WEDNESDAY 26.10.11


n influx of new competitors into the European market driven by readily available


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BADEN Research, analysis + opinion on international insurance + reinsurance


capital combined with cedants’ growing tendency to seek diversity on their panel of reinsurers is causing the reinsurance product to become commoditised – a trend that has dangerous long- term consequences for cedants. That is the view of Achim Bosch, regional


manager for treaty business in Germany, Austria and Switzerland and a member of the board at Gen Re. “A challenge for reinsurers is the belief that diversification, of any kind, is a good risk management strategy,” he says. “While using more reinsurers to reduce the


impact of a default sounds logical, the risk of a default is increased each time a share of a secure reinsurer is replaced with one that is less secure – no matter how big the number. We call it ‘di- worsification’.” He says that this logic, however, often falls on


deaf ears. This is because the idea of diversity suits reinsurers unable to offer value beyond price. A scarcity of other worthwhile investments means they are being provided with capital from inves- tors and this strong supply combined with ced- ants’ search for diversity is starting to commoditise the reinsurance product. “The ‘diversification is always good’ philoso-


phy is popular and many reinsurers do not create value beyond price. In such circumstances, it is increasingly difficult to demonstrate the value of reinsurance,” Bosch says. He stresses a good reinsurer adds value to


Diversity myth damages reinsurance A


More competition and readily available capital in Europe are a dream combination for cedants seeking diversity – but this approach is wrong, says Gen Re


where it believes unique expertise and a bespoke service still carry weight: the increasing complex- ity of risks, the reliability of risk models and the implications of Solvency II. “Risks are becoming more complex, not just larger, and they are more difficult


to assess,”


Bosch says. “The risk assessment and risk transfer of emerging risks requires tailored insurance and reinsurance solutions. ” Bosch says Solvency II will create opportuni-


Achim Bosch, Gen Re


cedants in many ways, many of them intangible. “But that often only becomes obvious during a crisis – and by then it’s too late. The long term commitment of a reinsurer to a client, the trust a client has in the availability of capacity, especially during and after a crisis, and the support a rein- surer can provide is difficult to put a value on but critical to success.” Bosch says this dynamic combined with new


competitors in the European market operating from emerging reinsurance hubs such as Zu- rich has put pressure on rates and terms in the European treaty market, especially on property- catastrophe business where brokers are usually in- volved. “With more reinsurers entering the Euro- pean markets writing business at adequate terms has become more difficult,” Bosch says. Despite the challenges facing the market, how- ever, Gen Re still sees opportunities in three areas


What’s inside 2 EXTREME PRICING CYCLES ARE GONE: NEW RE 6 MICRO-CYCLES REPLACE CASH FLOW UNDERWRITING 11 SOVEREIGN DEBT CRISIS MUST BE SOLVED: BERKSHIRE HATHAWAY 12 BOLT DEFENDS LLOYD’S MARKET’S ‘CRITICAL FRIEND’ APPROACH


ties for Gen Re to offer its core product: tailor- made risk transfer solutions to substitute capital. “Reinsurance is the most efficient solution as long as you provide top security over the long term. For that you don’t even need fancy products,” he says. He is critical of the way the industry is us- ing risk models but believes this too creates op- portunities. “The latest experiences in Japan and New Zealand again highlighted the inherent risk of relying too much on models – and the danger in basing decisions solely on their outcome,” he says. “They are a good indication but they bear the risk of underestimating the loss potential. Un- derstanding models, especially their changes, and their limitations is key.” But despite the challenges Bosch remains posi-


tive and believes cedants will again come to value the product of reinsurance. “The more I discuss this topic with clients, the more I see a healthy scepticism towards simply using model results. That assures me that the flight to quality, which today is interrupted, will ultimately have its come- back. Reinsurance is not a cost, but an asset.”


14 ECONOMIC UNCERTAINTIES LEAVE NO PLACE TO HIDE: SWISS RE 15 SOLVENCY II COULD ERODE MANAGEMENT CONTROL: DEUTSCHE RÜCK 16 CATASTROPHE RATES ARE NOT ONLY INDICATOR: AXIS 18 INSURANCE IS CRITICAL TO RUSSIA’S DEVELOPMENT 19 TOUGH LESSONS LEARNED FORMED ‘RESILIENT’ SCOR


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