7 September 2016 Insurance

Cedants in Europe take advantage of soft market conditions

The trend toward increased cessions suggests cedants in Europe are making the most of soft reinsurance market conditions, and have enhanced negotiating powers to benefit from this form of contingent capital, according to an AM Best report.

Twenty of Europe’s largest cedants are taking advantage of plentiful and inexpensive reinsurance capacity, securing more coverage and locking in favourable rates with multi-year reinsurance arrangements, the report suggested.

AM Best said that while retention ratios were down slightly year-on-year, the biggest change is the significant percentage increase in cessions in comparison to much lesser increases in premiums.

Carlos Wong-Fupuy, senior director and author of the report, said: "There are several factors driving increased cessions to the reinsurance market, including favourable pricing, particularly for catastrophe and larger risks that have historically been more expensive to reinsure.

“Insurers are benefiting from greater risk transfer in high risk layers, a segment of risk where there is abundant capacity, enabling them to reduce volatility and enhance balance sheet protection in the event of major catastrophe losses."

Furthermore, the report highlights the trend toward increased reinsurance cessions should also be understood in the context of more consolidated buying practices.

The report suggest that many of the largest cedants in the last few years have overhauled their reinsurance buying, in part driven by Solvency II.

These cedants, having adopted such an approach were able in most instances to reduce reinsurance spend and increase their retentions.

"Now the focus has shifted somewhat, with a greater impetus to increase return on capital," added Wong-Fupuy.

"Cedants are taking advantage of the enhanced bargaining power they have gained from a more centralised approach to managing risk exposures, including utilising reinsurance capital as a cheaper form of contingent capital."

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