Commenting on A.M. Best’s latest market briefings, senior director, Carlos Wong-Fupuy, said the trend of large European insurers increasingly ceding business to reinsurers to offset soft market conditions and Solvency II requirements is expected to slow in the coming year.
European insurers had been relying on reinsurance to enlarge their capacity for product diversification and minimise cost of capital, however, as the largest reinsurers begin to experience significant pressures on their cost of capital, combined with lower returns, A.M. Best predicts the rate of reinsurance purchase will come under strain.
“One of the reasons why insurers are buying more reinsurance is to try to make their balance sheets more efficient,” said Wong-Fupuy. “They have to strike the right balance between simply deploying capital and getting into new lines, businesses or using reinsurance, which in many cases is still being offered under very favorable conditions.
“At the same time, with this attempt to optimize their balance sheets, insurers are getting into lines like cyber that pretty clearly require not just financial support, but also technical support that typically comes from the largest reinsurers.”
In the year ahead, Wong-Fupuy believes that there will be growth, but on a gradual basis.
“There are still signs of continued trends, but on a much more limited pace than in the past. This is because the largest reinsurers are experiencing significant pressures on the cost of their capital, and the returns on capital are not what they used to be.
“However, as long as companies start trying to diversify, get into lines of business that require reinsurance support, there is going to be demand. There are opportunities for some better profit margins, but let’s recognize that any growth in new lines of business is going to be gradual,” he said.
And while A.M. Best is predicting a gradual decline in the rate of reinsurance purchase for European firms, a recent report by Deloitte noted an apparent upswing in reinsurance purchase by life and P&C companies, demonstrating that on a global scale, despite pockets of market softening, reinsurance purchase is still becoming increasingly popular in some market lines.
Across a broader-industry scale, industry experts have noted a general shift in incentives for reinsurance purchase, from product earnings and expertise to capital optimisation – as insurers’ capital management optimization strategies evolve to focus on risk-based capital frameworks.
