25 October 2017 Insurance

Volatility drives demand for quota shares

In the wake of what may be record levels of catastrophe losses in North America, demand for quota shares is on the rise, Jorg Bruniecki, head of global clients & broker management at PartnerRe, told Baden-Baden Today.

This trend has been developing since it first started to show momentum after the UK changed the Ogden personal injury discount rate, the rated used to calculate personal injury losses, more than expected, causing companies to revise their profit results mid-reporting season.

But this trend is gaining speed after hurricanes Harvey, Irma and Maria (HIM) hit North America, resulting in insured losses that could reach $100 billion, in the third quarter.

“The distaste for volatility increased massively even before HIM,” Bruniecki said.

He explained that if movement of 1 percentage point in a group’s combined ratio causes a 10 percent fall in its market capitalisation it can lead to dismissal of the CEO. That shows how nervous capital markets are around volatility, Bruniecki explained.

“There are more requests for casualty quota shares coming to the market as a result,” he noted.

Quota share is seen as a tool for capital relief as well as to manage volatility. Reinsurance can be used as an alternative to raising funds in the capital markets without having to stream down capital from the holding company to local units, he explained.

Companies must have a dividend distribution model and they have to deliver on that. They therefore depend on having constant streams of revenue coming from affiliated companies to be able to pay dividends and also to be able to look into potential M&A transactions.

“There is a lot reinsurance can do to support that,” Bruniecki said.

PartnerRe is working closely with cedants to develop a three-year target plan for their businesses—even the majority that also work with brokers.

He added that the company is reaping the rewards of a new-found focus: the Bermuda-based reinsurer has recently exited the insurance and primary business.

“Clients find it important that you are a pure-play reinsurer,” Bruniecki concluded.

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