Swiss Re Chairman of the Board of Directors, Sergio Ermotti, has once again given an interview. His latest statements show that the star banker still has little idea about reinsurance.
Sergio Ermotti is trying to do his group a good turn. But turning in exactly the wrong direction is likely to be the case.
The former group CEO of the big bank UBS told the “Handelszeitung” of today, Thursday, that the reinsurer would have to review its prices in order to improve profitability.
Shining with basic knowledge
This banality applies, of course, to every industry and every company. Referring to the insurance industry, he explained, “We are absorbing much higher volatility and higher risks than primary insurers today,” and that’s really where the executive is addressing the basics of the reinsurance business in a business journal.
“The bottom line is that we need to have returns on capital over the cycle at least as good as or higher than the primary insurers,” the Swiss Re Chairman continued.
And even at that, Ermotti apparently still lacks much knowledge about his own house. Indeed, primary insurance and reinsurance are becoming increasingly blurred. In any case, Swiss Re is itself poaching business from primary insurers and taking more and more butter off their bread.
Swiss Re’s business unit is called Corporate Solutions, and it does primary insurance business. All this really just shows that growth in reinsurance is increasingly difficult.
In addition, many primary insurers are merging into larger units and need less reinsurance cover – Ermotti’s traditional business is also declining.
Rapidly at competitors
But these are not Ermotti’s only thoughtless notions. Reinsurance contracts can be adjusted annually. In other words, every reinsurer charges the price it thinks is good for its forward business year.
But reinsurers are not dealing with beginners or risking laymen, they are dealing with professionals, hence, haggling over the price is not always easy. An interview on price increases is hardly enough.
The customers of reinsurers, for example, quickly look for alternatives if rates go too high or deductibles increase too much for the same price.
And primary insurers are hardly happy if no loss occurs despite insurance coverage. After all, then almost the entire premium minus some administrative costs is immediately profit, and that only accrues to the reinsurers.
Lack of diversification
“We are long-term partners, but we must have fair compensation for our capital,” Ermotti went on to say in the business journal, addressing two major construction sites for reinsurers at once.
First, it is becoming increasingly difficult for reinsurers to balance claims over time in addition to diversification within their own portfolios. Clients hardly stay loyal forever, and underwriting policies immediately drop off even after a few low-loss years.
It is then not uncommon for major losses to hit premiums that are far too low, as has happened again and again recently, making reinsurers look out of touch.
Shrinking equity capital
On top of that, reinsurers have to generate profits on an annual or quarterly basis, which is increasingly difficult to do with a longer partnership and over a longer period of time.
And secondly, the ex-CEO of UBS addressed “capital.” He has less and less of that himself anyway with rising interest rates, if by ‘capital’ he must mean the equity of Swiss Re itself.
As reported by muula.ch, this item at the world’s second-largest reinsurer is hurtling towards a mere single-digit billion amount.
Lack of foundation
But if by “capital” Ermotti meant risk capital or underwriting capacity, he hits an even greater sore spot with reinsurers.
With thousands of different individual risks it is not easy to determine the actual risk capital, and if the basis for the interest rate is not even really clear, it is not possible to calculate a specific return or ‘fair’ compensation.
Munich Re, the market leader, preached the whole model of interest on risk capital for years before the concept was secretly and quietly adopted.
Only active in banks
Investors in reinsurance stocks don’t have an easy time of it anyway, and therefore prefer to reach for shares in primary insurance companies if they want to get involved in the insurance industry.
Well, a look at Ermotti’s CV shows that he hasn’t had much to do with all of that so far anyway. Before his time at the big bank UBS, he had only been operationally active in the banking industry.
Before that, he worked for UniCredit Group. Between 1987 and 2004, he held various positions in the equity derivatives and capital markets business at the American Merrill Lynch.
Of course, the string pullers of the Swiss financial industry did a good job of orchestrating Ermotti’s selection for the chief supervisor post at Swiss Re after it became clear that he would not follow Axel Weber to the VRP post at UBS.
First, Ermotti, a banker, was appointed to the board at Swiss Re as an average member. There, the lack of knowledge about the supervised industry is not yet so noticeable.
And then, a short time later, he was promoted to Chairman of the Board of Directors – after all, he was already a member of the Supervisory Board. Ermotti thus replaced Walter Kielholz, a financial doyen who was retiring for reasons of age, at the helm of the reinsurer.
Commenting on Ermotti’s appointment, Kielholz had also pointed out that Ermotti was more familiar with business areas such as asset management, corporate finance, equity management and balance sheet and dealing with regulators than with insurance and reinsurance.
Bringing risks to exchanges
The latter, i.e. regulation, is something the large reinsurers would like to see more of. But there is hardly anything that can be done, because the regulatory authorities only act locally anyway and not – as is necessary for reinsurance – globally. In addition, regulators have no end clients to protect in this business among professionals.
Instead of talking his head off in interviews with the business media, Ermotti could now bring his knowledge of banking to Swiss Re and sell more reinsurance risks innovatively, for example via options, or place them directly on the capital market.
Because investors are currently earning beautiful returns with insurance-linked securities (ILS) without having much knowledge of the reinsurance industry and without having to deal with the complexities of reinsurers.