Fitch Ratings, a provider of credit ratings, commentary and research, has said that the growing reinsurance activities of several German and French insurers are contributing to stronger credit profiles, provided the associated execution risks are well managed.
In a new report, Fitch assesses the strategic move into reinsurance by eight European insurance groups and its impact on their financial strength, operational scale, and revenue diversity.
According to the agency, expanding into reinsurance allows these insurers to widen their business scope and reduce dependence on traditional income streams.
This diversification supports greater financial resilience, particularly in the face of economic or regional shocks.
However, Fitch warns that reinsurance brings challenges, including more volatile earnings and increased capital requirements, especially due to the higher exposure to large loss events such as natural catastrophes.
The reinsurance arms of the reviewed groups are increasingly international in reach, with 87% of their gross written premiums in 2023 originating from markets outside their home countries.
This global spread improves risk distribution but requires strong knowledge of different regulatory landscapes and local market dynamics. Entering new regions without sufficient expertise can undermine performance and lead to credit pressure.
The earnings from reinsurance are inherently more variable than those from primary insurance. Fitch’s analysis shows a wider range in combined ratios for reinsurance activities across 2019–2023, highlighting the sector’s cyclical nature.
A harder market in 2022 and 2023, brought on by a rise in catastrophic events and economic uncertainties, allowed reinsurers to achieve improved underwriting margins and reduce adverse loss experiences, resulting in a stronger combined ratio of 93% in 2023. Nevertheless, these conditions may reverse, posing future risks to profit stability.
Capital strength is another key consideration. Fitch’s proprietary capital model, Prism, shows that greater exposure to natural catastrophe risk significantly raises required capital buffers.
For example, Hannover Re, which contributes 60% of parent group Talanx’s total premiums, is a notable exception within the peer group, where reinsurance typically accounts for only 18% of group premiums. Its prominence means it has a substantial influence on the group’s overall capital adequacy.
Building a reinsurance business—whether organically or through acquisitions—presents distinct integration and execution challenges.
Organic growth requires sustained investment before profitability is achieved. Echo Re, part of DEVK, is cited as needing several years to reach consistent underwriting results. Acquisitions, such as SGAM btp’s purchase of Arundo Re, can quickly increase operational capacity but must be well aligned with group strategy to avoid financial instability.
Underwriting expertise is critical, particularly in emerging markets where higher margins are offset by greater risk. Fitch highlights the need for experienced teams, robust risk frameworks, and strong brand credibility to succeed in these business-to-business environments. Without these, reinsurance ventures can become liabilities rather than growth engines.
Financing strategies for reinsurance ventures also influence credit profiles. Whether funded through internal reserves, debt, or hybrid instruments, each approach affects leverage, capital structure, and ratings outcomes.
While acknowledging the increased exposure and volatility that reinsurance can introduce, Fitch Ratings concludes that—when properly managed—such diversification efforts can be beneficial to insurers’ creditworthiness. For companies with clear strategy, sound governance, and underwriting strength, reinsurance offers an opportunity to build a more robust and adaptable business model.
