Amidst a “negative outlook” backdrop for the reinsurance sector, with Fitch expecting profitability to sink further this year, structured reinsurance has been highlighted as one of the few lighthouses for the strained industry, named by the rating agency as a reinsurance growth area for 2017.
The surplus relief quota share reinsurance option is considered to be more flexible and cost-efficient than traditional reinsurance, allowing primary insurers greater capital optimisation, hence transactions such as this are considered a growth area.
Fitch said factors underlying its growth trend are greater capital reserve requirements for primary insurers under Solvency II – which have driven European insurers to strengthen their capital positions with more risk transfer opportunities and hence more structured reinsurance acquisition.
In Hannover Re’s January renewals period, the firm boasted structured reinsurance growth levels at an outstanding 66%.
Although, Fitch added, this sky-high growth was likely to be exaggerated by the simultaneous conclusion of some large deals.
And demand for structured reinsurance is forecasted to remain strong throughout 2017 with the largest, financially strongest reinsurers set to take the upper hand in gaining this market share.
Fitch said this is due to “counterparty default capital charges” which will be “lower when transferring risk to one or two of these very highly rated reinsurers than they would be for transferring the risk to a larger diversified pool of reinsurers with lower credit ratings.”
As noted by Fitch, some of the larger reinsurers have been increasing their participation with structured reinsurance agreements in more recent times.
The sometimes more complex nature of such deals requires greater knowledge and expertise, and the larger players are able to draw on their scale and skill set to participate in structured reinsurance deals where perhaps some of the smaller reinsurers aren’t able to do so, helping them to navigate the softening, challenging market environment, and ultimately achieve revenue where others can’t.