Local market competency invaluable to smaller reinsurers: A.M. Best

by Artemis on November 20, 2015

Being able to entertain large business lines and influence transactions in testing times has driven reinsurance industry consolidation, as global players look to increase in size, says A.M. Best’s Robert DeRose, but that doesn’t mean smaller reinsurers can’t be meaningful.

“I think size is really a relative issue. If you want to be a truly global reinsurer providing capacity to some of the industry leaders, then I would say that size is certainly an important strength to have,” said DeRose, Vice President of Reinsurance Ratings at financial services ratings agency, A.M. Best.

“But that doesn’t necessarily preclude small players from being competent players in the market,” he added.

The more sizeable, global reinsurance entities of this world have the ability, owing to the scale of their balance sheets and global reach, to influence programme terms and conditions or brokers, and are able to offer technical competency to clients that perhaps smaller, more niche, or more specialist-focused reinsurers are unable to provide, notes DeRose.

However, for the smaller players, “their focus and strategy is very, very different,” says DeRose. “They’re not looking to be all things to all players. They are looking basically to provide capacity, generally, to smaller, regional or very narrowly focused insurance clients.”

The benefit of this, and particularly when compared to large, international reinsurers that perhaps lack adequate market expertise in emerging regions, like Asia-Pacific, is that “they probably understand their local market very well, and have a lot of competency in that market,” explains DeRose.

John Andre, Group Vice President of Analytics at A.M. Best, explains that the Asia-Pacific is home, generally, to smaller reinsurers than seen in Bermuda, the U.S., and Europe, underlining that many of them are, or at least had been state-backed in the past.

“They really bring a lot of expertise to the table, in terms of that local market knowledge particularly, and regulations and other hurdles. And you also see, frankly, from the bigger companies in the states or in Europe, you’ll see arms of those companies here, either branches or subsidiaries, armed with a lot of local talent, that brings the same flavour,” said Andre.

Utilising and embracing local talent in an emerging market, particularly one like the Asia-Pacific where catastrophe-modelling and underwriting capabilities can be limited or non-existent, provides a company with a far better understanding of the exposures and workings of the market, mitigating risks of entering a market blind, or unprepared.

And this is where being a specialist, niche, highly competent but smaller reinsurer, whether in an emerging market or a mature one, can present an opportunity to embark on mutually beneficial partnerships with the larger, global players seeking to enter the market, in need of capacity and expertise, and local market knowledge.

DeRose expands on this point; “Quite frankly if a large national player doesn’t have competency in a local market, maybe they can construct a joint venture with a small local player, and use their local market capabilities to basically access the market. Rather than to go into it unprepared, or with a lack of knowledge, and in essence set themselves up for failure.”

And this is something that has been happening with smaller firms as well, explains DeRose and Andre, noting that following events in the Asia-Pacific in the past, smaller, Asia-Pacific domiciled companies took “advantage of very strong retro partners.”

“In fact, through reinsurance mechanisms is how a lot of the larger players, that’s how they access these small, regional geographic areas of the world,” said DeRose.

Whether partnering with a specialist, smaller local firm, or establishing a regional branch, or subsidiary to enter a new market, emerging or mature, the expertise and market knowledge of local talent is invaluable.

But it’s worth noting that although being a smaller reinsurer, providing you have market competence, isn’t a bad thing, as the challenging reinsurance market environment continues it’s possible that simply providing capacity won’t be enough to remain relevant to clients and the space.

Instead, smaller firms would be wise to utilise their local knowledge and market know-how to innovate and take advantage of opportunities.

Now obviously being small does place some limitations on ability to navigate challenging waters, but that doesn’t necessarily mean that they can’t do that, if they are innovative and take a very strategic approach to the business opportunities that are before them,” said DeRose.

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