The (reinsurance capital) context has changed: Mumenthaler, Swiss Re

When global reinsurance firm Swiss Re announced its first-quarter results last week, the company also notified shareholders and markets that it intends to withdraw from its iptiQ business, a tech-focused initiative that effectively brought the giant balance-sheet of the reinsurer much closer to the risk.

Having a background (in a previous life) in technology, e-commerce and finding ways to match capital with sources of demand in the most direct and efficient ways possible, I was always a fan of the iptiQ strategy.

I’ve described it before as Swiss Re “finding innovative ways to source risk as directly as possible” and while Swiss Re always called its iptiQ digital platform a B2B2C strategy, I’ve always viewed it as an innovative way to “white-label the Swiss Re balance-sheet for third-parties that can originate risk.”

iptiQ allowed Swiss Re to bring its risk capital and underwriting rules much further forward in the markets value-chain, though the use of technology, API’s, embedded strategies and partnerships, really all very typical e-commerce techniques, but less typical in wholesale capital financing like reinsurance.

By white-labeling the Swiss Re balance-sheet, business rules, underwriting and pricing, then making them available to partners through the iptiQ tech platform, the reinsurance firm was also bringing the end-client much closer as well.

Just a few years ago, Christian Mumenthaler, the outgoing CEO of the company, had said that offering things outside of pure capital transfer, such as iptiQ, was a core strategy, saying that these initiatives were “a differentiator, compared to just this traditional, more commoditised reinsurance.”

Back then, iptiQ was seen as one of the crown jewels for an expansive Swiss Re, a way to do more business directly, sourcing risk premiums more directly from the end-customer, shortening the market chain and embedding the company values and capital resources within partners business models.

Mumenthaler himself had said that capital was not the main value proposition in reinsurance, it was just an entry ticket to the fray, while expertise, service and innovation would drive success.

As the iptiQ business was growing and Swiss Re’s focus on alternative capital and insurance-linked securities (ILS) investors had been rekindled with the expansion of its Alternative Capital Partners (ACP) unit and launch of dedicated ILS funds, we had described the iptiQ strategy as having:

“…the potential to become another source of risk for Swiss Re and its third-party capital partners, expanding the reinsurers reach and ultimately creating a bigger mouse-trap for risk.”

Fast-forward to 2024 and iptiQ is no longer a core focus, in fact it’s seen as an initiative to withdraw from by Swiss Re.

It’s important to note here, that Swiss Re is set to maximise as much value as it can from iptiQ, as it withdraws and potentially sells it as a whole or in parts, which could be quite lucrative given the entire venture was created and built in-house from scratch and you could see any buyer maintaining a relationship with the reinsurer and perhaps even some level of access to balance-sheet capacity.

Now, with CEO Christian Mumenthaler leaving Swiss Re after 25 years and Andreas Berger stepping in to that position from July 1st, Mumenthaler made a last appearance at the quarterly analyst call recently and explained his view on the planned withdrawal from iptiQ.

Which gave some insights into how Mumenthaler and Swiss Re thinks about the reinsurance market today, versus how the landscape looked just a few years ago.

Mumenthaler explained the backdrop to the creation of iptiQ during the analyst call, “There was a time where there was a significant anxiety around reinsurance and low-interest rates and capital flowing in. Remember, in about 2017 after the big nat cats in the US, for example, pricing really didn’t react.

“So, it was really a question of, how is this whole value-chain going to develop and where will we play as Swiss Re in the future?

“That’s the time, I would argue you need to start to build strategic optionality and think about different places in the value-chain and have options in also the ACP (Alternative Capital Partners) space.”

Next, Mumenthaler explained why the context has changed today and why this makes iptiQ less attractive to retain, for the global reinsurance firm.

“What has changed is really, in the last one and a half years or so, a very strong interest rate increase ending this huge phase and stopping the capital flow, which was relentless coming from outside into the reinsurance business,” Mumenthaler said.

Continuing, “So, that means the coop is much more secure and the other thing that has changed is that, on the insurtech side, while things are developing, they are developing more slowly and there’s no real disruption to be seen.”

Going on to say, “So the question is not whether it can fundamentally be a good business or not. It is a question of, does it fit as part of our long-term future, does it fit with us?

“There I have to say, I think in another context, the sense was yes, this is a strategic optionality, we need.

“But, in the current context, I think the honest answer is, it’s very hard to see a future where we will need this, that’s more honest to say.”

Here, it’s worth pointing out, that Swiss Re’s reinsurance business has been expanding through the recent hardening of the market and now with stability largely the current market dynamic, profits look set to be attractive, loss activity and legacy effects allowing. So it’s perhaps not surprising the focus has changed, alongside this change in context and market dynamic.

Mumenthaler said that, at the time of iptiQ’s planning and launch, “We felt there was a very strong case for it.”

But given the changed dynamic in reinsurance in 2024, “Let’s be open that this is not a fit with us for our long-term strategic future. I can’t foresee a huge impact on us, so this is going to be managed for value.”

It’s really interesting to hear Mumenthaler’s viewpoints on this, as the changed dynamics he refers to are a lot to do with what drove the significant softening of reinsurance rates, especially in property catastrophe risks and also the growth of the insurance-linked securities (ILS) market.

But, perhaps it was not the growth of ILS capital that disrupted things and drove the reinsurer to explore initiatives such as iptiQ, rather it might have been the fact that all the major reinsurers of the world lowered their pricing, relaxed their terms and became far more competitive during that soft market phase, almost as a response to the rapid expansion of ILS and alternative capital.

Today, the ILS and alternative market is at least the same size, or bigger, and far more embedded in reinsurance than it had been back in 2017 and prior.

The main difference being, that ILS capital is now accepted as a stable, complementary, necessary capital extension and source of protection for the traditional industry. Not something to be afraid of in case it rapidly ate your lunch, so to speak.

The overall insurance and reinsurance industry has matured and learned to harness the appetite of institutional investors, to its benefit and we now stand with a much more robust capital framework for the industry today, than we did a decade ago thanks to ILS products and investors.

Will the dynamics ever return that could drive reinsurers to again seek to be innovative in bringing their capital right to the forefront of the market chain?

Quite possibly, in fact we do see this in many discrete areas, but for now we appear to be in a more balanced status-quo, between traditional and alternative, perhaps helped by the new balance in risk bearing between primary and reinsurer.

It won’t last forever, but finding a comfortable middle-ground where both sides flourish has been beneficial for profits and returns all round, meaning there are motivations to sustain the way traditional and alternative interact with less direct competition today.

All that said, it’s surely just a matter of time before some innovative company (maybe even Swiss Re) finds new ways to connect its balance-sheet capacity to burgeoning sources of risk far more directly (API’s to connect capital, algorithmic business rules to define the underwriting, anyone?).