EU’s large cedants take advantage of market conditions & ILS: A.M. Best

by Artemis on September 7, 2016

The 20 largest European cedants are making the most of the softening reinsurance market cycle and the abundance of traditional and alternative reinsurance capital, according to A.M. Best.

Monte Carlo Reinsurance Rendezvous 2016Heightened competition, a lack of large losses, and an inflow of capacity have contributed to persistent rate declines in the global reinsurance market, ultimately creating a buyers market that is favourable to cedants.

With traditional and alternative reinsurance providers fighting for a seemingly shrinking share of the reinsurance market pie, primary players have been able to secure efficient reinsurance protection on more favourable terms and conditions, effectively making the most of the softening landscape.

“Europe’s 20 largest cedants are taking advantage of plentiful and inexpensive reinsurance capacity, taking out more cover and locking in favourable rates with multi-year reinsurance arrangements,” said A.M. Best, in a report released in time for the 2016 Monte Carlo Rendez-vous, examining how primary players are approaching the current reinsurance market.

In recent years cedants have been adapting business models and looking for ways to increase efficiency and value to the market they serve. This has included centralizing their reinsurance operations, a shift in buying habits, and the use of insurance-linked securities (ILS) capital and features to optimize risk portfolios, as well as a move into new business lines.

“Such classes of business typically require greater reinsurance support, which could be one factor behind the reduced retentions and increased cessions in 2015 in comparison to 2014,” explains A.M. Best.

Retention ratios were down slightly year-on-year explains the rating agency, but at the same time cessions increased by a substantial 17% in comparison to far lesser growth in premiums. This trend of increased cessions suggests Europe’s 20 largest cedants are making the most of the soft reinsurance market, taking advantage of “enhanced negotiating powers,” says A.M. Best.

As cedants look to enhance their services and increase efficiency by adjusting business models and strategies, it’s natural that once this has been achieved they will be able to make a more intelligent and informed decision about the volume of reinsurance and ILS capital they desire.

As ILS continues to deepen its relationship with the re/insurance marketplace it’s finding its way onto more and more reinsurance business, whether this be in the form of collateralized reinsurance, retrocessional business, catastrophe bonds, or sidecars, for example.

“A.M. Best anticipates that reinsurers will continue to harness third-party capital as they
seek to differentiate and innovate, offering cedants a broader range of products, including collateralised reinsurance,” said A.M. Best.

“It is clear however that third-party capital providers have a long-term commitment to the reinsurance sector and many anticipate that more capital is waiting at the sidelines to flow into the sector post-event to take advantage of any market corrections,” continued the rating agency.

A.M. Best discussed recently how European mutual insurers were also taking advantage of the wealth of alternative reinsurance capital and the softening landscape, and it seems that the buyers market is assisting cedants across Europe in their efforts to improve efficiency and adapt business models to maintain relevance.

“While some cedants are tapping new capacity providers, including collateralised reinsurance and other non- traditional sources of cover, there is a theme of continuity with insurers looking to strengthen existing long-term partnerships with their counterparties, particularly when entering new lines of business,” said A.M. Best.

Clearly, some cedants and reinsurers alike will utilize ILS capacity and features more than others, but in recent times there has been a clear trend towards more and more traditional re/insurers embracing its features and capacity.

As insurers and reinsurers look to new business lines in order to offset some of the competition, and continue to evolve their business models and strategies to increase efficiency and improve returns, it’s possible that reinsurance and ILS demand will increase at the same time, with the expectation that cedants will continue to take advantage of the favourable market conditions.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.

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