Franz-Josef Hahn, Chief Executive Officer Peak Re, provided his views on turning points and business opportunities in the reinsurance market to the insurance publication, ‘Versicherungswirtschaft’, just prior to the recent year-end renewals. We reworked it slightly for Peak Times and are happy to share it now with our readers.

The market is soft, competition is tough. What are the current status and outlook for the reinsurance industry from your perspective?

The 2017 natural catastrophe events have wiped out more than USD 100 billion of capital which represents approximatively 20 percent of the global reinsurance capacity. It may trigger a rethinking in our industry and, at least, of our approach towards the pricing and underwriting of natural catastrophe risks. In addition, the low insurance penetration as we experienced it in the recent earthquakes in Italy and Mexico and also in other regions of the world is once again a topic of concern but also business opportunities. With the rapid development of technology and changing business processes industry players have to adapt fast. Thinner profit margins paired with efficiency gains thanks to the fast adoption of technology are reshaping the face of our industry.

Your business is cyclical. Currently we are in a downward cycle. What are your strategies in this particular phase?

Peak Re does not track the market. We can afford to be selective in our underwriting approach. There are still profitable reinsurance portfolios available with clients which are not adequately served by reinsurers geared towards pure analytics and short-termism. Our cost-efficient business model, proven since Peak Re’s start, enables us to trade profitably even in an environment of extremely thin margins. In addition, as a non-legacy player we belong to the early adopters of smart technology, which enables us to serve our clients with a higher efficiency.

How much does the current market environment constrain your business activities?

Over the course of the past five years we successfully built Peak Re to become the 43rd largest reinsurer worldwide in an environment of constantly falling rates. Thus, we feel we are perfectly well adapt to the prevailing conditions.

Expertise in underwriting, global network, innovative products – what else does it need to be successful in the current market environment?

If you excel in these three disciplines you certainly fulfil key criteria for success. At Peak Re, our key success criteria are our corporate culture, our cost-efficient set- up and the capital diversification we offer to our clients. Due to our lean set-up we are able to write profitable business in an environment where other players may only make a loss or remain below their return on capital targets.

Are M&A’s a route to success in the current environment?

Not necessarily. In an environment of declining margins, scale and efficiency are important preconditions for success. However, Peak Re has built its portfolio entirely through organic growth. We acquired a 50-percent stake in the Caribbean primary insurer NAGICO which gives us access to Caribbean risks — predominantly personal lines. These risks are entirely uncorrelated with our mainly Asian risks and thus help us to enhance our capital efficiency. M&A activities will only bring profitable growth to Peak Re if we are able to add on accretive capabilities and if the target fits our defined strategy of long-term profitable growth.

What do your cedants appreciate in your approach?

Our cedants appreciate our timely and accurate delivery in underwriting and claims settlement, the capital diversification we provide to their panel, our long-term partnership and our lean and efficient processes. Let us explain our approach in the light of our European set-up: Clients can access all resources of our company. On the one hand, they benefit from the proximity afforded by our Swiss subsidiary with full Solvency II equivalence. On the other hand, they have access to Peak Re’s single underwriting platform and are directly aligned to our Hong Kong headquarter through our Zurich office. Peak Re operates as one team, with colleagues in our Zurich office being part of the company’s three-cornered underwriting approach focused on portfolio and risk analytics, market knowledge and, of course, product underwriting. We are convinced that our underwriting process is more rigorous, thorough and efficient than the typical reinsurer set-up.

How real is the threat that in the future well capitalised primary insurers won’t rely on the support from reinsurers?

I think we are the best example that the recurrent repetitions of doom scenarios about the reinsurance sector are completely unfounded. The market is far larger than just the few well-capitalised primary insurers. Our clients portfolio predominantly includes small to mid- sized cedants as well as many mutual organisations in Europe. As we do not define ourselves as a pure capacity provider, we support our clients with risk diversification, expertise and capital. Most importantly, we are partners who understand our clients’ needs and business model and are able to challenge our cedants to improve their strategies as well as their market and risk management approach.

In which markets do you still see growth potential?

Our home market, the Asia emerging markets region, is still our largest growth engine. Additionally, we aim to become a globally well-diversified reinsurer. Therefore, we do not exclude neither a region nor a market. Within our strategy  of building a balanced and well-diversified portfolio, Europe plays a prominent role. Today, we are still underweight there, as we currently write about 17 percent of our premiums in this region (EMEA) which generates about one third of global premiums.

Is there still a region of predictable growth or has that become a myth?

Again, this is not relevant to us, as we follow our own growth path. We grow with our clients, not with markets. Our objective is to find opportunities for profitable growth also in challenging conditions. However, as we have demonstrated, they can also arise in markets where competitors retreat.

How realistic is a change in direction for reinsurance rates?

As I already said, Peak Re has been built to succeed in the current market environment. Rising rates will provide an additional boost to our profitability. In the meantime, we will stay as agile and relevant to our clients as possible. A market turn may occur once reserves are starting to dry-up and thus insurance players cannot meet their capital costs anymore.

Margins in underwriting and yields on assets are shrinking in tandem. What is the solution for reinsurers under these conditions?

Our recipe to success is a combination of client-centric underwriting philosophy, a long-term mind-set coupled with an attractive capital diversification. Our aim is to identify, capture and nourish attractive business opportunities, while some of our competitors are geared more towards short-term capital return targets. To successfully seize these opportunities, it needs a highly cost-efficient business model, which enables us to trade profitably even in falling markets.

Is the reinsurance business model under threat? Your plea please.

The reinsurance sector as a whole is more challenging than ever. However, the protection gap is still growing. Thus, business opportunities abound, which the industry collectively needs to capture to prove its value. If we are not able to seize these opportunities adequately, it will be new entrants which bring in the innovations and trigger a change in market environment. As such: nothing is more constant than change.