Big reinsurers can win if cedants retain more: SCOR

Bigger, global, reinsurers such as SCOR can benefit from the trend of big insurers retaining more risk because the quality of the business being ceded is better, believes Victor Peignet, chief executive of SCOR Global P&C.

He said these increased retentions represent a far bigger problem for smaller reinsurers. As insurers rationalise their risk-transfer programmes, smaller players are being questioned.

This is not an issue for SCOR, he said, which has benefitted. As a large, global player, cedants want to form deeper and more complex relationships with a smaller number of big players across many lines of business – at the expense of smaller reinsurers getting bumped off programmes.

“The other consequence of this is that the quality of the business we are getting is better,” Peignet said. “As a reinsurer, would you prefer to take on a larger programme of below average quality or a smaller one of a very high quality? For us, we would choose the latter.”

In a report published at its investor relations day in London recently, SCOR details the reinsurance buying dynamic of 12 global insurers, which are also clients of SCOR. Of the 12, only two bought more coverage in 2014 compared with 2013, two remained at the same level and seven reduced their programmes.

Yet nine of these 12 companies actually ceded a bigger percentage of their overall programme to SCOR and the other three kept it at the same level.

“The trend is benefitting us as we are being kept on programmes and even strengthening or relationships with clients yet the quality of the business we are taking on is better,” he said.

He likens the rationalisation of reinsurance buying and risk-transfer to the process many corporates went through several decades ago.

“What we are now seeing happen in insurance occurred in corporates many years ago,” Peignet said. “They are under pressure to improve their technical results. To do that, they need their underwriters to perform better and to do that there must be a bigger retention behind them.

“It is the same logic that many large corporates identified in the 1980s and 90s. They started making risk management the responsibility of the plant manager and they saved on their insurance costs.”

The landscape of its insurance clients is also changing in other ways. In the same investor day report, SCOR splits insurers into four categories: global insurers, regional insurers, local insurers and monolines.

In 2013, some 12 percent of SCOR’s estimated gross premium income came from global players, 12 percent from regional players, 43 percent from local insurers and 8 percent from monolines. A fifth type of business, which it categorises as insurance and alternative platforms, made up the rest of its business mix.

Peignet said its percentage of business from global and regional players is growing while the proportion from local insurers is decreasing.

What will happen around monolines is more difficult to predict, he notes, because he forecasts fundamental changes to this sector and the way it operates driven by regulation.

“It is clear that bigger players want to work with us more,” he said. “In terms of local insurers, some are growing and becoming regional players. Others are becoming more aggressive in their reinsurance buying and we may have to let them go.”

In terms of the wider dynamic of pricing in the market, Peignet admits it is tough. He likens today’s market to the situation in 1999 when pricing hit the bottom of the cycle after many years of constant decreases. On this basis, he anticipates a flattening but he doesn’t see the inevitable upturn yet.

Despite these tough market conditions, however, does identify a number of areas that have the potential to generate profitable growth for the reinsurance industry.

Three of these – catastrophe risk, agriculture and Inherent Defects Insurance (IDI) – are closely linked to the way governments choose to manage risk and social issues. “The private sector could offer proven comprehensive solutions covering these areas. In many countries the risks associated with these sits on the balance sheets of governments. It requires a process of dialogue with governments and representative bodies about the options available to them,” he said.

The fourth area he identifies is cyber risk, although he admits the industry is still grappling with how to best cover this. Finally, he notes that the various rafts of regulatory changes around the world mean that reinsurance can increasingly be used as a form of capital to help insurers comply with these new rules.