Europe’s 20 largest cedants have been increasing their reinsurance purchasing as they grow their product offerings with new lines of business that typically require greater technical and financial support, said A.M. Best Senior Director, Carlos Wong-Fupuy, commenting on the rating agency’s latest reports on large European insurers’ reinsurance ceding trends.
As cyber, new liabilities, and global corporate products emerge, reinsurance demand has grown to cater to the increased capacity for risk these products require.
However, Wong-Fupuy noted, this trend of increased cedance on to reinsurance is gradual, as growth into new areas of insurance is a slow, accumulative process; “After significant increases in retention ratios where the top companies had been actually changing and centralising their reinsurance purchasing policies, that has continued although at a much slower pace.”
“We think this is simply due to the fact that top buyers have been taking advantage of the soft reinsurance market and their strength in negotiation power developed over previous years.”
He added that European insurers buying more reinsurance this year are taking advantage of the still very favourable conditions under which reinsurance is being offered as they “strike the right balance between deploying capital and getting into new lines of business. Cyber comes to mind, strengthening new global corporate solutions.”
The largest four French cedants have shown patterns of retaining less risk than their smaller counterparts, although in Germany the difference in retention ratios is not as significant as seen in France – Wong-Fupuy said German insurers “tend to be relatively well capitalised, have the ability to retain more business, to focus more on underwriting risks.”
He added, however, that catastrophe risks were driving reinsurance purchase in Germany as insurers look to protect balance sheets.
In the coming year, trends of increased purchase are expected to continue, according to A.M. Best, although at a slower pace than previously seen due to pressure on the largest reinsurers’ cost of capital.
Wong-Fupuy explained that “the returns on capital are not what they used to be in the past. Having said that, as long companies start trying to diversify with getting into these lines of business which require reinsurance support, there is going to be demand there, so there is opportunity for some better profit margins than what we’ve seen in the past, but at the same time, its recognised that any growth in new lines of business is going to be gradual.
“These are lines that take time to materialise and are not as significant as the traditional segments of business that we have seen.”