European reinsurers show discipline on T&C’s: Goldman Sachs

The expansion of terms and conditions (T&C) has been a common feature of the global reinsurance sector as companies look to offset some of the pressures of a softening market, but analysts at Goldman Sachs feel European reinsurers are managing to resist the trend.

In an Equity Research report published in May 2015, Goldman Sachs discussed the European insurance and reinsurance sector, highlighting greater discipline from European reinsurers regarding T&C relaxation than the wider reinsurance market.

“European reinsurers have continued to demonstrate their ability to manage the pressure on terms and conditions relative to the rest of the reinsurance market,” said Goldman Sachs.

The broadening of T&C within the sector has been a prominent topic of discussion since the January 2014 renewals, says the report, and the potential dangers that come with any broadening of terms, particularly when no diversification adjustments have been made to compensate, is still as significant today as it was 18 months ago.

The end result of expanding reinsurance contracts T&C is a rise in the underlying exposures assumed by underwriters, which is why it becomes more prevalent in a softer market and is seen as a way for traditional players to compete for business with new, often cheaper entrants, as seen with insurance-linked securities (ILS) and catastrophe bonds.

Ratings agency Fitch noted recently that it expects the weakening of T&C to continue at the June and July renewals, citing pressure from excess capital and the rise of new entrants.

While the challenging environment is clearly an obstacle for all reinsurers be it U.S. or European, Goldman Sachs explains that certain advantages possessed by European companies has led them to be less concerned of any significant T&C weakening.

“Their underwriting discipline, ability to offer more tailored, holistic, global solutions and existing relationships with clients mean they are in much better negotiating positions compared with their smaller competitors,” said Goldman Sachs.

Adding; “Although European reinsurers are clearly not immune from the market-wide expansion of terms and conditions, the broad picture is that of a controlled expansion.”

Suggesting that the broadening of T&C is still an occurrence with European reinsurers, just perhaps in a much less dangerous and frivolous manner, so it’s certainly something the industry should, and due to much commentary on the topic will, keep a keen eye on.

Ratings agency A.M. Best delivered perhaps the sternest warning on the matter recently in a report on the London insurance and reinsurance market.

Explaining that it’s concerned over the trend of the relaxation of insurance and reinsurance T&C contracts and that it was keeping an eye on how companies manage increased exposures, citing concerns it could seriously, negatively impact future results.

So for now it seems European reinsurers are managing to resist any significant relaxation of terms, something that cannot be said for every reinsurer.

Should the benign catastrophe losses witnessed in recent months continue and the abundance of alternative reinsurance and growing traditional capital persist, exacerbating the challenging environment, we could see the European players being tempted into greater expansion of terms.