Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

In tiered reinsurance market, expect desperate actions by some


In a tiered reinsurance market, where large, globally diverse players occupy the top rung and more marginalised, smaller players are relegated, reinsurers should expect more desperate actions as lower tier reinsurers fight to maintain market share.

This warning comes from Deutsche Bank analysts in the wake of their trip to the Monte Carlo Rendez-vous where they met with some of the leading reinsurers and spoke with market participants.

The softening reinsurance market, as well as changing reinsurance buying habits, has led to the larger, more globally diverse and multi-line reinsurers becoming favoured as a ‘top tier’ for certain reinsurance programmes. Meanwhile, smaller players and those focused on single lines of business have often ended up marginalised and are acting more as followers to the top tier signings.

Of course such an environment does boost competition, both in terms of price and the stretching of contract terms and conditions, something which the Deutshe Bank analysts warn could be exacerbated at renewals to come.

Leading reinsurers need to be prepared for tier two and three players to continue fighting hard to maintain their market shares, with the possibility of some desperate actions likely. However, the Deutsche Bank analysts highlight that pricing can only drop so far.

While the expectation among larger reinsurers, such as Swiss Re, Hannover Re, Munich Re and SCOR, is that pricing declines will slow from now on, as pricing approaches technical levels, there is still room for desperate actions on terms and conditions or for some underwriters to take on risks that are less well understood.

Deutsche Bank says that the tiering of the reinsurance market appears to be gaining pace, and they foresee a gradual process whereby the market shares of smaller players increasingly shrink. While overall reinsurance buying is becoming more rationalised and reducing in some cases, the shares to the larger players tends to grow and the smaller players become more marginalised as a result.

In Monte Carlo this year there was also a lot of talk about innovation, big data, new product design and development and new lines of business. Again, this can contribute to the tiering effect, as the larger reinsurers have the scale and capital to enter into long-term product development, but the smaller players do not which could again lead to desperate actions.

The loosening of reinsurance terms and conditions is an area of real concern, as the tiering of the market gathers pace. The tendency to throw in something additional, or to bend to clients whims on contract terms is likely to become ever more tempting for the smaller players trying to maintain a share of a difficult market environment.

Of course, when it comes to terms and conditions the reinsurance buyers will be pushing for whatever they can get. Why wouldn’t they? If additional coverage or broader terms are on offer or within reach, it stands to reason that they will consider letting a lower tier reinsurer onto their programme in order to benefit from this.

So how to survive this market environment as a smaller player? Remain focused, add client value through your niche expertise, develop new products but ensure they are within your core competency, be competitive but don’t be foolish, be prepared to walk away, we’ll say it again – add value (cannot be stressed enough).

What does this mean for insurance-linked securities (ILS) players, who are often much smaller on a premium written basis given their fully-collateralized nature and lack of balance sheet leverage? It’s vital to remain focused on what ILS does well, add value through the expertise and new relationships you can help reinsurance buyers develop, get really good at explaining the benefits of collateralized protection, build relationships, show you’re there year after year and pay your claims as reliably or even better than traditional reinsurers.

The key to survival may be to avoid seeming desperate. The moment a large reinsurance buyer realises there may be something extra to gain from a market it could end in tears. Avoid marginalisation by remaining focused, aligned with your investors and providing much-needed capacity to those that appreciate it. Be prepared to walk away.

As competition ramps up towards the January renewals the chance that marginalised players will take desperate actions rises. This January discipline may be more important than ever before, both on the traditional and alternative reinsurance capital sides of the market.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

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