* Falling prices pressure reinsurance industry
* Observers see 'tiering' benefiting global reinsurers
* Small reinsurers face strategy revamp or consolidation
By Jonathan Gould
FRANKFURT, Feb 25 A slump in reinsurance prices
is playing to the strengths of the biggest global reinsurers,
while piling pressure on smaller competitors to diversify or
Reinsurers, which help insurers shoulder risk in exchange
for part of the profit, this month unveiled the results of talks
with insurance company customers to renew contracts for the
start of 2014, amid what analysts are calling the biggest
market-wide price decline since the late 1990s.
The results showed that reinsurance suppliers were
separating into tiers, with larger and diversified companies
such as Munich Re, Hannover Re and Swiss
Re faring much better than smaller and
narrowly-focused firms, which are likely to struggle to meet
return on equity targets, according to industry executives and
"It's a tough market for all but the larger two groups, the
top two tiers of reinsurers, are probably doing
disproportionately better," Swiss Re Chief Financial Officer
George Quinn told Reuters.
The headwinds facing the industry are coming from different
A dearth of natural catastrophes like hurricanes or
earthquakes over the last two years has left many reinsurers
sitting on a thick cushion of profit that has prompted their
customers to press for cheaper premiums.
That price pressure has been compounded by competition from
pension funds, which have poured into investment vehicles that
offer reinsurance in direct competition with traditional
Global insurance companies are also getting better at
Whereas different regions and divisions within one insurance
company used to make their own reinsurance decisions,
sophisticated new modelling techniques allow central managers to
devise group-wide reinsurance strategies.
That is helping insurers to improve returns and better
manage their capital, solvency and counterparty risks, and many
are buying less reinsurance as a result.
"Clients are concentrating their buying behaviour and are
more focused on a smaller list of reinsurers," Quinn said.
Reinsurers that can offer pricing, capacity and underwriting
in multiple business lines that match the global approach of
their clients will benefit the most, said Victor Peignet, a
senior executive at French reinsurer Scor.
"A group of 5 to 15 reinsurers is emerging and is going to
form the panel of co-partners for an increasing number of large
and mid-sized insurers," he told a conference call this month.
He predicted the industry shake-out would intensify in the
next rounds of contract talks between reinsurers and their
IS BIG BETTER?
Brokers say many reinsurance segments will see prices plunge
by 25 percent in 2014.
But bigger players do not appear to have suffered too badly
so far. Scor, for example, has reported a fall in average prices
of just 0.2 percent, while industry leader Munich Re said it had
seen a 1.5 percent decline.
"There is a growing sense that some carriers are beginning
to fare better than others in this market," said Mike Van
Slooten, head of market analysis at reinsurance broker Aon
The changes can be seen in Aon Benfield's regular analysis
of the top 31 reinsurance players, which represent more than 60
percent of the whole market, Van Slooten said.
"Even among the smaller players in that group, we see
growing evidence of disparity in performance," he said.
Among the smaller players, for example, U.S.-listed Argo
Group International Holdings has a return on equity of
5.9 percent over the last twelve months, compared with 12.7
percent for Swiss Re, according to Thomson Reuters data.
Smaller reinsurers - those with total capital of $3 billion
or so - may need to reinvent themselves to stay in the game, by
diversifying into insurance, forming consortia or seeking to act
as managers of outside capital, industry observers say.
"Some smaller reinsurers will likely look to consolidate in
order to survive," said Paddy Jago, President of broker Willis
Consolidation does not have to take the form of mergers,
however, and could result from weaker players being forced out
of business as clients switch to other providers.