Europe’s 20 largest cedants have significantly increased reinsurance purchases in the last two years as soft market conditions drive insurers to pass on higher levels of risk, according to A.M. Best analysis of market trends in its newly released report.
The agency said Solvency II requirements and carriers expanding into new lines of business were creating conditions driving higher demand for reinsurance.
The increasingly competitive market is pushing insurer’s towards innovation and into taking on newer risks such as cyber or specialist insurance lines, but this requires a greater reinsurance cushion to provide extra fall-back capital, and according to A.M. Best, in some cases, the help of reinsurer’s technical expertise.
Carlos Wong-Fupuy, senior director, said; “Some of the largest insurers have increased their reinsurance purchasing as they take advantage of the soft rate environment and optimise the efficiency of their own capital.
“The European directive imposes significant capital charges for insurers retaining particular products involving significant claims uncertainty and volatility, especially in the long-term. Purchasing reinsurance protection such as stop-loss or adverse development cover on reserves can be an efficient mechanism for reducing capital requirements.”
European insurer’s non-life premium ceding reached its peak in the last two years, said A.M. Best’s in its report based on analysis of ceding companies’ 2015 and 2016 interim data.
2015 saw non-life premiums for Europe’s largest 20 cedants grow by a significant 17.9% to €44.2 billion, while gross written premiums (GPW) grew by 6.2% to €333.3 billion.
In the first half of 2016, A.M. Best said reinsurance demand continued to grow, but at just half the pace than the year before with premiums ceded increasing by 3% to €21.9 billion and GPW decreasing by 1.3% to €154.1 billion.
Yvette Essen, director of research and communications, commented; “Given the pressure on rates for primary insurers and reinsurers, some of the largest European insurers have ventured into new lines of specialist business – particularly in the commercial and engineering sectors – or have been trying to strengthen their participation in these niche lines of business. Cyber also has attracted some interest from insurers, although this still remains an emerging risk.”
While carriers have been passing on more risk, the rating agency reported the pace of income retention rates falling has slowed.
In 2015 retention ratios fell from 88.1% to 86.7%
In the first half of 2015, interim market data shows retention rates at 86.2% and dropping slightly down to 85.8% in the first half of 2016.
Although it’s still too early to call this a market trend, early analysis suggests insurers are moving towards retaining less risk – even if rates of reinsurance purchase levels are beginning to slow; “While it is still too early to determine if this will become a clear trend, A.M. Best expects the declines in retention ratios to be less significant in 2016 and 2017 than those experienced in 2015.”
The agency’s market report “European Cedants Continue to Increase Reinsurance Buying but Demand for Cover Slows,” indicates a market with still some room for reinsurance growth despite the challenges, and with emerging lines of businesses like cyber risk becoming a more important part of insurer’s product offers, it’s unlikely this trend of increased reinsurance demand will be easing up anytime soon.
However, A.M. Best said, the industry is still looking at tough times ahead as “pressure on rates continues as a result of competition from alternative capital providers and new business opportunities remain limited.”