Soapbox - November

Intelligent Insurer asked a range of industry figures: Could cheaper reinsurance/ILS coverage long term mean cedants buy more coverage?

“More is not necessarily better; and as we help our clients manage risk more efficiently, we are not simply seeking a bigger solution or more coverage but pursuing more effective, innovative and flexible coverage tailored to their specific needs.

“With improved transparency and process standardisation, access to non-traditional products, such as private ILS and catastrophe bond transactions, is becoming more frequently achievable. Within this arena, it is not the price that will determine whether cedants buy more coverage, but the increased access to an overall better solution that will attract them to change their buying habits.”

Romulo Braga, senior vice president in the property & casualty reinsurance team, BMS

“We believe the rated business model is already at its capacity when it comes to peak risks. And as a result, there is un-met demand out there which is not coming to the market because it is too expensive. By lowering the cost of capital, this market even around just peak risks can grow considerably.

“Cedants can start to transfer risks they have traditionally retained and improve their capital allocation in the process. There are lots of cedants—and businesses and households—who will respond to price signals and bring their risks to market at the right price.”

Frank Majors, CEO, Nephila Capital (see cover story for full interview)

“I don’t think many disagree that high reinsurance premiums result in higher cedant retentions, with lower rates leading to the opposite result. The real question is whether cedants come to view ILS coverage as equivalent to traditional reinsurance coverage. You can have all the ILS cover in the world available but if a cedant is uncertain of the claim-paying ability of the seller they presumably won’t buy it. That said, the collateral mechanisms in place for most ILS products provide a measure of reassurance to buyers and those CAT bonds that have been triggered did in fact pay claims.”

Francis Fortunato, CEO, CATEX

“Cedants buy what they need to buy, cedants who are not buying enough due to economic difficulties, may take the opportunity to buy more if cheap prices allow, but this would only happen in countries with lax or no regulation. Otherwise, reinsurance might be cheap but it still has a cost, economies are not growing and therefore toplines have seen little growth. Furthermore ceding companies are retaining more and not until they have an equity problem will there be an incentive to buy more. Such a move might be motivated more by regulation, interest rate swing or rating agencies than cheap ILS.”

Ingrid Carlou, CEO, Patria Re

“Market dynamics such as the influx of third party capital, changing buying patterns and continued consolidation of reinsurance purchasing by larger global groups has had a material effect on the reinsurance landscape this year.

“Softening rates mean cheaper reinsurance is already available to clients on many lines of business and our advice is to take advantage of these price corrections where appropriate.

“It is, however, essential for cedants to take a balanced view on how, and to whom they cede their risk and to ensure that they properly evaluate the merits of traditional and alternative sources of reinsurance, regardless of price. The value of the broker as a trusted adviser increases as client choice widens.”

John Cavanagh, Global CEO of Willis Re

“The amount of cover insurance companies are buying is in general driven by their exposure and solvency and / or rating requirement. Hence cheaper reinsurance would typically not lead to buying more capacity. However insurance companies may consider buying more protection, especially in respect of frequency protection or as side cover. And as reinsurance serves as a substitute for capital, buying more reinsurance may lead to reduced cost of capital.”

Johannes Martin Hartmann, chairman of the Board of Directors, VIG RE

“There is one angle that does support this case, although the impact is only of a second order nature at best. The key driver for triggering additional reinsurance purchasing is still a major loss occurring beyond expectation.  Failing that, reinsurance spending will have to remain within the agreed budget for most insurers.

“However, currently $44billion out of $510billion reinsurance capacity is provided by financial markets. This is partially funded by pension funds which like the diversification benefit and tend to have a lower return requirement than traditional reinsurers.

“As the inflow of financial markets capital keeps growing, the increased supply of capacity will put downward pressure on prices (at least until the next large market loss occurs). Falling prices allow insurers to either reduce their overall reinsurance spend or buy more cover, which begs the follow-on question: “Will pressure for reduced reinsurance spending (increased results) win the battle against buying additional cover?” or bluntly put “Will the CFO win from the CRO?”

Marc Beckers, head of Aon Benfield Analytics EMEA

“If the ILS market develops more ‘proportional’ type products then this could well happen. An anomaly of the growth in ‘securitised reinsurance risk’ is that, unlike most other securitised markets (credit card receivables, mortgages, auto loans, etc) it has become established primarily as a ‘tail risk’ offering, not as simply a ‘freeing up of the regulatory or economic  balance sheet to do more deals’ logic.

“That in part is because traditional proportional reinsurance already does that. Nonetheless, a cheaper source of supply (if that is what happens) inevitably leads to greater demand.

“More important in overall demand though would be true innovation by the reinsurance markets in providing ‘risk mitigation’ offerings that primary insurers can build products based on, especially in commercial lines. Cyber risk is an obvious case in point but almost every area of commerce has currently unmitigated areas of risk for which the global re/insurance markets could offer solutions.”

Stuart Shipperlee, partner, Litmus Analysis

Soapbox, Reinsurance, ILS, Intelligent Insurer

Intelligent Insurer