Changing dynamics at renewals do not mean a major shift in the portfolio for Spanish reinsurer MAPFRE RE, which is focused on the stability of its long-term client relationships.
Recent reinsurance renewals have settled down from the 1/1 shock experience faced by many cedants, of tightened capacity and rates risen exponentially. However, MAPFRE RE has sought to maintain stability throughout the drama of a market turn. The Spanish reinsurer prioritises maintaining client relationships and has eschewed major change to its book of business, MAPFRE RE CEO Eduardo Pérez de Lema tells GR.
“There has been a pricing shift in our reinsurance treaties but not a portfolio shift. We have increased capacity overall, but not by much. There’s been no massive shift, and it certainly didn’t reduce, which is what some in this market have had to do in this environment,” Pérez de Lema says.
“We are focused on relationships, and our priority is to maintain a stable approach to our clients,” he continues. “Of course, we have not been satisfied with results in the previous few years, but we are now more content with the position of the book and with our client base.”
While pricing has swung to much more adequate levels for reinsurance risks being taken, stability requires cedants that meet certain standards and share a similar perspective, he suggests.
“The increases in our deployed capacity have been mainly for these existing clients. Our approach sets a high standard, and our clients are those that are consistent with that approach,” Pérez de Lema says.
“Clients can take decisions about whether they want to trade in the same way with us. Some others in this market are more opportunistic and transactional, but the core of our portfolio is about stability and long-term relationships,” he adds.
That long-term view sits within MAPFRE’s broader company ethos, which is at odds with opportunism, with a traditional emphasis on thoroughness, throughout the organisation.
“I don’t know if it’s part of being within a wider insurance group, but we take a long-term view,” he says. “Naturally, we want adequate returns, and of course we try to obtain the best deal, it would be impossible to operate in a different way. However, we’re here for the long-run; our company will be here longer than other participants in this market.”
Renewals in April and July were more orderly and predictable, Pérez de Lema notes, with “no surprises” after January. However, he is still mindful of a volatile geopolitical and macroeconomic environment.
“Volatility is always difficult to handle, we see the rise in geopolitical risk and we’re concerned with social instability, and we don’t know where things are going,” he says.
“The biggest threat we see in the short-term is the inflationary environment. However, in the long-term, the rise in interest rates, away from a period of very low interest rates, is, of course, very positive for us in the industry to get a more normal investment income.”
Pérez de Lema has a preference for property risks over casualty risks. On long-tail line of business, he expects inflation’s effects to continue “for months and years”.
“Inflation is having an impact across the industry. It’s not just casualty reinsurance; it’s affecting business across motor, homeowners and property classes. Inflation (CPI) is reducing but there are very substantial components of the inflation that are affecting us as an industry and will continue to impact us in the foreseeable future,” he adds.
Stability, in market terms, is what MAPFRE RE is seeking at upcoming renewals, he suggested.
“We’re looking at a much more stable market than last year. The reinsurance market going back to a more risk-adequate level of pricing and coverage and we need this to be maintained over time,” Pérez de Lema says.
“We need to wait and see if additional capital is coming into the industry, but essentially, we’re going to a Rendezvous this year where the aim is to maintain the status quo. As an industry we need to prove that we can maintain reasonable returns for the risk that we take over time, especially after many years where we have been underperforming consistently,” he adds.
Climate risk role
Pérez de Lema describes combating climate change and building resilience as “a big part of our responsibility” and “a core part of what we do in providing coverage to clients”. Our obligations is to provide growing protection for the risk but doing that sustainability necessitates exercising underwriting caution.
“We need to find ways of doing things sustainably and not putting our own solvency at stake in the process. We pay a lot of attention to the increasing impact of climate change, as well as its socially linked consequences,” he says.
“The very high impact of natural perils events in recent years is however not only consequence of climate change. It’s also driven by how much we build in highly-exposed areas, where we concentrate our risk, where we provide coverage, and how well we understand our risk, if we price and structure it properly,” he continues.
“We see climate risks being under-estimated and not being priced sufficiently. Reinsurance structures should be designed in a way to help clients get the cover where it’s needed, but with a good understanding of the risk, and that comes with a price. Is also true that pricing for a long term phenomenon, like climate change, in a short term treaty, like traditional one year reinsurance covers, is extremely complicated.”
MAPFRE RE has reduced its exposure in some territories with under-priced climate risks, he notes.
“We have exited from certain levels of risk in specific territories. However, this is more the consequence of inadequate reinsurance structures or pricing, rather than about geographies or general appetite of taking risks,” he says.
MAPFRE is focused on understanding how the development of artificial intelligence (AI) can be applied to insurance business to greatest effect, Pérez de Lema explains.
“It’s application on mass distribution and management can be tremendous for insurance companies. However, for reinsurance business we see it as an efficiency play and data analytics,” he says.
“It’s coming at much higher speed than the other technologies we’ve seen emerge in the past decade. Of course, we’ve seen some disruption, but this one is going to be much faster than whatever disruption seen previously.”
Efficiency represents one of the sector’s biggest challenges, he emphasises, aiming for more premium to be spent on covering risks, rather than reinsurers’ own costs and expenses.
“We need to reduce frictional costs,” he says. “If you compare reinsurance with other industries, we’re pretty inefficient on operations. However, it’s difficult to automate underwriting for a tailor-made product.
“We’re not trying to replace underwriter. However, there is much potential when it comes to accounting, operations, data transmission and analysis needed for risk evaluation. For property cat underwriting, for example, we need to automate processes for risk assessment and much of the manual work needed from us and from our clients.”