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9/2 M97/February 2018 Reinsurance

Introduction

A market is any place that brings together a buyer and a seller to agree a price to exchange goods or
services. A market can be very formal such as a shop, a financial market such as the stock exchange or it
can be a car boot sale, selling goods from a street corner or an advert in a local newspaper. The various
products on offer can be reviewed and a decision to buy or sell made.

To align this concept more closely to our area of study we can consider what Professor Carter, a specialist in
insurance and a professor of economics, had to say about markets:
A perfect market is one in which a homogeneous commodity is traded among many buyers and sellers
who have easy access to one another and freely exchange information on prices, terms and availability of
the commodity.

Key terms
This chapter features explanations of the following terms and concepts:
Broker market Captive insurance Domicile Financial strength ratings
companies
Hard reinsurance market International Underwriting Lloyd’s London Market
Association (IUA)
Market capacity Market cycles National Association of Rating agencies
Insurance Commissioners
(NAIC)
Realistic disaster Risk financing Securities and Exchange Soft reinsurance market
scenarios (RDS) Commission (SEC)
Solvency II Syndicates Terrorism Underwriting cycle

A Nature of the reinsurance market Reference copy for CII Face to Face Training

In the reinsurance market, the commodity is reinsurance, which is bought and sold both within the
confines of local regional insurance markets as well as between markets on an international basis. The
size, capacity and nature of reinsurance markets range greatly from the small monopoly markets of
certain developing countries to the large international markets based in London, New York, Bermuda,
Japan, Switzerland and other locations.
In fact, owing to technological advances in communications, many of these trading centres, which may
have been considered as separate entities only a few years ago, can now operate largely as a single,
highly competitive integrated market for the buying and selling of reinsurance.

Question 9.1

In what fundamental way do insurance and reinsurance markets differ from most other types of market?

There can no longer be a clear division between domestic and international reinsurance markets. Due to
No clear division
between domestic the size and nature of many of the risks accepted by insurers today, there is a worldwide need to spread
and international
9 reinsurance markets risk outside the confines of a national insurance market. Companies which previously wrote
Chapter international reinsurance business.
predominantly domestic insurance and reinsurance accounts are often able to participate in
In some markets, only locally established companies operate and their business is almost exclusively
domestic. In these instances, inwards foreign reinsurance may be restricted to reciprocal exchanges. On
the other hand, in the large, well-established markets, such as London, the reinsurance of overseas
insurers forms a substantial part of the business transacted by both domestic and foreign reinsurers.

Reinforce
Before you move on, remind yourself of the various buyers and sellers of reinsurance (studied in chapter 1)
operating in the markets.