How reinsurers benefit from the market turn

With primary insurance companies seeking higher rates since the beginning of the year, proportional reinsurance programs are benefiting directly from these rate improvements, Joseph El-Sayegh, president and CEO of SCOR Canada Reinsurance Company, told Canadian Underwriter Wednesday.

In proportional reinsurance, a reinsurer agrees to assume a percentage of a primary insurer’s original policies, up to a limit. The reinsurer does not underwrite the business itself, meaning it essentially relies on the underwriting – and hence, the pricing – of the primary insurer. And so when ceding companies (the primary insurers) increase their premiums, that flows through the reinsurer’s proportional book of business.

“Should the hardening of the primary market create more attractive proportional supply?” El-Sayegh asked. “It will be a question how much the reinsurance market is prepared to increase its capital exposure to lower margins, which is mostly the case on proportional business.”

On the excess of loss side, it’s still too early to speculate on the extent to which primary market hardening will benefit reinsurance programs, since the majority of the Canadian market is renewed on Jan. 1, El-Sayegh said.

In excess of loss reinsurance, also known as “non-proportional reinsurance,” a reinsurer agrees to pay for a primary insurer’s losses that exceed a specified limit.

Excess of loss treaties will see their basis of pricing (gross net earned premium income) growing during a hard market, El-Sayegh noted. However, underwriting discipline needs to be maintained for the improved insurance rates to benefit the reinsurance market.

Many global insurance companies and markets have been revising their risk appetite and tolerances to promote profitability, “taking drastic positions on some lines of business or portfolios” and showing an increasing willingness to protect results, El-Sayegh observed.

“We observe increasing pricing trends on both the insurance and retro sides, which are creating further positive conditions and a hardening market, especially in the commercial lines,” El-Sayegh said. The “retro” reference is to retrocessional reinsurance, in which one reinsurer takes on part of the risk from another reinsurer.

“Many companies are revising their market position and either pulling out of lines of businesses or cancelling under-performing portfolios, creating scarcity of available capacity,” he said. “Access-to-market becomes the main target for commercial lines brokers rather than price, hence driving prices upward.”

The latest significant reinsurance renewals took place in July, where reinsurance pricing increased globally, albeit modestly, and there is room for further improvement, El-Sayegh said. He added that there have been larger price increases in the U.S. compared to Europe so far.