re insurance markets and regulation

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Reinsurance Markets & Regulation

Reinsurance MarketsCession Rates

Retention Rates

Reinsurers

Emerging MarketsCompulsory Placement of Insurance

Demand & Supply in Developing Countries

Reinsurance Regulation


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Reinsurance Markets

Reinsurance is the most international aspectof the insurance business


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Distribution of Reinsurance PremiumsGlobally (2005)

North

America

51%

Europe

34%

Asia

10%

Rest of the

World

5%

Risk Management and Insurance , Figure 23.6, p. 613


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Swiss Re Premiums Earned (2008)

Swiss Re, 15 Jan 2009


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Cession Rates

The contribution of reinsurance to theworlds insurance markets can be measured

in terms of cession rates reinsurancepremiums divided by direct insurancepremiums


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Cession Rates by Region (1998)

Life Industry Nonlife Industry

(%) (%)

North America 1.6 12.6

Latin America 4.6 15.1

Western Europe 2.2 14.6

Asia 0.8 29.2Rest of the World Nil 26.1

World Total 1.5 14.0

Risk Management and Insurance , Table 23.3, p. 613


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Retention Rates

Retention rates tend to be low in countrieswith low market concentration (i.e., a largenumber of small insurers dominating the

market)

In contrast, high retention rates in the U.Sand Canada are influenced by a preference

toward XL reinsurance in contrast to theEuropean propensity to rely on proportionalreinsurance


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Retention Rates

In the personal and small commercialinsurance lines, insurers demand lessreinsurance

Modest coverage limits


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Retention Rates

In life insurance, reliance on reinsurance tohedge the protection component iscorrespondingly small in comparison with thepure risk component in nonlife contracts

Conversely, life insurers with a greater

proportion of business in mortality ormorbidity-based lines are likely to demandmore life reinsurance than those with agreater proportion of business in savings-oriented products


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Dominance of Large Reinsurers

Large international, professional companiesdominate reinsurance markets globally.

Eight of the 10 largest reinsurers aredomiciled in Europe, with the remaining twoin the U.S.


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Worldwide Reinsurance Premium USD180bn (GPW 2006)

Reinsurance Summit 2007, Swiss Re, 25 May 07


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Reinsurance in Emerging Markets

Reinsurance is critical to building a domesticinsurance industry

Domestic insurers in most developing countries,due mainly to low levels of capitalization, havelow capacity and retentions and acorrespondingly high demand for reinsurance


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Focal markets within Emerging Markets

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


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Dependency on reinsurance supplied byforeign reinsurers

Insuring industrial infrastructure necessitatestechnical expertise

Capitalization of the majority of insurers indeveloping economies


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Most insurers in developing countries haveproportional treaties as the basis of theirreinsurance programs

This permits small, undercapitalized insurers toaccept more risks than they could otherwise

Facultative reinsurance is used in the traditionalway to supplement treaties for large loss

exposures


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Fronting is common in developing countries

With fronting, the insurer acts more as aninsurance service provider than a risk-bearing

insurer

Fronting insurers can come to rely on cedingcommissions


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Compulsory Placement of Insurance

The mechanism by which reinsurance isplaced in the international market often isspecified by local laws

In some countries (largely in Africa), allreinsurance must be placed through nationalreinsurance companies, although the trendis to abandon such practices.


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These governments believe that they canincrease domestic retention capacity by:

diversifying the pools of risks from individualinsurers to the national reinsurer

permitting more favorable terms and priceswhen the national reinsurer retrocedes risksinternationally


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In addition to compulsory cessions todomestic reinsurers, some governmentsimpose obligations for domestic insurers tocede business to regional reinsurers

E.g. Asian Re 5% of business by SE Asiamember countries

Philnare National Reinsurance Corporation


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Resultant concentration of insured exposuresusually fails to diversify risks and exposesthe industry to catastrophic loss potential

Domestic insurers too often fail to developdesired expertise, instead relying on cedingcommissions for large portions of theirincome


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Demand and Supply of Reinsurance inDeveloping Countries

Improving retention capacity has been acommon goal of developing economies,which necessitates the presence of

financially stronger insurers

Through M&As and higher capitalizationrequirements

A smaller number of larger companies can

result in a higher national retention


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Insurers in developing countries sometimesaccept reinsurance to improve their spreadof risks or to utilize available capacity

A smaller number of larger companies canresult in a higher national retention


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In general, business from many developingcountries is considered desirable byinternational reinsurers

International reinsurers wish to diversifytheir portfolios

International reinsurers are an importantresource for insurance companies ofdeveloping countries


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Reinsurance Regulation

Reinsurance is subject to less stringentregulation than is direct insurance

Current initiatives in reinsurance regulationare largely the domain of advancedeconomies and intergovernmentalorganizations

EU, UK, US, and the International Association ofInsurance Supervisors (IAIS)


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Regulation Geographic

Application

Purpose Effective Date

IAIS Standard on Supervision

of Reinsurers

Global Lays down supervisory standards for

reinsurance globally

2003

Financial Groups Directive E.U. Introduces a financial regime for

international financial conglomerates

to enable regulation on a whole-group basis in lieu of piecemeal in

each country of operation

2005

International Financial

Reporting Standards

Global Introduces international accounting

standards

Phase I in 2005 with

full implementation

expected in 2007

Reinsurance Directive E.U. Introduces fast-track adoption ofregulation for European reinsurers 2008

Solvency II E.U. Creates a consistent, risk-based

insurance solvency system, that is

compatible with international

developments in supervision and

financial reporting

2011

Source: Global Reinsurance Highlights (2004).

Some Regulatory Developments inReinsurance

Risk Management and Insurance , Table 23.6, p. 618


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