European cedants slow down purchase of reinsurance
Despite a soft market, large European cedants have slowed down the pace at which they are buying reinsurance, according to AM Best.
Higher cessions have been driven by a diverse range of factors, including regulatory demands under Solvency II and the need to support product diversification – including new lines of business, a report titled “European Cedants Continue to Increase Reinsurance Buying but Demand for Cover Slows,” noted.
In 2015, total non-life premiums ceded for the 20 largest European cedants rose by 17.9 percent to €44.2 billion while gross premiums written (GPW) increased during this period by just 6.2 percent to €333.3 billion. For the 15 companies in which data were available, demand for reinsurance continued in the first half of 2016 but was less pronounced. Premiums ceded increased by 3.0 percent to €21.9 billion, while GPW decreased by 1.3 percent to €154.1 billion.
Carlos Wong-Fupuy, senior director, said: “Some of the largest insurers have increased their reinsurance purchasing as they take advantage of the soft rate environment and optimise the efficiency of their own capital. The need to protect capital and make it more efficient has become even more important following the implementation of Solvency II in 2016. The European directive imposes significant capital charges for insurers retaining particular products involving significant claims uncertainty and volatility, especially in the long term. Purchasing reinsurance protection such as stop loss or adverse development cover on reserves can be an efficient mechanism for reducing capital requirements.”
The report notes product diversification also has been a contributor to increased reinsurance purchasing. Underwriting new lines of business can grow a company’s top line, but requires additional reinsurance support, which can provide technical assistance, as well as capital.
Yvette Essen, director of research and communications, said: “Given the pressure on rates for primary insurers and reinsurers, some of the largest European insurers have ventured into new lines of specialist business – particularly in the commercial and engineering sectors – or have been trying to strengthen their participation in these niche lines of business. Cyber also has attracted some interest from insurers, although this still remains an emerging risk.”
In 2015, overall retention ratios for the 20 largest European cedants fell to 86.7 percent from 88.1 percent. Based on interim data available for 15 of the 20 largest cedants, the retention ratio stood at 86.2 percent in the first half of 2015, but this slipped to 85.8 percent at first-half 2016. The report states that it appears that insurers are continuing to retain less risk, although the rate at which they are increasing reinsurance purchasing has slowed. While it is still too early to determine if this will become a clear trend, AM Best expects the declines in retention ratios to be less significant in 2016 and 2017 than those experienced in 2015.
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