The lower margins made on reinsurance catastrophe business placed in Europe combined with less established risk models available to assess these risks means that buyers in Europe are less likely to be using alternative capital sources to place these risks, says Manfred Seitz, managing director of the international reinsurance division of Berkshire Hathaway.
He says that while alternative capital is certainly present in the European market, mainly in the form of catastrophe bonds, it does not represent a significant factor – yet. There is a big difference to the US market where catastrophe cover is more of a commodity class and placed both with traditional markets as well as alternative capital markets, Seitz says.
He adds that in Europe, catastrophe reinsurance is a smaller class of business generally and often placed in combination with other forms of reinsurance protection based on long established relationships between reinsurers and cedants.
“Reinsurance is not only about catastrophe protections and this is the space where capital market players are mostly and almost exclusively active,” Seitz said. “In the European market there are certainly large global players in insurance and reinsurance that complement their catastrophe risk management structures with ILS concepts. However, in the broad market alternative capital instruments are very much the exception.
“Catastrophe cover is placed in conjunction with all other non-cat classes of business and long term relationships with reinsurance markets play an important role.
“I would generally regard the capital market risk appetite in Europe on a lower level, due to less developed and less solid cat modelling and smaller monetary margins compared to US cat placements.”
Against this backdrop, he says the Baden-Baden meeting remains as important as ever to buyers and reinsurers alike.
“The concentrated meetings and in many cases already concrete negotiations in Baden-Baden will maintain their importance. The conference provides a valuable forum for in-person focus on the renewal issues to be resolved and agreed in the weeks ahead. The notorious shortage of hotel rooms and long waiting lists during the reinsurance week in Baden-Baden certainly attest to this,” he said.
He believes recent loss events in Europe such as the floods and hailstorms will mean the majority of programmes will be stable in terms of structure with regulatory changes potentially prompting clients to buy more coverage.
“This means, retentions should remain relatively stable, while there could be an interest by some companies to purchase more capacity resulting from actually experienced shortage or expected requirement for larger limits within Solvency II,” he said.
He says pending regulatory changes such as Solvency II remain on the agenda of reinsurers and insurers. Some are frustrated by its continuous delays while the broad thrust of regulatory reform is pushing some towards considering further diversification.
“As is very evident from comments in the broad market, the continued delay of Solvency II is a burden for clients in terms of significant expense already incurred and ongoing as well as uncertainty over what the final regime will encompass,” he said. “Obviously, for outsiders and industry members alike it is difficult to comprehend why it takes a solid 16 years to create and implement new capital rules for the insurance industry.
“Diversification is certainly a benefit under the new Solvency II regime. In this context, a prudent and efficient risk management concept would certainly address this. The influence of rating agencies and regulators may be an accelerator in this regard but I would think for many market participants this is and was a standard issue in the risk management concept.”
Europe, Berkshire Hathaway, alternative capital