European mutuals take advantage of soft reinsurance market: A.M. Best

Low global interest rates and certain Solvency II requirements have hindered the profitability of mutual insurers in Europe, leading some to take advantage of the softening landscape and influx of alternative reinsurance capital, according to A.M. Best in a recent report.

The changing risk landscape, rise of technology and heightened competition at a time of persistent pressures in the global insurance and reinsurance industry has driven a need to innovate, increase efficiency and ultimately remain relevant to the market for all in the risk transfer landscape.

According to international financial services ratings agency A.M. Best, generally, stock insurers have better responded to the need to innovate in the changing risk landscape than mutuals, although the latter has been seen to embrace the wealth of alternative and traditional reinsurance capital and take advantage of the softening environment.

“European mutual insurance companies are at an inflection point in which they must embrace change, or risk losing relevance and market share,” said A.M. Best.

“Depending on the local market in which they operate, their size and history, mutual companies are adapting to these myriad challenges in a number of different ways. Strategic considerations faced by European mutuals include consolidation, governance, recognition of the need to innovate, and capital optimisation.

“In particular, some mutuals are taking advantage of the soft reinsurance market,” continued A.M. Best.

Owing to their ownership structure that sees the ultimate owners being the policyholders, as opposed to external shareholders, mutual insurance companies can find it more difficult to access other forms of capital, and therefore can rely fairy heavily on reinsurance to provide additional capital and manage catastrophes, and other losses.

The global reinsurance marketplace has witnessed an influx of capital from both traditional and increasingly alternative reinsurance sources, fuelling competition and a supply/demand imbalance that has ultimately resulted in reduced rates and a buyers market, where cedents can take advantage of attractively priced reinsurance protection.

And according to A.M. Best that’s exactly what some European mutual insurance companies have been doing in more recent times, as they look to add efficiency and optimise their protection structures.

“Buying reinsurance remains a key feature of the mutual industry in a move that increases security and enables the release and deployment of capital. Whilst some mutuals have taken advantage of the soft reinsurance market to increase their cover, using risk transfer as a form of contingent capital, quite a few have preferred to benefit from cash savings and reduce their expense base to ease pressure on performance,” said A.M. Best.

Admissions from some insurers in the space during renewals has revealed that in some cases, both mutuals and stock insurers and have increased the size of their catastrophe reinsurance programs for a similar or reduced rate, highlighting the more efficient abundance of reinsurance capital available in the space.

Increased capital requirements under new Solvency II frameworks and the dangerously low interest rate environment has further pressured mutuals, explains A.M. Best, but the abundance of excess capital as a result of benign losses and competition has enabled some to optimise their efficiency and enhance market relevance.

The ratings agency explains that mutuals really need to push innovation and embrace change in the marketplace in order to continue to compete with stock insurers, which A.M. Best says have responded better to the need to innovate.

It’s promising to hear that some European mutuals are utilising the wealth of alternative reinsurance capital that continues to enter the space, albeit at a slower pace than previously, and making the most of the efficient, attractively priced capital in order to optimise their reinsurance coverage, which is an important part of their structure.

A range of different strategies and approaches to navigate the testing re/insurance marketplace has already, and will continue to be a feature of the risk transfer landscape as firms look to mitigate the negative impacts and increase relevance.

One of the ways both stock and mutual insurers, and reinsurers have in more recent times sought to offset some of the challenges is with the utilisation of the current abundance of efficient traditional, and alternative reinsurance capital.

While mutuals might be slower to adapt and change to the evolving risk landscape, as highlighted by A.M. Best, there is evidence of some embracing the glut of capital market’s backed capacity to increase the efficiency of their business, and limit the adverse impacts of the softening environment.