Reinsurance News

Growing prevalence of risk-based capital regimes to drive reinsurance demand: Aon Benfield

17th January 2018 - Author: Staff Writer

Aon Benfield’s 2018 reinsurance market outlook forecasts a continued modest upturn in reinsurance demand globally driven by the growing prevalence of risk-based capital regimes and emerging areas of risk transfer.

profitable-growth-reinsuranceReinsurance demand could also benefit from modest global economic growth alongside heightened risk awareness following a record-setting catastrophe loss year.

Additional demand for property reinsurance is expected to be stimulated by changes in the National Association of Insurance Commissioners (NAIC) US Risk Based Capital (RBC) model.

The NAIC has adopted a specific catastrophe risk charge in its RBC model which applies from March 2018.

Aon Benfield said that although the new clause lowers RBC for most catastrophe-exposed firms, a small proportion of U.S. insurers are likely to be materially impacted; “many Florida and Texas homeowners companies will experience a material drop in RBC once the catastrophe risk charge is adopted and are likely to consider increased use of reinsurance to manage regulatory and rating agency capital requirements.”

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Many companies are now in the process of adjusting to the new framework for catastrophe risk based capital and are following up with talks with regulators and rating agencies about the implications.

In addition, A.M. Best has finalized changes to its rating methodology criteria, including the stochastic-based Best Capital Adequacy Ratio (BCAR) revisions, Best’s Credit Rating Methodology (BCRM) and many supplemental criteria, such as terrorism, catastrophe risk and new company formations.

“The catastrophe risk charge is now part of the covariance formula, which reduces the net impact on required capital, all else equal. However, this benefit was lessened, as the risk charge will now be on a pre-tax basis (whereas it was previously net of a 35 percent tax benefit for US tax-paying entities). Most companies with significant catastrophe exposure saw an increase of 3 to 8 points in BCAR as a result of this change,” Aon Benfield explained.

Aon Benfield said companies with low current BCAR scores relative to their rating level, higher-rated companies whose current catastrophe reinsurance program exhausts near the 100-year return period, companies with aggressive investment strategies or high asset leverage, thinly-capitalized health companies and annuity writers will be most heavily impacted.

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