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Changes in reinsurance cessions not sufficient to impact ratings: A.M. Best

22nd March 2017 - Author: Steve Evans

Changing patterns in reinsurance cessions from major insurers to reinsurers are not sufficient alone to impact ratings, according to A.M. Best.

Rated reinsurers tend to be the largest companies and the changes being seen in cession rates from insurers to them are not going to be sufficient to affect their standing. Equally the changes in cessions reported by A.M. Best will not impact the ratings of the large European ceding companies.

Rather, the rating agency sees cession rates as an example of enterprise risk management in action, for the insurers, as they look to enhance their own capital efficiency through the way they use and the amount of reinsurance purchased.

A.M. Best highlighted in a new report that some of the largest European cedents have been increasing their use of reinsurance, but noted that this trend has now begun to slow.

Reinsurance buying patterns have been changing over the course of recent years, with the centralisation of cessions within re/insurance groups at first causing an increase in retentions and fears over reductions in reinsurance buying, but that was soon followed by some increases in cessions from very large companies.

There have been a number of reasons for the increases.

First, cedents have centralised and rationalised their reinsurance purchases, which has given them a better overview of their needs and enabled them to be more strategic, resulting in a slight uptick in buying as opportunities are identified.

Regulatory changes, such as Solvency II becoming embedded in the European market, have created a little more demand for reinsurance.

Market conditions have made buying more reinsurance protection attractive, with rates down at or near lows and the bottom of the cycle perhaps in sight. This has stimulated some increased demand, particularly for multi-year covers that can be locked in over the longer term.

This is noted as a potential factor for reinsurers to watch out for in future renewals.

The fact large cedents have been locking in multi-year reinsurance while the market is soft, and after they’ve identified the strategic opportunities to do so, could make coming renewals more lumpy as some major cedents do not need to renew every year anymore.

While changing cession rates are not going to affect anyone’s ratings, they are affecting the reinsurance market dynamic and also making it much harder for analysts and raters to call the bottom of the cycle.

A.M. Best believes that more stability is on the way, but whether stability with reinsurance pricing stable but still soft will benefit reinsurers remains to be seen.

As cession rates slow down a little and large reinsurers look to lock in large deals, multi-year covers, tailored protection and also move increasingly into direct corporate risks, there seems little reason for them to push rates considerably higher.

That could continue the marginalisation of some smaller reinsurers, meaning that pressure may remain in reinsurance even while pricing achieves greater stability.

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