Falling costs make reinsurance an efficient form of capital: JLT
The falling cost of reinsurance has now made it a more efficient form of contingent capital when compared to equity debt and a carrier’s own capital, according to a report from JLT Re.
‘Viewpoint Report – Reinsurance: The Price is Right’ highlighted that the cost of reinsurance has fallen to levels significantly lower than most other forms of capital, and underscored the value and efficiency of reinsurance capital in the current market place.
In the report JLT Re suggests that by deploying reinsurance strategically, cedents can increase franchise value, support growth initiatives and pursue more profitable business in order to navigate today’s challenging operating environment.
JLT Re also suggests the falling demand has coincided with record levels of dedicated reinsurance capital, and the result has been four years of falling reinsurance rates across most lines of business.
It adds that now is the time for insurance carriers to compare weighted average costs of capital to the cost of reinsurance capital.
David Flandro, global head of analytics, JLT Re, said: “Some buying behaviours could, at the moment, be described as counter-intuitive. Cedents’ recent purchases have not, on average, reflected a presumption of higher expected loss experience.”
Mike Reynolds, global chief executive officer, JLT Re, commented: “We are encouraging clients to carefully re-examine strategic reinsurance purchases, not only in regard to earnings protection but also for value creation.
“Carriers with the foresight to exploit today’s cost effective reinsurance can help secure future profitability by preparing for the next unforeseen event(s) which could precipitate or accompany a turn in the market.
“Indeed, the disaster scenarios included in the report show how increased reinsurance spend can minimise volatility and protect cedents’ balance sheets in the event of major natural catastrophe losses, large man-made disasters, sudden macroeconomic changes and adverse reserve development issues, or a combination of all four”.
Flandro continues: “The peaks and troughs of the underwriting cycle have long been core features of the reinsurance market. No two cycles are the same and market developments over the last five years have seemingly transformed the sector’s capital structure, potentially influencing the duration and volatility of future cycles. But the cycle is not dead.”
Reynolds concludes: “Reinsurance is now potentially the best-priced source of capital for most carriers. But market dynamics will not stand still forever and there are already emerging trends around reserving, capital inflows and the macroeconomic environment that could prove to be catalysts for future change.
“Reinsurance buyers can secure competitive advantages by anticipating cyclical change and JLT Re is committed to deliver its best-in-class advice and risk transfer products to support clients in managing market change”.
