Recent developments with rating agency criteria, and regulatory changes across the world has resulted in a narrowing of the gap between differing capital requirements for reinsurers, which is expected to increase demand for reinsurance protection in the near future, according to Aon Benfield.
Reinsurance brokerage Aon Benfield, in a recent Reinsurance Market Outlook report, underlines the potential for increased demand for reinsurance coverage in 2017, in response to regulatory changes, and the amended A.M. Best stochastic-based BCAR model.
“Under the amended stochastic-based BCAR model, catastrophe reinsurance is more accretive for 80 percent of companies as compared to the current BCAR model framework. One main reason is that companies will now receive quantitative benefit from buying reinsurance above the 100 year wind return period up to the 200 or 250 year all perils return period,” explains Aon Benfield.
Furthermore, the reinsurance broker explains that the cost of reinsurance protection for catastrophe reinsurance programmes will be anywhere from 50 to 100 bps lower under the new BCAR model, which, should result in an increased demand for coverage from buyers.
Amendments to the A.M. Best BCAR model remain under review and the public comment period runs until March 1st, 2017. The Aon Benfield report discusses the changes to the model in some detail, but the message from the broker is that it could result in a slight uptick in reinsurance demand, while reducing the cost of reinsurance capital.
As well as changes to rating agency criteria, Aon Benfield highlights regulatory developments across all regions as a stimulus for heightened reinsurance demand. The broker states that regulators continue to raise capital requirements by increasing minimum capital standards, advancing capital models, reevaluating catastrophe risk exposure, and including asset risk management processes in its reviews.
“The impact of these actions is closing the gap between rating agency and regulatory capital requirements. As such, Aon Benfield sees pockets of the market where increasing regulatory requirements will push up demand for reinsurance in the near future,” said Aon Benfield.
Regulatory developments noted in the Aon Benfield report include developments with the Own Risk Solvency Assessment (ORSA) legislations in North America, the U.S. risk based capital (RBC) catastrophe risk charge (which the NAIC is reportedly close to implementing), Solvency II in Europe, and regulatory advances in parts of Asia and Latin America.
Aon Benfield states that once the catastrophe risk charge is adopted and fully included in the RBC formula a number of Florida homeowners’ companies will likely experience a meaningful reduction in RBC. As a result of this, some firms might look to purchase a greater volume of reinsurance to successfully manage the changes.
Solvency II, which was implemented in Europe just over a year ago, could also have a material impact on the supply and demand of reinsurance across the EU, warns Aon Benfield.
The reinsurance broker explains that the introduction of Solvency II has resulted in many companies requiring higher capital requirements, which, along with an increasing need for EU companies to mitigate their exposures to capital-intensive products, could result in greater reinsurance demand.
Furthermore, “high levels of uncertainty within legacy reserves drive higher regulatory capital requirements,” says Aon Benfield, which could also act as a catalyst for increased reinsurance demand.
Increased capital requirements and improved regulatory landscapes in emerging parts of the world, such as Asia and Latin America, for example, also has the potential to boost demand for reinsurance capacity in the future, explains Aon Benfield.
The broker says that this happened in Argentina, Chile, Brazil, China, and India, among others, in 2016, and expects increased demand for reinsurance to be a result of such regulatory developments.
The reinsurance marketplace remains overcapitalised so any uptick in demand will be welcomed by the industry. However, the continued flow of traditional and alternative reinsurance capital both in the market and sat on the side lines waiting to enter, suggests that any increase in demand from regulatory advances or changes to rating agency criteria, will be easily absorbed and insufficient to ignite a turn in reinsurance pricing.
