Global specialty insurance and reinsurance firm Brit Ltd. has increased its use of quota share reinsurance, increasing its expenditure on cover by $62.6 million as it seeks to take advantage of still declining rates to better manage its net position.
Brit explained in its results this morning that it had increased its reinsurance expenditure to 22.6% of gross written premiums, with increased use of quota shares the main driver.
The softened reinsurance market has caused a number of re/insurers to take greater advantage of quota shares, as the simplicity of sharing a portion of a portfolios risks with third-parties proves an effective way to manage net exposure, while the costs are low as rates are still declining.
The insurance-linked investment market and ILS funds are taking on significant shares of new quota shares coming to market, Artemis understand, with the supply of risk helping to fuel further ILS market growth across the recent renewal season.
Additionally, re/insurers like Brit are also making increasing use of quota share sidecar vehicles, as a way to directly tap into third-party investor appetite from the capital markets to assume insurance risk. Brit itself upsized its Versutus quota share collateralised sidecar by 33% at the renewal this year.
Brit has increased its reinsurance expenditure by $62.6 million, having spent $432.0m or 22.6% of GWP on reinsurance or retrocessional coverage in 2016, up from $369.4m or 18.5% of GWP in 2015.
In the Brit results statement this morning, the company explained; “The increase in expenditure is principally driven by the increased use of quota shares to manage our net exposure in the current soft market conditions, partially offset by savings on other areas of the programme.”
Of course the soft market conditions that Brit has been reducing its exposure to are also the reason it can afford to upsize its reinsurance coverage.
Matthew Wilson, Group CEO of Brit Limited, explained the price declines the company has seen at renewals; “Brit experienced an expected overall rate reduction of 3.3%, lower than the 4.1% reduction experienced in 2015. This reduction was seen across both reinsurance business, which experienced rate reductions of 4.8%, and direct business, which experienced rate reductions of 2.9%.”
So the reinsurance price reductions that Brit saw are actually slightly higher than some other companies experienced, but in-line with the broker views of the recent renewal periods.
The softening market environment both leads to companies taking on more risk and using more reinsurance to lay risk off, making for an environment where portfolio management, or perhaps even sculpting, becomes increasingly important.
Of course quota shares are hardly sculpting, as they offload a defined share of risks rather than a more refined approach to managing exposures, but in the current environment where pricing is low and capacity can be cheap, it’s a good time to take these steps to ensure re/insurers are protected.
Wilson continued; “We have looked to balance our portfolio by actively defending our core business, ensuring rigorous risk selection in the classes experiencing pressure and modestly expanding in areas where profitable opportunities exist, while contracting in areas where it is felt that profit margins are thinner. We are also managing our net position through the selective use of additional reinsurance protections, such as increased cessions on quota shares.”
Mark Cloutier, Group Executive Chairman of Brit Limited, gave a little more clarity as to why the market environment calls for a slightly more cautious approach, in Brit’s opinion, explaining; “Market conditions remain challenging as competition from new entrants and additional capacity from existing competitors with appetite to grow has put continuing downward pressure on rates across several major classes of business. We do not believe these conditions are sustainable over the longer term and certainly call for a cautious approach to growth.
“In this climate, we are determined to maintain underwriting discipline and have adopted a defensive stance to protect our business and preserve capital. Our strategy is to remain well diversified and to focus on retaining quality business, while contracting the areas of our book experiencing the most rating pressure. We also continue to assess cautiously new business and manage our portfolio mix to target areas of our book with less rating pressure. We believe that such an approach will enable us to weather the current environment and position us well for the future when the ill-discipline reads through to results and market conditions improve.”
Of course there is another potential angle to this, which is that rather than ill-discipline, the effect re/insurers like Brit may be feeling could be due to their balance-sheet backed strategies no longer being the most efficient for certain risks.
That makes it attractive to lay off more risk, taking advantage of cheaper costing capital where re/insurers can (such as through sidecars and collateralised deals with ILS funds). However, it doesn’t necessarily mean there will be a day of reckoning where ill-discipline is going to suddenly come to light, as the division between discipline and ill-discipline also depends on the cost-of-capital.
It could just mean times are changing and certain risks are better-suited to other business models and other capacity structures nowadays.