A new survey from Towers Watson confirms that more than half (55 percent) of property/casualty insurance chief financial officers believe the property reinsurance market is softer than the primary market, while about one-third (34 percent) deem that the same is true for casualty business.
“CFOs attribute this softness primarily to the significant growth of insurance-linked securities [ILS] and other alternative forms of reinsurance capital,” Towers Watson said.
The survey examined trends in the P/C reinsurance market, as well as drivers and consequences of current market conditions. While nearly all respondents (97 percent) utilize traditional reinsurance, the survey found that most insurers are not currently using alternative forms of capital to protect their business. Fifty-nine percent are either purchasing reinsurance through a collateralized reinsurer or are likely to consider such a purchase. Twenty-seven percent are currently using, or look favorably on the use of, both insurance-linked securities, such as catastrophe bonds, and hedge fund-owned reinsurers.
“The opportunities in the risk transfer market are just starting to be realized,” said Stuart Hayes, senior consultant at Towers Watson. “Many fresh sources of capital are seeking investments that are uncorrelated to their existing investment holdings. With risk transfer arrangements continuing to evolve, we anticipate P/C insurers hastening their participation in various structures across the risk transfer spectrum, thus complementing their traditional reinsurance programs.”
The survey also assessed the impact alternative capital is having on the reinsurance market, as well as the advantages and disadvantages in using alternative reinsurance vehicles. Ninety percent of respondents indicated that they have seen or expect to see decreasing prices due to alternative forms of reinsurance. Eighty-eight percent said the lower cost of capital afforded by alternative reinsurance options is their top benefit. When focusing on the limitations of alternative vehicles, 69 percent cited complexity of the contract or deal structure, and 62 percent named ambiguity related to contract triggers.
Towers Watson indicated that despite the threat of overcapacity in a softening market, less than a quarter believe there is a need for consolidation among reinsurance companies (21 percent) or that consolidation will take place in the next two years (24 percent). However,52 percent feel that prolonged soft market conditions could drive reinsurance market consolidation in the future, while competing alternative capital sources were cited by 48 percent as possibly having the same effect.
“Reinsurers need to be aware of the near-term realities of a relatively soft reinsurance market and the longer-term potential of the alternative risk transfer market,” said Matthew Ball, director at Towers Watson. “Given the increase in reinsurance and alternative capital supply, reinsurers are faced with a property catastrophe market that is likely to soften unless there are major catastrophic events with very large losses. Reinsurers may face a classic economic example of reduced demand and increased supply that drives prices lower.”
The survey also found that more than three-quarters of respondents revealed that their enterprise risk management (ERM) processes haven’t changed reinsurance purchasing across various structures, with the exception of catastrophe reinsurance, where 31 percent said ERM has prompted them to buy significantly or somewhat more coverage.
According to Hayes, this purchasing trend could change: “ERM programs are becoming more sophisticated, helping insurers gain an even better understanding of previously hidden risks. The resulting analyses should change reinsurance purchasing decisions.”
Towers Watson noted that forthcoming regulatory and accounting changes won’t likely change insurers’ current ceded reinsurance structures. Only 10 percent indicated they’re likely to make changes that accommodate the new requirements, such as the Own Risk and Solvency Assessment regulations, International Financial Reporting Standards, and proposals issued by the International Accounting Standards Board and the U.S. Financial Accounting Standards Board.
But more insurers anticipate increased industry use of reinsurance as a result of pending regulatory and accounting changes. Nearly half (48 percent) expect the use of catastrophe reinsurance, aggregate loss covers (38 percent) and quota share structures (31 percent) to increase, while less than 15 percent foresee decreased use of aggregate loss covers and aggregate risk transfer structures.
Hayes added, “Once these pending changes take effect and their impact on capital requirements are better understood, more significant changes in reinsurance purchasing decisions might occur.”
Ball explained that the new market realities “are requiring the reinsurance market to adapt and operate more efficiently. Reinsurers that realize the efficacies of alternative capital, while maintaining the relationships and platforms already built around traditional reinsurance solutions, will distinguish themselves by providing primary P/C insurers the best risk transfer solutions.”
Towers Watson gave the following details for its sixth North American P/C CFO Survey: It included 29 CFO participants, distributed relatively evenly among commercial lines (31 percent), personal and commercial insurance (24 percent), and P/C insurance and reinsurance (21 percent), as well as between stock (48 percent) and mutual (42 percent) companies. Thirty-eight percent have core operations in the U.S.; 17 percent operate locally; and 14 percent are multinational/global. The largest number had total direct written 2012 P/C insurance premiums between $100 million and $500 million (39 percent), and 11 percent had 2012 premiums of more than $5 billion.
Source: Towers Watson
Was this article valuable?
Here are more articles you may enjoy.