Allianz’s retrocession expert talks about how his success is measured, the use of alternative risk transfer mechanisms, and the greater focus on return periods, caused by Solvency II
Wolfgang Wopperer is responsible for buying retrocession for Allianz Re, the group reinsurer for German primary carrier Allianz. Members of the Allianz group buy all their reinsurance from Allianz Re, which pools the exposures and cedes any risks that exceed its appetite to other reinsurers – typically for what Allianz Re considers peak catastrophe risks, such as European windstorm and US windstorm and earthquake.
Wopperer, who is an economics graduate, started his reinsurance career on the underwriting side of the business at Frankona Re (which was bought by Employers Re, in turn absorbed by Swiss Re), mainly handling property-catastrophe excess-of-loss business. After eight years at a niche reinsurer, Wopperer joined Allianz, initially overseeing a team of underwriters for treaty and property/casualty reinsurance business. He made the switch to retrocession two years ago.
Q: How would you describe the current state of the reinsurance market? Is it soft or softening?
A: I would say the US catastrophe market is softening from a very hard position. I would not call it a soft market – more medium to hard. Even in the non-US catastrophe markets, I would say it is medium. If there was a further single-digit rate decrease, I would still assess rates as risk-adequate.
Q: How does Allianz Re structure its retrocession programmes?
A: We consider two aspects. One is our risk appetite per event, which we scale down from our so-called peak scenarios from our core exposures, such as European windstorm, US hurricane or California earthquake. However, what we consider peak is not a sharp distinction.
There are some risks that are not peak for us, such as earthquakes in Portugal or Turkey for example, but where we have a lower risk appetite per event and therefore where we would want to protect ourselves more on a per-event basis.
The second aspect is our annual aggregated loss, where we also have a defined risk appetite. We always check alternative options for reinsurance programmes by simulating them and seeing what effect they have on our annual expected loss.
Q: How do you choose your retrocessionnaires?
A: We have had a sophisticated business partner management approach at Allianz Re for the past two years, where we have tried to be more strategic.
In the past, our programme was focused more on the large continental European reinsurance companies. We would ask them for capacity first and then give the rest to the wider market. We now have defined 12 to 15 core preferred partners, although we do use others.
We now allocate business to reinsurers much more systematically. For example, if a partner wants access to our more plain vanilla risks, we now check that this partner is also supporting us on our more difficult programmes or is delivering some added value to us overall.
The criteria we use to choose reinsurers include the market intelligence they provide us, product input, flexibility, capacity, quoting intelligence (in other words, helping us to find the right price) and security.
The most important consideration for us is continuity. However, security, capacity and quoting intelligence are also very important.
Q: How has the financial crisis affected your buying strategy?
A: It has and it hasn’t. It has in the sense that, while we were always very sensitive to counterparty security, we are now even more sensitive to it. We still look at rating agency ratings but we also consider factors such as credit default swap [CDS] spreads if they have CDS in the market. In addition, we talk more to our large partners about their own protection, their investment strategy and their investment portfolio to get a better understanding of their position in addition to the publicly available information we receive.
However, our approach hasn’t changed in the sense that, after the financial crisis, our biggest focus was on the continuity of our counterparties. We did not want to jump on every rumour or alert and change the panel. Instead, we tried to get a little bit more in-depth knowledge about the situation and deal with it more subtly, for example by saying we should be a little more careful with a particular counterparty or take a closer look to try to understand what is going on. We very much avoided breaking up business relationships.
Q: How will Solvency II affect your buying?
A: Solvency II will be very important and will have an effect. The first impact we see, and how our group risk unit was translating Solvency II for our protection landscape, is greater focus on the more frequent return period for catastrophes – in other words, up to one-in-200 years – and to have maybe a little less focus on the more remote return periods.
Q: How is your success as a buyer measured?
A: It is measured on whether we get an attractive price, enough capacity, and the extent to which we have built up a good relationship with our partners that provides us with an assurance they will support us when the market gets tougher.
There are also other soft factors such as the quality of the material we produce when making a submission. This is somewhere we are quite ambitious: you don’t want to go to the market with sub-standard information and we would like to provide the best information among our peers. I don’t know whether we always achieve it, but the feedback we get from the market is that we at least deliver consistently good-quality information.
Q: To what extent do you use alternative risk transfer mechanisms such as catastrophe bonds?
A: To a great extent. Our Advanced Risk Intermediation (ARI) team is focused on any type of non-traditional protection. We work very closely with the team to check the pros and cons of using traditional, non-traditional or semi-traditional types of reinsurance for each protection requirement we have. Overall, up to 30% of the capacity we purchase is alternative.
Q: How would you describe an average day in the office?
A: There is no average day; it very much depends on the season. In summer, the average day is spent on several hours of analytical work – considering options for the protections we have in place, changing them, enhancing them and doing feasibility studies for additional protections. This also includes exchanging information with the ARI team on the use of traditional and non-traditional protection.
The day also involves replying to internal group queries, for example from the group risk unit or planning control, in addition to keeping contact with counterparties and brokers.
The day looks totally different in October and November, when the whole of the time is filled with placement issues, conference calls with the brokers and phone calls with reinsurers, trying to steer the progress of the placements. GR