11 September 2016 Insurance

Reinsurance as capital management tool will mean long-term growth

An increasingly marked separation is emerging between the way insurers are buying reinsurance to support specific lines of business and manage their P&L, and the reinsurance they are purchasing for capital management reasons, Eric Paire, head of Global Partners & Strategic Advisory EMEA, Guy Carpenter, told Monte Carlo Today.

He said the use of reinsurance as a capital management tool has been growing for several years but has now increased exponentially since the introduction of Solvency II. This has meant growth for reinsurers but, as other regimes around the world also adopt risk-based regimes similar to Solvency II, demand should increase steadily over time.

“We are seeing a clear trend of companies taking a broader view of risk and looking to optimise their capital. They are combining life and non-life risks and taking what you might call a holistic view,” Paire said.

“That approach has definitely accelerated since Solvency II, meaning more business for reinsurers. But as the same type of regulatory regime is rolled out elsewhere, we would then expect demand to grow for the same reason in other countries as well.”

He said the approach insurers take with this form of reinsurance is also very different. “You have more people involved including the CFO, actuaries and accountants and the strategy is usually driven from a boardroom level,” Paire said. “They are taking a group view and considering their consolidated operations. Since Solvency II this process has been at full speed.”

One of the interesting things about this form of reinsurance is that, in stark contrast to the traditional form covering specific lines, it is much harder to make generalisations about its pricing. Because every deal is unique with specific aims and objectives, it is very hard to judge whether the rate charged is adequate, and how it fits into wider market trends.

“I would note that there is ample capacity in this segment meaning there is competition for business and pressure on rates. But every deal is bespoke and addresses the specific metrics of the client, so it is hard to generalise,” he said. “It is very different from normal reinsurance and can often be a win for both parties.”

A common theme in the industry in recent years has been cedants shrinking their panels, preferring to work with a smaller number of players able to work with them globally and across the business.

The move towards using reinsurance as a capital management tool would fit in with this as only around a dozen reinsurers globally have this kind of reach and capacity. However, Paire believes it is hard to generalise and each insurer has its own approach to this.

“We are seeing different schools of thought. Yes, some buyers have reduced their panels but we still see groups who like the benefits of highly diversified panels. Insurers have also changed their strategy depending on where they are in the cycle. It really does vary.”

In terms of where the use of so-called alternative capital fits into all this, Paire said that this form of capital remains focused on the property cat side and has not yet found a way to access the type of capital management requirements insurers need.

This could eventually change. Guy Carpenter has partnered with Vario Capital with the aim of structuring so-called whole portfolio ILS bonds. “That is the aim of the venture, but there is a long way to go before that becomes commonplace,” Paire said.

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