Increase in reinsurance demand likely to favour top-tier: Moody’s

Moody’s Investors Service underlined an increased demand for reinsurance from cedents in 2015 as insurers looked to improve efficiency and adjust strategies. However, any further uptick in demand is likely to favour the top-tier reinsurers, according to Moody’s.

Artemis discussed recently that reinsurance broker Willis Re noted an increase in demand for reinsurance at the April 1^st renewals, as some cedents looked to adjust strategies, resulting in greater use of reinsurance protection.

With rates in the global reinsurance sector remaining under significant pressure, underlined by April 1^st 2016 renewals being the fourth consecutive year of price declines, any uptick in demand will be welcomed news for those in the space.

During 2015 Moody’s states that U.S. insurers ceded 13.6%, roughly $79 billion of direct premiums, an increase of the 12.9%, or roughly $73 billion witnessed a year earlier.

However, Moody’s claims that in the U.S., “notwithstanding the modest increase in cessions during 2015, we do not expect primary insurers’ demand for reinsurance to return to the level of 10 to 15 years ago,” as it feels that “there has been a secular shift in the primary insurers’ demand for reinsurance.”

A trend that Moody’s attributes to insurers increasingly sophisticated modelling capabilities, along with improved capital management capacity that enables cedents to be more efficient.

That being said, Moody’s does expect to see some insurers to continue to utilise greater reinsurance in a strategic manner in 2016, in an effort to improve performance or efficiency, although “we don’t expect this to benefit all reinsurers equally,” advised Moody’s.

The ratings agency expects that those reinsurers considered top-tier are most likely the ones that will benefit from insurers adopting a more “strategic use of reinsurance,” owing to their ability to structure more complex and larger transactions when compared to smaller, more niche market players.

Another potential area of growth for reinsurers is with the longevity risk transfer, or swap sector, says Moody’s, something that has been highlighted by a number of pension firms and market analysts in recent months.

The longevity reinsurance sector is widely predicted to expand in 2016, as it did last year, as reinsurers look to add diversification, and life insurers, pension funds, and annuity writers increasingly seek to hedge some of their longevity exposures.

Again however, Moody’s says that it expects “the top-tier reinsurers, and particularly those with life reinsurance operations to be the primary beneficiaries of demand for longevity risk protection.”

The potential for the longevity risk transfer market is huge, with more and more pension funds and alike throughout the U.S. and Europe seeking to offset any potential risk of people living longer than expected.

Currently, the larger reinsurers seem more than willing and able to take on any longevity risk that becomes available, but should the market grow to its potential it’s likely that capacity from smaller players, and also the capital markets will have an opportunity to participate here.

The fact that Moody’s feels the top-tier reinsurers will benefit the most from increased reinsurance demand, both in the property catastrophe space, longevity market, and beyond, underlines the importance of insurer to reinsurer relationships.

And these relationships are equally important for insurance-linked securities (ILS) players, where managers of funds need to develop relationships in the traditional reinsurance renewal market in order to secure growing shares of programs.

The top-tier ILS fund managers are also likely to be the ones who benefit most and fastest from the reported increase in demand seen at recent reinsurance renewals. With the capital and capacity to meet large cedents needs, these larger ILS funds are able to position themselves as valuable risk capital diversification for their clients.

Something the smaller players would be wise to continue building and strengthening in current market conditions to improve their chances of securing business should demand continue to rise.

As the global insurance and reinsurance market remains under significant pressure, reinsurance demand could continue to grow as cedents look to make the most of the continued buyers market environment.

Discipline is now as important as ever, perhaps more so, and from Moody’s warning this perhaps applies increasingly to those companies not considered top-tier, as it’s important to be able to capitalise on any increase in demand that escapes the larger players.

Keep up with all our reinsurance renewal news and analysis here.