Profile: Ulrich Wallin
In a world where pure reinsurers are supposed to have had their day, Mark Geoghegan catches up with a master who has made a mockery of this received wisdom over the past decade
How is it that some reinsurers do so much better than others? What is their secret?
The answer is that they outperform very slowly and marginally, but they do this consistently over long periods of time.
The nature of compound interest means these small day-to-day gains multiply and produce some pretty spectacular long-term results. Hannover Re is the ultimate case in point. It is not the first company to trip off the tongue when you think of knockout performance. It is not a sexy start-up. It is a mature company operating all over the globe. It is in the top tier of reinsurance.
Surely this should make its returns dull and unappetising? Surely it has become too big to be able to outgrow or outperform the market? Shouldn’t it have evolved into a nice, diversified, predictable, but ever-so-slightly-dull proxy for the reinsurance market as a whole as it nestles in with its larger European peers?
Wrong. Very wrong. Hannover’s returns have shot the lights out in the decade-long tenure of its unassuming and down-to-earth CEO Ulrich Wallin.
What’s more, he has performed against the aftermath of the global financial crisis, quantitative easing, plummeting yields and ballooning capital.
He is going to step down from his role in the next quarter, so I had to catch up with him to find out how he has done so well.
If you have never met him, Ulrich is easy-going, approachable, straightforward and direct – but not in an aggressive way. He exudes high intelligence and a thoughtful studiousness but without parading his intellect in a way that would make anyone in his company feel uncomfortable or inadequate.
On the contrary, he is a patient listener and will put you at your ease, hearing you out before making any counter-arguments. He is absolutely dependable and consistent.
In short, he is exactly what you want your reinsurer to be: someone smarter and more solvent than you, but a patient and responsive partner who is going to help you grow your business and be there for you in your hour of need.
No wonder Hannover Re has done so well…
Mark Geoghegan: At Hannover, you have a famously lean culture. What is it about that culture that has made Hannover Re so successful?
Ulrich Wallin: Hannover Re came into the market as a small reinsurer with a relatively lean capital base. We called it the “thin tiger syndrome”. We always felt that we would be different to the established carriers, and that has lent to a culture of basically trying to outperform, trying to get a place on the table of the established reinsurers.
Mark Geoghegan: You’re now a global reinsurer. How can you continue the mentality of the small reinsurer when you’re a big reinsurer now?
Ulrich Wallin: We’re still trying to keep the differences. One is that we still haven’t got a matrix organisation. Of course, we have a pricing department. But still, the final decision rests with the client-facing underwriter. That way, we have clear responsibilities in our structure. We also have less general administration.
As such, we are acting a little bit quicker than many of our competitors that probably have to satisfy various structures in their organisation before they can make important decisions.
Mark Geoghegan: So if you give more power to underwriters facing the client, how do you control that – in terms of making sure that they don’t go rogue or do anything that you’d later regret?
Ulrich Wallin: We keep records of the prices that we write the business at, and we also keep records of the difference between the technical prices and the actual prices. We have a very strict management of natural catastrophe limits.
We have a global risk appetite and each of the underwriting departments gets an allocation of cat risks that they can write. Of course, if they have more opportunities, they cannot just write it because then they would overwrite the capacity that they have been allocated.
We are very strict with that, but they have the ability to trade aggregates if they can fill one but not the other. We encourage them to come with proposals to write more. We have a system so that the decision for that would take no longer than 24 hours.
The controls are there, but still the final decision rests with the underwriter, and therefore they feel responsible for the results as well.
Mark Geoghegan: You’re stepping down from your role this year. What advice would you give to your successor?
Ulrich Wallin: With our business model, which is more or less the business model of the pure reinsurer, we have the opportunity to grow our market share further.
I would say the growth in the reinsurance market is not overly exciting. In the last five to 10 years, the market generated two to three% a year maximum growth. If you have higher growth ambitions, which we have, you need to outgrow the market, which just means that you want to increase your market share. There’s a limit to that, but I think we are not yet at that limit.
So, for the time being, the business model of the pure reinsurer is still valid. Only if we get to a size where we can no longer expect to profitably grow our market share, then we would have to change our business model.
Mark Geoghegan: At what point would you say Hannover Re is too big to continue the pure reinsurer model?
Ulrich Wallin: From where we are now, we could probably double our market share. Then we would be at 12-15%. At that point, we would probably have reached what we can achieve at the current business model. If we want to go further, then we would have to offer a lot more services.
If you look at the structure of demand for reinsurance, the largest part is volatility management and capital management. Then there is the part where the reinsurer gives support to the insurer, along the value chain of the insurer – so helps with the distribution, with the products and the pricing.
That’s a little bit more prevalent on the life and health than on the P&C side. But at this point in time, at least on the P&C side, that’s the smaller part of reinsurance demand, because certainly the large insurers would say they can do it themselves.
With the small to medium size insurers, that part of the business model has some relevance, but it’s still less relevant than the capital management and volatility management.
If we achieve that kind of market share of 12-15%, then we would have to actively try to spur demand for our capacity with those kind of service offerings. And then the big question is what kind of margins would be left for us after the expenses that we would have to incur to provide those services?
Mark Geoghegan: Would it be fair to say that that the catastrophe model of making outsize returns after a price spike post-loss doesn’t exist anymore?
Ulrich Wallin: It still exists, but it needs significantly more pronounced losses. It also needs a change in the way you view the exposure. The market really only hardens if market participants, even with increased prices and better terms and conditions, are cautious because they are not sure that it’s enough to really make the business profitable.
Of course, if we have, say in 2019, another year where the ILS market loses money and it’s a little bit more severe than what we have seen in 2017, then people would reassess the business overall. But outside that, we would probably have to assume that the supply outweighing demand would continue to put pressure on margins.
Mark Geoghegan: So is it a good assumption that you have to work towards the idea that a property catastrophe subsidy will no longer exist?
Ulrich Wallin: That’s absolutely the case. I would also say, in order to still be able to generate attractive margins on the reinsurance business, you have to outperform the average player in the market. Because it’s probably a fair assumption that the average margins in the reinsurance business are gradually decreasing, and it’s not easy to see why that trend should change.
Mark Geoghegan: Do you think there’s likely to be more or less consolidation? Or do you think we’re nearly done with consolidation in the reinsurance sector?
Ulrich Wallin: First of all, I think the structure of the demand for reinsurance favours the larger reinsurer at this point in time. That’s because of global reach and being active in all lines of business, and having a reasonable size of capacity suits the reinsurance buyer because he can buy a more holistic programme from those kinds of reinsurers, which is more capital efficient. Therefore, there is a little bit of a tendency that the business gravitates towards the larger reinsurers.
At the same time, certainly on the P&C side – to a lesser extent on the life and health side – there’s certainly room for smaller reinsurers as well.
There is still some push, in particular from the brokers, to spread the risks around a larger number of participants; not to be that reliant on a very small number of partners. Because if you fall out with the reinsurer that has 50% of your business, you have a real problem. So people want to have spread, and that would of course allow smaller players also to be successful. It’s very difficult to move from an entity that is among the top 50 but not among the top 10, to a top five position. For reinsurers that have to survive in a free trade environment, it’s very difficult to move and rival, say, the Munich Res and Swiss Res of this world. But there’s still a business model for a smaller reinsurer, I would say.
Whether we will see more consolidation in reinsurance, where reinsurance is the main part of their business, it’s really difficult to say. It’s entirely possible. If you want to set up a reinsurer that is rivalling the size of the two market leaders you really would need acquisitions. You would need to find a number of the next reinsurers in line behind the two big ones. They would then have to merge in order to get to a similar size.
Whether or not that is happening, it’s very difficult. On the one hand, of course, you would lose business if you did that, because one and one would clearly not be two. On the positive side, you would have lots of synergies because you could take out a lot of expenses out of the combined organisation.
On the negative side again, you would have a very big challenge on the integration of the organisations. Finding a corporate culture for the merged organisation would be a challenge. For the time being, it’s possible but I think there’s nothing imminent.
Mark Geoghegan: Is there anything you’re worried about particularly in the global insurance space? Is there anything that keeps you up at night?
Ulrich Wallin: One is the whole space of cyber and silent cyber, because we are looking at the real exposure, which is quite difficult to quantify. In the case of silent cyber, we don’t even get any money for it.
The problem is that you can think of scenarios where the losses are a little bit larger than what you can expect from, say, natural catastrophes, where we probably have a better handle on the risk.
The other question, of course, is the issue of global warming. Natural catastrophe losses are rising. If you look at recent years, 2017 and 2018, where we had above-average large losses, you might think, “Okay, that’s an aberration, and it will go back to the expected loss level, then the current cat pricing might be able to cater for that.”
But there’s also, of course, a possibility that cat losses are rising. If that’s the case, all your current cat pricing would be insufficient.
It’s not so much of a problem if the losses are rising gradually. It’s only if you have a sharp increase that you cannot adapt your pricing
Mark Geoghegan: On a personal level, what are you looking forward to most about retirement?
Ulrich Wallin: Well, probably doing a little bit more private travelling and less business traveling.
Mark Geoghegan: Where have you always wanted to go to as a tourist that you haven’t been able to go?
Ulrich Wallin: Well, more to where I have already been up to now, I like traveling in Europe. Say, Austria, Switzerland, the North Sea. But also not being boxed in completely by the diary. Right now, a vacation is automatic downtime in July, because that’s the only time that is free in between all the board meetings and other things I have to do. That will be a relief, of course, and quite a nice change – that I have a little bit more freedom to plan these things. That’s probably what I’m looking forward to most.
Then I have to see to what extent I still dabble around in the business.
Mark Geoghegan: So we haven’t seen the last of you, Ulrich?
Ulrich Wallin: Not completely, I would say.
Mark Geoghegan: So more non-executive work, I presume.
Ulrich Wallin: Well, more non-executive than executive, I would say. If you look at the current position that I have as a CEO, you are basically responsible for everything, but have limited influence on what’s happening in the company.
That’s, of course, something that can be quite stressful. It hasn’t been the case with us over the last ten years, luckily, but still I quite look forward to not having that pressure any longer.
So there you have it.
We haven’t seen the last of Ulli – less boxed in by his diary, refreshed from his bracing North Sea and Alpine breaks, and coming to lend a very calm head and a helping hand to a board near you soon.
On Bermuda consolidation:
“You can see with these business models that they all look so alike, so that’s where you see quite a lot of mergers and acquisitions. You have a clear synergy case if you have two business that look almost the same. If you put them together, you will clearly have a good synergy case, and I think that will continue.”
“For the InsurTech start-ups, disruption is very difficult because in reinsurance, you need quite a lot of capital to start your business, and you have the problem of distribution, which is not going away if you are an InsurTech.
“Therefore, the InsurTechs have for the most part looked for cooperation within the existing insurance and reinsurance market. Reinsurers have a relatively good opportunity to work with InsurTechs, because, to the extent that they are not that much involved in insurance, they have less of a channel conflict.”
Lloyd’s and the Argenta deal
“Argenta is just about giving us strategic options in the Lloyd’s market. The Lloyd’s market, of course, is based on specialty business, co-insurance, and co-reinsurance business. It fits a little bit better with the reinsurance model, because we are not taking risks entirely out of the market. You only take a small part, so it’s not so detrimental for our clients.
“Also, we get fee income. In a stable market, I would say it’s a defensive play. It gives us participation in the Lloyd’s business with a business we have known for many years. It hopefully gives us an additional profit stream.
“In a dislocated market, through the managing agent and setting up of the Hannover Re syndicate, we would have the ability to take advantage of that market through the Lloyd’s franchise. I still think it’s a strong franchise.”
This article was first published in the Spring 2019 issue of Insider Quarterly