Europe’s 20 largest cedants are benefiting from lower reinsurance rates and stronger bargaining power, resulting from a trend that saw increasing centralized reinsurance purchasing at a group level. A new report from A.M. Beststates that reinsurance rates in Europe remain under pressure given the recent influx of new capital.
The Best’s special report titled, “Europe’s Largest Cedants Alter Reinsurance Purchasing Practices,” notes 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.
Carlos Wong-Fupuy, senior director, analytics, 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 centralized reinsurance strategies.”
The report notes softer reinsurance rates and increased retentions were 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 EUR 39.2 billion from EUR 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 EUR 315 billion in 2012 to EUR 316 billion in 2013 for the same companies.
Yvette Essen, director of industry research – Europe & 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 centralization of reinsurance purchasing. This has helped insurers to reduce costs and receive better terms and conditions as they purchase reinsurance with increased bargaining power. Centralizing 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.”
Source: A.M. Best Company Inc.