Shift in Capital for Reinsurers?

As more primary insurers use a formal risk appetite statement, their reinsurance buying habits have evolved, according to reinsurance brokerage Willis Re. And with reinsurance becoming a greater priority for many firms, there could be an opportunity for insurance-linked securities (ILS) to expand their global footprint. Increased regulation across the insurance and reinsurance industry—underlined by the implementation of Solvency II in Europe and combined with a desire for greater risk and transactional transparency from investors—has caused a “fundamental shift in reinsurance purchasing,” Willis Re says. In its recently published 2016 Global Risk Appetite Report, Willis Re highlights that reinsurance is moving up the priority list of global insurers. Purchasers are adopting different approaches, a trend that could result in the greater use of ILS capacity to optimize reinsurance programs. The report says, “With rising regulatory and shareholder demands, increased pressure on insurer margins and a growing desire for a strong performance measurement framework, the dramatic shift towards risk quantification and management is clear." See Also: How to Understand Your Risk Appetite At Artemis, we have previously discussed the notable changes in insurers reinsurance purchasing habits, particularly in light of the growing trend of centralized buying strategies to increase efficiency and drive potential organic growth opportunities, something that’s been limited in the softening landscape. As some primary insurers look to retain more business, essentially keeping more risk on their books, the establishment of centralized reinsurance purchasing units has increased. Furthermore, a need for greater capital levels under Solvency II regulation has also seen some insurers retain more business, something that could result in greater demand for reinsurance. Potential for increased reinsurance demand, the growing trend of centralized reinsurance purchasing and regulatory advances suggest ILS has an opportunity to capitalize on the changing habits of buyers and further grow their share of the overall reinsurance market pie. The collateralized reinsurance market is one of the fastest-growing sub-sectors of the ILS space, and, as more primary players look to move their reinsurance purchasing in-house, it’s possible that collateralized reinsurance could feature more and more as insurers look to diversify their reinsurance placements with capital markets investor-backed capacity. “As an industry, we’ve observed the broad shift around reinsurance purchasing in recent years with the increasing adoption of formal risk appetite statements," said Tony Melia, Willis Re International CEO. "Those statements have proven essential to provide macro-level guidance to underwriting, global retention management and alignment of cession to wider strategies—linking ‘micro’ strategies to ‘macro’ targets." As insurers and reinsurers continue to adapt to new regulatory requirements, the softening re/insurance landscape and the resulting challenges, it’s expected that a variety of purchasing and distribution tools will be adopted and tested. ILS capacity has been growing at an impressive rate absent any increase in demand for reinsurance protection from buyers, so it certainly wouldn’t be too surprising to us at Artemis if the market evolutions highlighted by Willis Re led to greater use of alternative risk transfer solutions to increase efficiency and diversify portfolios.