Renewals show Solvency II driving reinsurance demand
January renewals evidence that Solvency II will increase demand for reinsurance products as European insurers attempt to strengthen their capital position through risk transfers, Fitch Ratings said.
The main beneficiaries of this trend are likely to be the financially strongest reinsurers in the EU and any other country whose regulatory regime is deemed fully equivalent to Solvency II.
Hannover Re's latest update showed that its structured reinsurance business, which can help insurers optimise capital, grew by two-thirds in the January renewals period. This rate of growth probably reflects the timing of some large deals, but we expect demand to remain strong.
SCOR said it has received a high number of enquiries from insurers wanting to improve earnings stability and optimise capital, while Munich Re's CFO said balance sheet management and regulatory optimisation will become increasingly important drivers of reinsurance business.
It is too early to get a complete picture of the impact of Solvency II on reinsurance demand, but one risk insurers are increasingly keen to transfer is longevity risk. This is because the risk margin introduced under Solvency II creates high capital requirements for longevity risk when interest rates are very low. Transferring longevity risk via reinsurance creates capital charges for counterparty risk, but these tend to be significantly smaller than those for retained longevity risk.
Insurers are also looking for other risk-transfer opportunities that can significantly strengthen their capital position under Solvency II. For example, RSA's recent disposal of £834 million of legacy liabilities to Enstar Group will boost its Solvency II capital ratio by as much as 20 percentage points.
Reinsurers in the EU or a country that has been granted equivalence for reinsurance supervision will have an advantage in winning Solvency II-related business. Firms outside these jurisdictions could be required to post collateral or liaise with local European regulators, adding costs and delays.
The biggest and financially strongest reinsurers will also have an advantage. Counterparty default capital charges will often be lower when transferring risk to one or two very highly rated reinsurers than they would be for transferring the risk to a larger pool of reinsurers with a slightly lower credit rating. Risk-transfer transactions are also likely to be across multiple regions and products, which will make it harder for small, specialist reinsurers to compete.
