Reinsurance Markets & Regulation

Reinsurance Markets Cession Rates Retention Rates Reinsurers Emerging Markets Compulsory Placement of Insurance Demand & Supply in Developing Countries Reinsurance Regulation

25 March 2011

Reinsurance Markets
Reinsurance is the most international aspect of the insurance business

Distribution of Reinsurance Premiums Globally (2005)

Rest of the World Asia 5% 10%

North America 51% Europe 34%

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Risk Management and Insurance , Figure 23.6, p. 613

Swiss Re Premiums Earned (2008)

Swiss Re, 15 Jan 2009

Cession Rates
The contribution of reinsurance to the worlds insurance markets can be measured in terms of cession rates reinsurance premiums divided by direct insurance premiums

Cession Rates by Region (1998)

Life Industry (%) North America Latin America Western Europe Asia Rest of the World World Total 1.6 4.6 2.2 0.8 Nil 1.5

Nonlife Industry (%) 12.6 15.1 14.6 29.2 26.1 14.0

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Risk Management and Insurance , Table 23.3, p. 613

Retention Rates
Retention rates tend to be low in countries with low market concentration (i.e., a large number of small insurers dominating the market)
In contrast, high retention rates in the U.S and Canada are influenced by a preference toward XL reinsurance in contrast to the European propensity to rely on proportional reinsurance
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Retention Rates
In the personal and small commercial insurance lines, insurers demand less reinsurance

Modest coverage limits

Retention Rates
In life insurance, reliance on reinsurance to hedge the protection component is correspondingly small in comparison with the pure risk component in nonlife contracts
Conversely, life insurers with a greater proportion of business in mortality or morbidity-based lines are likely to demand more life reinsurance than those with a greater proportion of business in savingsoriented products

Dominance of Large Reinsurers

Large international, professional companies dominate reinsurance markets globally.
Eight of the 10 largest reinsurers are domiciled in Europe, with the remaining two in the U.S.

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Worldwide Reinsurance Premium USD 180bn (GPW 2006)

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Reinsurance Summit 2007, Swiss Re, 25 May 07

Reinsurance in Emerging Markets

Reinsurance is critical to building a domestic insurance industry
due mainly to low levels of capitalization, have low capacity and retentions and a correspondingly high demand for reinsurance

Domestic insurers in most developing countries,

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Focal markets within Emerging Markets

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Banking & Insurance CEO Conference , Swiss Re, 29 Sept 2010

Reinsurance in Emerging Markets

Dependency on reinsurance supplied by foreign reinsurers

Insuring industrial infrastructure necessitates

technical expertise Capitalization of the majority of insurers in developing economies

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Reinsurance in Emerging Markets

Most insurers in developing countries have proportional treaties as the basis of their reinsurance programs

This permits small, undercapitalized insurers to

accept more risks than they could otherwise Facultative reinsurance is used in the traditional way to supplement treaties for large loss exposures

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Reinsurance in Emerging Markets

Fronting is common in developing countries

With fronting, the insurer acts more as an

insurance service provider than a risk-bearing insurer Fronting insurers can come to rely on ceding commissions

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Compulsory Placement of Insurance

The mechanism by which reinsurance is placed in the international market often is specified by local laws
In some countries (largely in Africa), all reinsurance must be placed through national reinsurance companies, although the trend is to abandon such practices.

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Compulsory Placement of Insurance

These governments believe that they can increase domestic retention capacity by:

diversifying the pools of risks from individual

insurers to the national reinsurer permitting more favorable terms and prices when the national reinsurer retrocedes risks internationally

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Compulsory Placement of Insurance

In addition to compulsory cessions to domestic reinsurers, some governments impose obligations for domestic insurers to cede business to regional reinsurers

E.g. Asian Re 5% of business by SE Asia

member countries Philnare National Reinsurance Corporation

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Compulsory Placement of Insurance

Resultant concentration of insured exposures usually fails to diversify risks and exposes the industry to catastrophic loss potential
Domestic insurers too often fail to develop desired expertise, instead relying on ceding commissions for large portions of their income

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Demand and Supply of Reinsurance in Developing Countries

Improving retention capacity has been a common goal of developing economies, which necessitates the presence of financially stronger insurers

Through M&As and higher capitalization

requirements A smaller number of larger companies can result in a higher national retention

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Demand and Supply of Reinsurance in Developing Countries

Insurers in developing countries sometimes accept reinsurance to improve their spread of risks or to utilize available capacity

A smaller number of larger companies can

result in a higher national retention

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Demand and Supply of Reinsurance in Developing Countries

In general, business from many developing countries is considered desirable by international reinsurers
International reinsurers wish to diversify their portfolios

International reinsurers are an important resource for insurance companies of developing countries
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Reinsurance Regulation
Reinsurance is subject to less stringent regulation than is direct insurance
Current initiatives in reinsurance regulation are largely the domain of advanced economies and intergovernmental organizations
Insurance Supervisors (IAIS)

EU, UK, US, and the International Association of

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Some Regulatory Developments in Reinsurance

Regulation IAIS Standard on Supervision of Reinsurers Financial Groups Directive Geographic Application Global E.U. Purpose Effective Date Lays down supervisory standards for 2003 reinsurance globally Introduces a financial regime for 2005 international financial conglomerates to enable regulation on a wholegroup basis in lieu of piecemeal in each country of operation Introduces international accounting standards Introduces fast-track adoption of regulation for European reinsurers Creates a consistent, risk-based insurance solvency system, that is compatible with international developments in supervision and financial reporting Phase I in 2005 with full implementation expected in 2007 2008 2011

International Financial Reporting Standards Reinsurance Directive Solvency II

Global

E.U. E.U.

Source: Global Reinsurance Highlights (2004).

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Risk Management and Insurance , Table 23.6, p. 618

Q&A

25 March 2011