Reasons to be cheerful, as cedents look to reinsurance capital support

by Artemis on February 5, 2016

After a number of renewals where the world’s insurance companies have been carefully managing their retentions, increasing them in many cases, there are signs and reasons to be more cheerful as reinsurance capital is once again rising up the agenda.

The retention trend began as insurers have been restructuring their use of capital, including reinsurance, as they sought to extract more profit from their risks as efficiency rose up the agenda. But there are now signs that demand for reinsurance capital is set to rise, according to some industry executives.

The trend towards retaining more risk has resulted in slower demand growth for reinsurance capital, which combined with the effects of alternative capital’s growth, the high-levels of capital among traditional reinsurers and the lack of large capacity draining losses, has served to exacerbate the reinsurance price environment.

Regulatory changes such as the introduction of Solvency II are one reason to be cheerful in reinsurance, as the increased demands on insurers to manage their books and their capital bases is expected to result in a steady uptick in reinsurance demand.

Some of that demand will be from cedents seeking protection, to lower their risk exposures and improve their capital outlook. But from others there is expected to be an increase in the use of reinsurance as a capital management tool as well.

There are also signs that some traditional insurance companies are facing the prospects of reserve strengthening, with AIG the most recent major player to do this.

Even the threat of reserve strengthening can be enough to cause insurers to use more reinsurance capital, as they attempt to head off any negative effects by offloading chunks of or even whole portfolios.

Additional demand for reinsurance capital is also expected to emerge as new primary lines of business such as cyber insurance begin to gain scale. In fact, as some of these new lines develop, reinsurance capital is often at the table in the very early days of structuring new products, which means the security to engage in new and innovative business lines is assured.

As insurers seek to grow their product range and help their clients meet the challenges of an increasingly data driven and technological world, reinsurance capital will help to enable and drive much of that innovation.

There are even signs of pockets of growing demand for property catastrophe reinsurance, as insurers increasingly realise that the relatively benign major loss environment just cannot last forever. There is a sense that some insurers realise they have been playing a dangerous game by buying less reinsurance, and that they have been lucky that this coincided with a period of relatively low catastrophe activity.

Another stimulus for buying reinsurance could be the growing realisation among both insurers and reinsurers that there are certain perils or layers within the reinsurance tower where their own balance-sheet is no longer the most effective capital for providing the necessary support.

This trend is a response to lower pricing and the realisation that in some peak peril regions there is a more efficient source of capital available for reinsuring risks. This could result in greater retrocessional reinsurance use, as well as greater need for reinsurance capital among primary players. Of course this also bodes well for the capital markets, as both insurers and reinsurers are increasingly expected to welcome investors into their business structures, as they seek to establish multiple balance-sheet approaches to managing their underwriting portfolios.

So, despite the evident pressures in reinsurance, there are reasons to be cheerful for providers of risk capital.

That’s not to say providing the additional capital required, to support the re/insurance industry in its regulatory, growth and structural needs, is going to be easy. Competition will be high and reinsurers need to come to the realisation that their own capital is not always going to be the best suited to underwriting or supporting certain risks and portfolios.

For reinsurers and retrocessionaires, as they shift towards becoming the gatekeepers of risk, operating with multiple balance-sheets, including own, joint-venture and third-party investor backed, there will continue to be a need for a change in mind-set and strategy.

Some companies have already achieved this, but others are only starting out on what can be a long and difficult journey. Throw in the need for increased efficiency and lower expenses, which is a given in the changing reinsurance market, and it’s clear that not everyone can be a winner.

But there are brighter signs on the horizon, as risk capital and reinsurance rise up the agenda again and become the supporting tools for re/insurers growth, regulatory change and innovation strategies.

CEO of AXIS Capital Albert Benchimol noted the reasons to be cheerful in the companies earnings call this week, saying; “Among the more favorable trends we saw, reinsurers panels are getting smaller in some instances, increased retentions are no longer working for all cedents and Solvency II driven purchases introduced opportunities into the mix.”

Consolidation of panels adds another layer of pressure to remain relevant and acquire scale. But this should also push reinsurers further down the multiple balance-sheet approach, as they stand to be ready to solve a broader range of client problems by leveraging different sources of capital, with different risk and return appetites.

Alex Moczarski, CEO of reinsurance broker Guy Carpenter, also notes the signs of increasing demand, during his firms earnings call, explaining; “The good news I think is that some of our major clients have signaled their interests in returning to the reinsurance markets to meet their capital needs. So we can seek and expect revenue growth for this year.”

Daniel Glaser President and CEO of Marsh & McLennan Companies, also noted among his firms clients a “willingness at some firms to reconsider reinsurance as a way to reduce volatility.”

And that is what a lot of this comes down to. Reinsurance is an effective dampener of volatility, which is really what many cedents want in order to better protect the performance of their organisations. Alongside that, reinsurance can be an efficient source of capital to enable growth, provide the capacity needed to back innovation and to offset regulatory burdens.

All of this bodes well for reinsurers, retrocessionaires and the ILS fund manager sector. Demand for reinsurance does tend to ebb and flow, but the market appears to be setting itself up for a period of growing demand.

The key is to be positioned with the right corporate and capital structure to be able to support client needs, as well as to have an innovative approach and a willingness to try new avenues and test new business models.

But, and perhaps most important of all, reinsurers and ILS managers need to work to make their clients lives easier, to solve their problems, to help their clients innovate and to look like heroes when they crack new markets, new risks and create new business lines.

By doing this reinsurance can secure its position as the volatility dampening, innovation driving, peak peril risk transferring, regulatory capital need supporting, pool of capital that the re/insurance and wider corporate industries rely on.

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