Gap between tier 1 and tier 2 reinsurers becoming starker: S&P

13-11-2015

The gap between first and second tier reinsurers is becoming starker as cedants redefine the way they look at counterparties.

This is the finding of panellists at the 2015 Bermuda Reinsurance Conference, sponsored by Standard & Poor’s (S&P) and PwC Bermuda.

According to the panellists, cedants do not view reinsurers equally and currently have far fewer significant relationships with counterparties that they did before the most recent financial crisis.

“And although pricing might be a draw, other considerations, including credit quality, product offerings, and the size of a reinsurer's balance sheet, may push cedants toward particular relationships. On the other hand, some favour a wider range of reinsurers to spread out counterparty credit risk,” said S&P.

According to James Slaughter, senior vice president of global reinsurance strategy at Liberty Mutual, the majority of the company's relationships (about ten of about 20, down from a significantly higher number a decade ago) are very significant and cross every business that the company underwrites.  

Bill O'Farrell, chief reinsurance officer at ACE, explained that his company takes a different approach where, instead of simply limiting the number of reinsurance counterparties, ACE focuses on screening the counterparties. The thresholds it sets tend to point ACE to larger and fewer counterparties.

"We don't limit in the sense that we have to have only 20," said O'Farrell. "I'm in the camp of 'distribute widely'--that leads to better price transparency."

Additionally, panellists disagreed over whether smaller reinsurers will continue to play a significant role in the market.

Slaughter believes that "in a more complex space, smaller specialists will have a role to play and will carve out niches."

However, Samir Shah, head of insurance capital markets at American International Group, wasn’t as certain. He said: "I really don't know what the role of a small reinsurer is. I guess it depends on how small."

Either way, the competitive pressures bearing down on smaller reinsurers have fostered consolidation in the industry, explained S&P. It added that whether this will benefit cedants is unclear.

Standard & Poor's, S&P, PwC Bermuda, 2015 Bermuda Reinsurance Conference, Bermuda, James Slaughter, Liberty Mutual, Bill O'Farrell, ACE, Samir Shah, AIG

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