As more primary insurers utilize a formal risk appetite statement their reinsurance buying habits have evolved, says Willis Re. And with reinsurance becoming a greater priority for many firms there could be an opportunity for insurance-linked securities (ILS) capacity to expand its global footprint.
Increased regulation across the insurance and reinsurance industry underlined by the implementation of Solvency II in Europe, combined with a desire for greater risk and transactional transparency from investors has caused a "fundamental shift in reinsurance purchasing," says Willis Re.
In its recently published 2016 Global Risk Appetite Report, reinsurance brokerage Willis Re highlights that reinsurance is moving higher up the priority list of global insurers with cedants adopting different approaches to purchasing, a trend that could result in greater use of ILS capacity in order to diversify and optimize reinsurance programs.
"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.
"Centralized buying is also widespread as insurers increasingly link reinsurance strategies to risk appetite in order to achieve corporate objectives and the competitive advantage," said Global Chief Executive Officer (NYSE:CEO) of Willis Re, John Cavanagh.
Artemis has discussed previously 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 also result in greater demand for reinsurance.
Potential for increased reinsurance demand, the growing trend of centralized reinsurance purchasing, and regulatory advances suggest that ILS has an opportunity to capitalize on the changing habits of cedants and further grow its share of the overall reinsurance market pie.
The collateralized reinsurance market is one of the fast 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. 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," said Willis Re International CEO, Tony Melia.
As insurers and reinsurers continue to adapt to new regulatory requirements, the softening re/insurance landscape and its 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 cedants, 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.
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