15 September 2014 News

Loss may make cedants rethink retentions

A very large loss could potentially reverse the trend of large insurers retaining more risk on their own balance sheets, believes Manfred Seitz, managing director of international reinsurance at Berkshire Hathaway.

But he added that it is almost impossible to predict how big a loss would be required to reverse pricing trends – such is the amount of capacity in the market at the moment.

He said that large, global, insurers are under pressure in terms of their own earnings. As a consequence, aided by strong balance sheets and very sophisticated risk modelling techniques, they are reducing the amount they spend on reinsurance and reconfiguring their entire approach to risk transfer.

“They are trying to optimise their risk-transfer programmes. They are re-examining what they can retain and the areas where they really need protection,” Seitz said.

But he believes a very big market-wide loss could reverse this trend to a certain extent.

“A big loss could have the potential to hit insurers, which could be more vulnerable without the same levels of reinsurance protection that they once had. It would certainly get their attention and give them an insight into whether their risk management is at the right level. That could change things.”

But he added that it is impossible to predict what size loss would be needed to turn pricing in the market. “To speculate about that is a moot point,” he said. “The reason so much money is in this industry is because returns are so poor in other areas of the capital markets. Unless that dynamic changes it is hard to imagine capacity exiting any time soon.”

Against this backdrop of cedants retaining more risk and soft pricing in many lines, Seitz said Berkshire Hathaway is focused on maintaining and strengthening relationships with its existing clients.

“We have been a very stable player in the European market for a long time now,” Seitz said. “Our aim now is to work more closely with our key clients and look at what we can do better and how we can complement them in other ways.

“Insurers are retaining more and becoming a lot more sophisticated. But that is not a bad thing if you are a sophisticated reinsurer. They want more complex solutions across multiple lines of business and there are not many reinsurers that can offer that."

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