Establishing a foothold in the European market can be lucrative for Bermudan reinsurers, but it is also a long and painstaking task, Bill Miller, KPMG Bermuda’s head of actuarial, tells Bermuda:Re+ILS.
Boots on the ground in Zurich are increasingly important for companies looking to crack the European reinsurance market—increasingly so as the city’s value as a reinsurance centre grows year on year and more companies look to either completely domesticate or establish a presence there.
ACE now has a big presence in the market, as does PartnerRe, while Tokio Millennium has also shifted the core of its operations there.
Bill Miller, head of actuarial at KPMG Bermuda, says a big reason for this shift is Zurich’s very sound and practical regulatory environment—a factor that has similarly made Bermuda such a strong reinsurance centre.
Another factor working in its favour, he says, is the increasing globalisation of the re/insurance industry. “The recent anticipated growth of emerging markets, in the Far East particularly, puts Zurich in perhaps a more geographically central spot than it was in the past when the industry was much more London and North America-focused,” he says.
In Europe, markets such as Italy represent an attractive prospect for reinsurers due to its solid insurance markets. He says establishing a portfolio in such areas is helpful from a diversification perspective.
“As a diversification play, it makes sense in some respects because when entering a new market you are not adding concentration of exposures, but on the other hand it is difficult sometimes for underwriters to get comfortable with the expected losses and potential outcomes in new markets like this,” he says.
Breaking into such markets is not always easy, however. Relationships can be long-term and difficult to disrupt while each market will have its own nuances and often regulatory differences that must be appreciated.
This means that establishing key relationships and attracting the right talent is vital. “It’s essential to attract and retain high quality marketing and underwriting talent,” Miller says. “You need people who understand these regional markets, who can underwrite profitably in them and develop the production of networks and connections.”
The big European players will always be difficult to crack. This means that any commitment to the EU market must be for the long term rather than just as an opportunistic play.
“There are so many unique markets within the space that knowing the local coverage issues, claims and legal environments, and unique classes of exposure is essential for understanding the market as a whole,” says Miller.
While elements of the markets in Europe tend to work on the basis of direct business, broker relationships can also be very important. Miller notes, however, that brokers are also under pressure at the moment.
“You need people who understand these regional markets, who can underwrite profitably in them and develop the production of networks and connections.”
“Primary carriers are really pressing brokers to push reinsurers on terms and pricing. Meanwhile, reinsurers are looking to diversify by getting into European flood or Japanese/Far East exposures, thinking there’s a better rate on line there.”
Miller also acknowledges that companies with both insurance and reinsurance operations have an advantage in these tough market conditions. He says some businesses have chosen to shrink their reinsurance units when pricing is not adequate—a better strategy than having bottom-line pressure on premium and revenues.
“Nobody wants to shrink but if you’re a reinsurer within a larger group like ACE, that’s exactly what they’ve done—shrunk their reinsurance business,” says Miller.
“This type of sacrifice potentially results in more favourable conditions, and allows growth on the primary insurance side.”
A flight to quality
If Bermuda players are to break the stranglehold of the large European reinsurers, they must attract and retain high quality underwriters and marketing experts and be able to differentiate coverage offerings and pricing in their own individual way.
Miller notes that the lack of available data in Europe compared to the US is one factor that makes market penetration difficult.
“This is an environment of imperfect information. But because the culture is different, companies really rely on underwriting judgement, whereas in the US you would perhaps do the same but wouldn’t hold the underwriter accountable to some actuarially driven benchmark,” says Miller.
“In this respect, there’s less accountability in Europe; having underwriters who really know the market is ultimately how you succeed there.”
Miller also describes the variables that insurers should take into account when choosing their reinsurance panels, and how Bermudans can make sure they stay relevant.
Financial strength is a key factor in long tail lines, he notes “as companies ask themselves whether the reinsurer is going to be around several years down the line when the claims come home to roost”. There is generally a flight to quality in this sense, Miller explains.
Maintaining a proper capitalisation is also key. The Bermuda Monetary Authority and the soundness of its policies and regulation ensure Bermuda companies are financially strong and are used to operating within a robust regulatory framework. This puts cedants’ minds at ease when pondering whether to work with Bermudan players.
Miller also describes how, when insurers select their panel, they also consider the ease of doing business and executing contracts, as well as the avoidance of disputes over coverages and recoveries.
“But the big reinsurers are fighting to retain the renewals they really understand. Even as the market gets soft, they tend to try to make aggressive decisions to hold on to those accounts,” says Miller.
For Bermudans, staying ahead of emerging trends, good portfolio management and proficient data models are their best tools when considering a move into Europe.
Miller concludes: “Having good information systems, monitoring processes and even good pricing benchmarks—to be able to change your course and tweak your direction in terms of which classes are most desirable—is vital.”
Bill Miller is head of actuarial at KPMG Bermuda. He can be contacted at: firstname.lastname@example.org
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