Despite the current market environment being generally positive for primary insurers, the evolution of the reinsurance market highlights several challenges this can create for firms, according to analysts at Moody’s.
Ratings agency Moody’s Investor Services discusses the potential and apparent impact the structural changes currently filtering through the reinsurance space have on primary insurers, in its latest “Reinsurance Monitor” publication.
“We are spending more time discussing reinsurance usage and strategy as part of our meetings with primary insurance companies globally,” explained Karambelas, stressing that this trend mirrors the idea that “insurers’ use of reinsurance continues to evolve.
With a wealth of traditional and alternative reinsurance capital readily available, insurers can continue to benefit from a wide source of attractively priced capital. However, should this persist for a prolonged period the abundance of capital, albeit cheap, is likely to create fierce competition among primary insurers.
Competition has been a consistent theme of the global reinsurance sector in recent months, leading to a host of merger and acquisition (M&A) activity, most recently with Endurance’s announced takeover of Montpelier Re.
Expanding on the impact of sustained, cheaper reinsurance that is accessible to insurers, Moody’s analyst Kevin Lee added; “Falling reinsurance prices have encouraged insurers to cut commercial property insurance rates but have had less influence on casualty insurance prices where low interest rates have encouraged underwriting discipline.”
Karambelas advised that generally, in today’s world, insurers are well capitalized, which in turn results in less dependency on reinsurance.
Primary insurers are also “increasingly sophisticated in their evaluation of reinsurance needs.”
And the constant supply of cheap, traditional and alternative reinsurance capital also reflects that insurers “are generally applying savings from lower reinsurance pricing to expand or optimize their reinsurance programs,” noted Karambelas.
Beyond competition, another issue facing global primary insurers resulting from the abundance of reinsurance capacity, and in particular when this capital is combined with broader terms, warns Moody’s, is the temptation for insurers to write more and more business, “incrementally pressuring primary rates and/or altering the insurers’ risk profiles.”
This raises a valid and interesting point, as simply writing more business because it’s cheap and available could lead to companies being dangerously overexposed, resulting in negative stances from ratings agencies and in the worst instances lead to a fatal blow for the company in question.
That being said, should primary insurers make the most of the ample capital in the sector, by being prudent with the business they write and maintaining disciplined underwriting practices, it can also add welcomed geographical and product diversification to their portfolio.
But the trend seen over recent months has been that primary insurers are generally retaining more risk, something underlined by Moody’s and also discussed here on Artemis in the past.
Looking forward, Lee of Moody’s believes that “insurers will once again get the better of reinsurers in 2015,” but with the view that “this gravy train cannot go on indefinitely without some negative consequences for insurers.”