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Major insurers lower retentions, buy more reinsurance

17th February 2017 - Author: Steve Evans

New reinsurance demand is being seen as some of the world’s largest insurance companies lower their retentions on existing layers of reinsurance coverage and expand their programs, buying new layers as well.

So far this year it has come to light that insurance giant’s Zurich and AIG have both significantly reduced the retentions on their catastrophe reinsurance coverage for 2017, as this trend of better managing earnings volatility and using reinsurance as a capital tool starts to play out in earnest.

This is a trend that has been evident for a couple of years now, as the much vaunted rationalisation and centralisation of reinsurance buying, naturally flowed into an appetite to buy protection more intelligently, to protect the balance-sheet and shareholders.

The upshot is that now large insurers have identified where they could make savings, through more intelligently and centrally buying their reinsurance, so perhaps now is the time they can begin to expand on this, with a more strategic approach.

Analysts and brokers forecast a near-term increase in reinsurance buying, but this could perhaps be a longer-term trend as well, as insurers become more strategic in how they buy protection and where risk is retained versus laid off to other parties.

Of course the currently low level of pricing in the global reinsurance market also plays a role, as there is evidence of some companies taking advantage of soft markets in order to bulk up on coverage as well.

With pricing near a low and likely to stay there, due to the forces of capital which are ready to deploy at any sign of increase, these larger reinsurance buys could be repeated in years to come, perhaps becoming more permanent fixtures in insurers capital bases and enabling them to be more efficient in terms of risk retained.

Analysts feel that the lower retention levels seen at major players such as Zurich and AIG, both of which made some of the biggest moves here, could benefit the larger reinsurers such as Swiss Re and Munich Re, as these firms are likely to benefit from increasing shares.

Catastrophe exposures at the major insurers are dropping as a result. AIG reduced its property catastrophe attachment point from $3 billion down to $1.5 billion in January, while also enhancing its property excess of loss protection as well.

Zurich has seen similar reductions in retentions on some of its core catastrophe exposure buckets, as it too seeks to reduce volatility around this business.

Insurers are set to emulate this and its been reported that other major primary players also bulking up reinsurance programs at 1/1. In addition some are leveraging more third-party capital directly so as to lay off risk, providing opportunities to the ILS market as well.

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