ECMs move cedants to increase retentions


The growing use of economic capital models by cedants to help structure their reinsurance programmes has led to many increasing their retentions – a phenomenon that is almost paradoxical at a time when reinsurance is relatively cheap.

That is the view of Andreas Molck-Ude, chief executive of New Re. Although he characterises the market as generally stable albeit with more competition on property-catastrophe business, he said that he has witnessed a clear trend of clients increasing their retentions.

This is a very interesting paradox,” he said. “The market is competitive and capacity available at relatively cheap prices. In such a market historically buyers have bought more reinsurance. Yet there is a consistent trend for both big and smaller players to increase their retentions at the moment.

I believe this is because of more model-based buying. Strategic decisions are being taken at a senior level within companies whereby boards are concluding that they are well capitalised and they are comfortable with a certain level of risk. That has meant they are not getting tempted into buying cheap capacity.”

Although he acknowledges that economic capital models have been entering the market for several years, this is the first renewals in which he has seen their influence come to bear in such a striking manner.

The problem you then have in Europe is that the cake is certainly not growing,” he said. “If anything it means there is a trend towards it shrinking. Capacity is also increasing and this is putting pressure on rates. But we are also noting that cedants are not that keen to move, preferring to maintain stable panels of reinsurers.”

Partly in response to some of the changes he has noted in the market, New Re has restructured this year creating two distinct divisions: a dedicated property/casualty unit that writes mainly excess-of-loss and broker-led business; and a specialty division that creates more bespoke products for clients, especially multiline and aggregate covers.

The latter division is headed up by Artur Klinger, a New Re executive who has steadily grown this side of the business over the years and has now joined the New Re board.

We have built the company into becoming a leading provider of structured solutions and by putting this type of business into its own division it positions us well to develop this further and we are seeing more demand for these solutions from the market,” he said.

For some cedants, increased retentions also mean they want to secure protection in a different form and this can be through the use of multiline aggregate covers, for example. Such solutions can give significant capital relief under economic capital models. But each deal can be very complex and must be structured on a bespoke basis for each client.”

He adds that while the structured side of the business is increasingly in demand and becoming ever-more complex, the property-catastrophe side of the business is becoming ever-more competitive given the influx of new capital providers and increasingly is growing commoditised as well. But this trend also means it sits better as a dedicated unit within the business.

He said that although the impact of the recent influx of alternative capital into the industry has a relatively limited impact in Europe, it is having an indirect affect as it effects the mentality of the market in terms of where rates should be moving and in some instances traditional reinsurers are moving to compete in new areas to avoid the intense competition on property-catastrophe business in the US.

economic capital models, retentions, New Re

Bermuda Re