Reinsurers lose 20% of market share to alternatives: Conning

A new study from Conning found that reinsurance companies are under pressure from all angles alternative, with the capital markets, captives and government-sponsored entities all taking risk that was once their domain.

The study looks at how buying trends have shifted in the soft reinsurance market and discusses the dynamics of the last decade. Much of that period has been characterised by the rise of the capital markets and ILS funds, but other alternative sources of capacity have also pressured reinsurers, as ceding companies hunt for efficiency.

“Few sectors have undergone as much change in the past decade as the reinsurance market,” explained Matt Sternat, Vice President of Insurance Research at Conning. “The lack of catastrophes, inroads from alternative capital, and changing buyer patterns have led to dramatic consolidation and change among reinsurers.”

These trends have led to an adjustment in reinsurance buying patterns, as ceding companies increased the sophistication within which they look at risk transfer and became more discerning about where they source it from.

“Reinsurance buyer behavior has been mixed, with concentration in reinsurer panels among larger cedants, but more diversification beyond the top 25 buyers,” Sternat continued.

Efficient sources of reinsurance and risk transfer capacity has driven this decline in market share of the overall risk cessions Conning’s study analyses, with captive vehicles and government backed programs offering levels of capital efficiency that a traditional reinsurer cannot often compete with.

The Conning study looks at reinsurance buying by ceding companies over the past decade, exploring how reinsurer panels have changed and how the mix of collateral types shifted, as well as the proportion of premium ceded by major re/insurers.

The alternatives have taken a sizeable chunk out of what was the traditional reinsurance market’s domain.

“Even though insurers are ceding a larger portion of their premium, traditional reinsurers lost 20 points of market share in the past ten years, much of it to new captives,” Steve Webersen, Head of Insurance Research at Conning, said.

That’s a quite stunning figure and perhaps goes some way to explain why the steady ingress of capacity from the ILS market has created such a significant wave of change in reinsurance as well, if such a significant percent were already flowing out of the traditional market towards other alternative structures.

“Our analysis indicates 11 of the top 25 assuming entities were nontraditional reinsurers, either captives or government-sponsored entities, accounting for nearly 30 percent of the assumed premiums from that group,” Webersen continued. “Within the traditional reinsurer group, stalwart leaders have defended their market positions, while others have not.”

Interestingly, Conning’s analysis found that the shrinking of reinsurance panels is not as widespread as perhaps thought, identifying that “While we found it is true that reinsurer panels have shrunk among larger buyers, that trend did not hold true beyond the top cedants.”

Captives have been a huge area of opportunity for ceding companies, with their usage increasing dramatically in the last decade. Whether this trend will continue could depend on much more than just a hunt for efficiency though, as global tax rules and also the definition of true risk transfer could play into this in years to come.

The capital markets has played a major role in this period of change, again offering efficient alternatives to the traditional reinsurance model. It will be interesting over the next decade to see how the capital markets and risk shifted into captives might interplay, as investors could stand to benefit from any moves forced by regulation or protectionism here.

Conning expects we will see further evolution of these trends.

“Our research and interviews confirm that the procurement of reinsurance is a global business, increasingly complex and sophisticated and one that is still largely relationship-driven,” the company explains.

“No doubt we have only seen the beginning of the evolution in the buyer-seller relationship, with consolidation, new products, and new sources of capacity reshaping the market.”