Large insurers re-enter reinsurance market

Large primary carriers are re-entering the reinsurance market after having largely abandoned the sector in the 1990s and early 2000s, according to Willis Re CEO James Kent.

In March, for example, French insurer AXA unveiled plans to acquire Bermuda-based property/casualty commercial lines re/insurer XL Group for $15.3 billion in cash.

Earlier in January, American International Group (AIG) entered into a definitive agreement to acquire Bermuda-based Validus Holdings.

Many major non-life primary companies with large personal line and small medium enterprises portfolios are facing the greatest disruption from new distribution models, Kent said in the Willis Re 1st View April 2018 report.

Similarly, large primary companies with life portfolios are facing profitability challenges and an inability to differentiate their results from general investment markets. Against this background, buying large transparent, well-managed reinsurance companies with synergies in some areas of their existing portfolio is proving attractive, Kent noted.

Primary companies exited the reinsurance market in the late 1990s and early 2000s due to poor exposure management that had led to earnings volatility and, in many cases, large underwriting losses that resulted in capital strains.

The assumption now is that access to diversified sources of risk, allied with greater confidence that historic technical issues are now better managed through advanced risk quantification techniques, is sufficiently enticing for large primary companies looking for growth. However, the biggest change may be on the social side with the management of large primary companies now being more confident that they have the skills to manage the different social dynamics of a reinsurance business versus a primary commercial/personal lines writer.

The “Big Balance Sheet” reinsurer model is being reinvigorated and the real test for management will be their portfolio management ability and the agile use of their large balance sheets.

Primary insurers re-enter the reinsurance market at a time when prices are subdued. At April 1 renewals, buyers renewed loss-free programmes at broadly flat year on year renewal pricing, similarly to the January renewals, according to the report. While this has been disappointing for reinsurers looking to achieve real rate increases, increased demand from a number of buyers is resulting in some new opportunities and, consequently, some welcome premium growth, the report added.

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