro arrangements and alternative forms. We invest in cat bonds and this contributes to a better yield of our invested assets. We also help our clients to issue ILS, so we could be described as a transformer.
I think it is better to adapt to this situation and see how many benefits we can draw from it. It reduces retro costs, we get better returns from investing in ILS and we have a broader product offering by helping clients to access the capital markets. Furthermore, as soon as interest rates increase, the ILS bubble will start to recede.
Which companies will do best in this continuing soft market?
I am convinced that well-diversified companies will do best.
At Scor we value diversification, which is a key principle of our business. Of all the big reinsurers, we are the only one with a book made up of roughly 50/50 life and non-life. We have been able to demonstrate over the years that these two business lines are largely uncorrelated. For example, the 2011 Tohoku event left our life business largely unaffected.
The companies that operate in limited business lines and in just a handful of markets are dangerously exposed to big shocks, which have the potential to derail them.
Fortunately for the industry, diversification is now valued by the rating agencies and I am happy with this development. It is also important that diversification is at the heart of Solvency II and is totally ignored by Solvency I.
Do you have any ambitions to become the world’s largest (measured by GWP) reinsurance group?
At Scor, we have a quite different goal. I believe in the tiering approach. A few years ago, every reinsurer was considered alike by ceding companies, prices and capacities were the dominant factors for selecting their reinsurance panel, but this is no longer the case. Before the crisis, the dominant thesis in the industry was the commoditisation of reinsurance. The world’s large insurance groups are now only selecting a few reinsurers to cede the bulk of their protection. As a result, reinsurers have to offer value in terms of services, economic intelligence, worldwide capacity and global servicing. Scor aims to be a tier one company. To be a tier one company, you need to lead a large part of the treaties and you have to have direct access to the client.
The aim is not to be the largest, but to be a tier one reinsurer with access to business worldwide. I believe that we have succeeded in this.
If the market stagnates further, then access to business will be more difficult and it will become harder for tier two companies to diversify. For tier three companies, unless they operate in a niche market, then they are going to suffer badly over the coming years. Furthermore, size matters again, because economies of scale and economies of scope are on the rise. Fixed costs do indeed increase (compliance, reporting, cost of date base…).
What do you think will be some of the main discussion topics at Monte Carlo this year?
When it comes to Monte Carlo, I am often surprised how sweeping a lot of the topics being discussed are and, traditionally, how wrong they have sometimes been. What Monte Carlo often lacks is granularity. I call on reinsurers not to be distracted by headline statements but rather to focus on the markets they serve.
My plea is for reinsurers to avoid any big statements that may not reflect the entire reinsurance universe. The gap between what you can discuss with each of your clients about market developments and the general statement is quite wide. At Scor, we believe in the fragmentation of markets according to which each market has its own development, its own dynamics.
What are some of the emerging risks and opportunities for the reinsurance sector?
Each risk is an opportunity. For example, cyber is a risk but also an opportunity. A good reinsurer is always looking at risk. When I read a paper I read it from cover to cover because each article has a consequence for my industry sooner or later. When I read about genetic manipulation, it interests me. When I read about 3D printing, it interests me. And the same about solar storms, driverless cars or drones.
Any development in science and technology gets my attention and it is our duty to assess the impact for insurers and reinsurers, such as identifying adequate tariffs and defining appropriate terms and conditions.
Is innovation in reinsurance possible?
Yes, of course. However, as an industry we need to dedicate more time to technological developments and use these to invent new products and to change the way we handle claims.
Previously, at the heart of insurance there was an asymmetry of information between the risk carrier and the insurer/reinsurer on the other side. But now, we are entering an ‘era of sensors’ that allows us to monitor risk factors in real time.
The implication in terms of prevention, fraud detection and claims handling are far-reaching, for both life and P&C insurance.
The leading (re)insurers of the future will definitely be those who decided to invest in technological developments.