Collateralized reinsurance capacity, reduced pricing helping insurers

by Artemis on February 17, 2014

We all know that reinsurance buying conditions are good at the moment, prices are down due to high levels of capital (both traditional reinsurance and alternative) as well as a low-level of catastrophe losses, with many saying it’s a reinsurance buyers market.

But it is useful to see real world examples of primary insurance companies taking advantage of the current reinsurance pricing environment and abundant availability of alternative reinsurance capital to increase their protection and buy more cover.

One such example comes to light from Selective Insurance Group, a holding company for ten property and casualty insurance companies offering personal and commercial lines products including flood covers.

Through the reduced pricing available in both the traditional and alternative reinsurance market Selective has increased its protection for 2014. At the same time Selective has increased its use of collateralized reinsurance covers, which now make up a meaningful proportion of the insurers overall reinsurance program.

For 2014 Selective has increased its reinsurance program limit by $100m, growing the limit of its top layer from $150m to $250m, according to the firms CFO Dale Thatcher. This expanded the overall reinsurance program to $685m of cover excess $40m of retention.

Collateralized reinsurance makes up a significant proportion of Selective’s overall reinsurance program and the insurer clearly appreciates having diversified sources of risk capital available to it from the current reinsurance market environment.

Thatcher explained; “As we increase our catastrophe reinsurance program we look for ways to minimize the credit risk inherent in a reinsurance transaction, by dealing with highly rated reinsurance partners and by purchasing collateralized reinsurance products, particularly for extreme tail events.”

Selective appreciates collateralized reinsurance products so much that not far off 30% of its total reinsurance protection is sourced from partners providing collateralized protection. Selective’s current reinsurance program provides it with $197m of collateralized reinsurance limit, according to Thatcher.

So Selective grew its reinsurance protection by $100m, which is an increase of around 18%, with 30% of the total program coming from collateralized sources, but interestingly the insurer said that the entire program was placed with ceded premiums in line with its 2013 program, despite the additional limit purchased.

This gives a good idea of just how attractive reinsurance buying is for primary insurers right now. Despite the fact so many large insurers have increased retentions, if buying conditions remain this attractive it is expected that more limit will be purchased by many primary players looking to improve their capital positions.

Finally, for Selective the result of increasing the amount of limit purchased and growing the top layer of its reinsurance program can be seen at where the program now exhausts for the insurer. Before this year Selective’s reinsurance program provided it with protection up to a 1 in 250 year event, when its reinsurance ran out at around a 1 in 225 year event the year before.

Another insurer which is benefitting from alternative reinsurance capital and collateralized options for its reinsurance program is Zurich Insurance Group. Zurich has used the competitive pricing environment created by the increased inflow of alternative capital from investors such as pension funds to buy more reinsurance protection for itself.

Michael Kerner, CEO of General Insurance at Zurich said of alternative reinsurance capital; “This has created the opportunity, particularly in cat reinsurance for us to generate some savings in our purchasing. What we did with that saving essentially was buy more reinsurance coverage.”

Kerner then details some of the details about how Zurich made use of the savings; “The biggest change we made at January 1 was in our Aggregate Cat Treaty. On the first layer of the program we bought down the co-participation from 25% to 10%. So rather than placing only 75% of the cover, we placed 90% of the cover. We also reduced the attachment point by $100 million, so the cover attaches quicker, and it covers us better than it did in 2013. That’s what we did with at least a portion of the savings.”

This is just two examples of insurers using alternative reinsurance capital and collateralized covers as part of their reinsurance program, benefitting from reduced pricing and the highly competitive reinsurance market environment. The buyers market for reinsurance is expected to continue through the year and insurers renewing property catastrophe protection at the mid-year reinsurance renewals may find year-on-year savings very attractive indeed.

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