Sophisticated cedants demand so much more from reinsurers
Reinsurers should not underestimate the rapidly increasing sophistication of cedants in today’s market and the increasingly complex risk transfer and capital management solutions they are willing to explore, Denis Kessler, the chairman & chief executive officer of SCOR, told Baden-Baden Today.
He said the idea that reinsurance is largely used only as a risk-transfer tool is rapidly diminishing. It is now also being used as a capital management tool and also a financing tool, in order to help companies generate cash to invest in further growth opportunities.
One of the consequences of this dynamic is that some cedants are retaining more risk, he said. But focusing on this point alone oversimplifies the rapidly changing way in which cedants want to work with their reinsurance partners.
“Reinsurance has always been used as a risk transfer mechanism and as a way of minimising volatility. However, many people are still unfamiliar with its uses as a capital management tool,” Kessler said. “More recently, a third use has emerged: as a financing tool or liquidity provider – this is a different function again.”
With regard to this third use, he said that the best example is where a reinsurer assumes the value-in-force life business of an insurer, allowing a client to monetise a long-term asset now and potentially use the proceeds to finance further growth in the future.
“There is no single model any more – you have many types of demand and cedants are becoming incredibly sophisticated,” Kessler said. “Reinsurers can now help cedants with several parts of their balance sheets in different ways.
“This means that our dialogue now also takes place in different areas. We are speaking more and more to the chief risk and chief financial officers of large companies. These are increasingly complex discussions, based on cooperation and the fact that their understanding of risk and capital is now equal to that of reinsurers. They are very knowledgeable and sophisticated compared with the days when reinsurance was purely about risk-transfer and we dealt with a single reinsurance buyer.”
Kessler said that this changing dynamic suits large, global players such as SCOR, which are able to offer complex solutions spanning multiple lines and multiple geographies. And while this growing sophistication started among the large, global insurers, it is rapidly filtering down and being picked up by smaller cedants.
“Good ideas tend to circulate fast and no patents exist in the re/insurance world,” Kessler said. “This type of more sophisticated thinking is spreading fast – it is percolating down to smaller insurers and moving around the world.
“The key concept in these organisations today is risk management, rather than just buying reinsurance. They are aware that there are a number of tools available to them and they will assess and use those that best fit their model. We are also operating in a world of shared information and expertise now. Things are very transparent – the days of protecting information are over.”
Within this changing landscape, Kessler reiterates his view that many cedants are also choosing to work with larger players. This is driven by the costs associated with monitoring a large panel, the cost of managing claims, the desire for global coverage and a desire to work with reinsurance partners across multiple lines of business.
“This is good news for large, global players, but bad news for Tier 2 and Tier 3 players,” he said. “These companies are increasingly finding themselves remote from the client and under the greatest threat from alternative forms of capital. This will drive consolidation.”