Europe’s largest cedants alter reinsurance purchasing practices

Reinsurance rates in Europe remain under pressure given the recent influx of new capital, resulting in stronger bargaining power for large cedants.

This is according to a new AM Best special report, which found that this trend resulted in increased centralised reinsurance purchasing at a group level.

The report also noted that despite capacity being available from traditional reinsurance players, alternative capital continues to enter the market in the form of insurance-linked securities (ILS), hedge fund-backed reinsurers and sidecars.

The report noted softer reinsurance rates and increased retentions as the key contributors to a sharp 8.2 percent fall in the overall amount of non-life reinsurance premiums generated by Europe’s 20 largest group cedants in 2013 to €39.2 billion from €42.7 billion in 2012.

Meanwhile, examination of 2013 financial returns – the latest data available – shows that gross premiums written (GPW) increased moderately by 0.3 percent from €315 billion in 2012 to €316 billion in 2013 for the same companies.

Carlos Wong-Fupuy, senior director of analytics at AM Best, said, “To an extent, primary companies with strong balance sheets perceive less need to transfer profitable business to reinsurers or providers of alternative capital solutions. The low interest rate environment and subsequent lack of investment opportunities in all economic sectors is forcing insurers to allocate more of their excess capital to their core insurance activities.”

Ghislain Le Cam, associate director, analytics, added: “Alternatively, some insurers or reinsurers are returning excess capital to investors in the form of share buybacks or special dividends. Solvency II has also been a key driver for the largest groups to integrate their capital and risk management, which includes the increased focus on centralised reinsurance strategies.”

Yvette Essen, director of industry research – Europe and emerging markets and report author, added: “Insurers have taken significant steps to focus on both technical profitability and more efficient capital management at the business unit level through the centralisation of reinsurance purchasing.

“This has helped insurers to reduce costs and receive better terms and conditions as they purchase reinsurance with increased bargaining power. Centralising reinsurance purchasing is increasingly important in terms of risk management as they focus on stronger enterprise risk management (ERM), which encourages the development and monitoring of risk appetite at a group level before it is cascaded to business units.”