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Solvency II fuelling increased reinsurance demand: Fitch

16th February 2017 - Author: Luke Gallin

Commentary from reinsurance companies following the key January 1st 2017 renewal season supports the view that Solvency II regulation will increase demand for reinsurance protection, according to international rating agency, Fitch Ratings.

The benign large loss environment and abundance of capital in the global reinsurance market, from both traditional and third-party sources, has driven a supply/demand imbalance in the global reinsurance market, pressuring returns and fuelling competition.

However, during the recent 1/1 2017 renewal season some reinsurers commented on an increased demand for reinsurance protection as primary players looked to take advantage of the favourable buyers market conditions.

While the abundance of efficient reinsurance capacity is likely one reason for greater demand for reinsurance cover at 1/1, Fitch has said that new regulatory requirements as a result of the implementation of Solvency II in early 2016 is also driving up demand.

Reinsurers’ trading updates following the crucial January renewals period reinforce our view that Solvency II (S2) will increase demand for reinsurance products as European insurers attempt to strengthen their capital position through risk transfers,” says Fitch.

EU domiciled reinsurers with financial strength are likely to benefit the most from increased demand from buyers, and the same applies to players in non-EU countries that are deemed fully Solvency II equivalent, explains Fitch.

The rating agency says that strong growth in Hannover Re’s structured reinsurance business at 1/1, a volume of insurer enquiries regarding the improvement of earnings stability and capital optimisation at SCOR and Munich Re’s expectation that regulatory optimisation and balance sheet management will grow in importance, suggests that Solvency II requirements is, and will continue to increase reinsurance demand.

It is too early to get a complete picture of the impact of S2 on reinsurance demand, but one risk insurers are increasingly keen to transfer is longevity risk,” says Fitch.

Under Solvency II the risk margin introduced creates greater capital needs for longevity exposure when interest rates are low, as they are currently, meaning that this is one area that Fitch expects to see continued demand for reinsurance capacity.

Furthermore, primary insurers are increasingly keen to take advantage of a range of risk transfer opportunities that enables them to bolster their capital position under Solvency II guidelines, with Fitch highlighting Enstar’s £957 million UK employers’ liability reinsurance deal with RSA.

Reinsurers in the EU or a country that has been granted equivalence for reinsurance supervision will have an advantage in winning S2-related business. The biggest and financially strongest reinsurers will also have an advantage.

Risk-transfer transactions are also likely to be across multiple regions and products, which will make it harder for small, specialist reinsurers to compete,” says Fitch.

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