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Chapter 9 Reinsurance market 9/5

A2O Tight economic controls and developed financial centre
With the advent of alternative risk techniques, the location of a strong market is of advantage to insurers
looking for different ways of handling their risks away from the traditional reinsurance placements. The
location of a developed financial centre also provides an additional source of clients and a possible
additional source of capital when looking to set up in or expand into a market. Reinsurers are interested
in a relatively stable economy.

Be aware
Strong inflation has an adverse effect on rate estimation and influences the estimation of other costs, such as office
space and staffing costs.

A2P Strong currency

Reinsurers do not want to be in an economy where the currency is under constant threat of devaluation.
This makes it very difficult to establish a reasonable perspective for the development of long-term
business relationships.
Be aware
Currencies fluctuate in value in relation to each other but, as a rule, reinsurers prefer to conduct their business in
so-called major currencies, such as GBP and USD, since they are supported by the world’s biggest economies and
are therefore less likely to be predisposed to sharp movements in relative value.

A2Q Arbitration facilities
Most reinsurance contracts favour arbitration to litigation and so insurers and reinsurers prefer
Most reinsurance
commercial centres that can provide an experienced pool of arbitrators and defined techniques of contracts favour
arbitration. Although arbitrations can be conducted anywhere, there is a desire to locate them in existing arbitration to litigation
centres, such as London or New York, and when inserted into wordings, arbitration clauses usually
suggest a major existing centre as the seat of arbitration.

A3 Extraneous environmental features Reference copy for CII Face to Face Training
Table 9.1 shows other market aspects which also affect the purchase of reinsurance.

Table 9.1: Extraneous environmental features
Price The price of reinsurance fell rapidly through the late 1990s; only following 9/11 and the
collapse of the equities markets has there been any substantial increase. After Hurricane
Katrina in 2005, some areas of the reinsurance market, such as natural catastrophe, energy
and retrocession, responded positively but overall there was not a substantial movement in
the price and in some lines it actually fell. There is also reluctance on the part of insurers
buying, say, pecuniary loss classes of reinsurance to want to pay more to prop up
unprofitable property portfolios. This shows that a number of different aspects affect price.
Availability and the relative strength of the equity markets are influencing factors. As was seen
when world financial markets were affected by the banking crisis in 2008, reduced values of
equities and lower returns on investments meant that management wanted a better return on
underwriting capital resulting in increased pricing.
Availability Following 9/11 there was a significant tightening of the capacity available within the market
due to the withdrawal or bankruptcy of several notable reinsurers, e.g. Gerling and Highlands
Insurance. Chapter
However, following Hurricane Katrina a number of new enterprises were set up, notably in
Bermuda, to take advantage of the post-9/11 potential rate increases. As a result, there was 9
not such a profound impact on the market.
Strength of Reinsurance companies become larger through mergers and acquisitions. With the decline in
competition the equities market, this trend has become less popular but in 2005 Swiss Re acquired GE
Insurance Solutions, the fifth largest reinsurer worldwide, from General Electric Company in a
US$6.8 billion transaction, making Swiss Re the world’s largest reinsurer. However, by 2010
Munich Re had regained the top spot.

Developments in With the advent of electronic placement and claims collection, recovery times have
loss exposures decreased, putting a strain on the cash flow of some reinsurers.
This is a double-edged sword, as reinsurers can then apply similar pressure on their
retrocessionaires.