Reinsurance purchasing strategies have shifted from capital protection to a focus on managing volatility and de-commoditising solutions as cedants continue to seek out stability and growth from the ‘vibrant’ array of market solutions, according to Guy Carpenter executives President James Nash and Managing Director Julia Chu.
The Guy Carpenter executives commented on the latest reinsurance ceding market trends, highlighting how the thriving market has gained in complexity and scope of products as it evolves to match the needs of insurers, who have broadened their scope of reinsurance use.
Nash said; “The effectiveness of reinsurance as a capital substitute was highlighted by the global financial crisis of 2008, where debt and equity financing were not available to our clients – reinsurance stepped in as the only source of readily available capital.”
“In the period following the financial crisis, some insurance entities, with balance sheets repaired, chose to retain more risk and consolidate covers as ceded premium flattened out.”
Guy Carpenter noted the reasons for buying reinsurance have expanded from capital protection to earnings management, reducing volatility and promoting profitable growth.
Julia Chu, Managing Director, said; “Clients, from global insurance giants to specialty niche Lloyd’s underwriters, have unique risk profiles. Solutions for earnings protection are not ‘one-size fits all.’
“Some may seek protection for one large severity event and others may seek protection for frequency of occurrences on an aggregation point.”
“Regardless of where this risk comes from or how an optimal solution is designed for them, the universal goals are more consistent quarterly/annual earnings that many investors prefer and that, in turn, allow those companies to attract higher price multiples.
“As clients focus more on protection of earnings and the value that stability brings, they have shifted towards more expansive covers and the availability of a broader array of reinsurance solutions on offer.“
Some product innovations include special coverage features applying to specific industries or risks unique to specific clients, according to Guy Carpenter.
The increasing numbers of alternative capital solutions entering the market through vehicles such as sidecars means that more capital could potentially be locked up in market segments, to offset this, Nash explained the industry continues to seek solutions that would ensure post event liquidity.
Opportunities for reinsurers have appeared as a result of the move by insurers towards a capital-light structure and changing risk distribution strategies.
“Similarly, opportunities present themselves to those willing to support new primary product development and partner with their insurance company counterparts to support growth initiatives,” Guy Carpenter explained.
Increased demand for reinsurance has also come from firms looking for optimal structuring of programmes to minimise regulatory capital where Solency II is implemented.
“We have seen an increase in the number and frequency of loss portfolio transfer deals, such as the recent Berkshire Hathaway transaction for AIG.
“Transactions to free up capital, prevalent in the non-life sector, have increased in life companies looking to free up capital through distribution of significant blocks of life business into the reinsurance market. This is an area that presents increasing opportunities for the intermediated market,” Nash said.