Capacity in the reinsurance market is growing as primary insurers enter the annual treaty renewals season, writes Kevin Godier.

Beginning on November 1, and culminating with the signature of the bulk of treaties on January 1, the ongoing reinsurance renewals season will once again see primary insurers match their requirements up against reinsurance market appetites.

It comes against a background where the results of the whole turnover credit insurance players are very strong, according to David Edwards, managing director, credit, bond and political risk team at Guy Carpenter, one of the principal treaty brokers.

But, he notes that: “Reinsurers are still watchful on how the surety market will develop, and remain cautious about the political risk insurance (PRI) environment, despite the robust way that it came through the crisis.”

Whether reinsurance buyers keep much of their risk for the net account, and buy mainly excess of loss cover, or share a quota of every risk that they write, they will be dealing with reinsurers that were dealt a double blow in the wake of the 2008 financial crisis. First of all by the huge influx of trade credit insurance claims stemming from the crash in western economies, and subsequently by a wave of PRI payouts linked to emerging market troubles.

Throughout these troubles, Thomas Lallinger, head of financial risk department at Munich Re believes that “the insurance industry has managed the crisis very well and demonstrated its ability to manage risk and return in a highly professional way”.

Munich Re has been a reinsurance market stalwart over the past two decades, and earned a premium of €744mn annually in 2010 from the credit/surety/PRI classes.

“Now the industry has to show that the lessons learned from the crisis and the pre-crisis years have been understood and are being applied,” Lallinger adds.

Another leading reinsurer, Hannover Re, increased its reinsurance volumes across redit, surety and political risk by more
than 60% from 2008 to 2010, mostly in credit insurance.

“Trade credits loss ratios went up sharply in 2008/09, but are down sharply now as a consequence of significant measures taken by the primary insurers,” reflects Jan Mueller, managing director, credit, surety and political risk at Hannover Re.

Looking to the future, he warns that bottom line thinking should continue to prevail. “Competition for business is increasing, and the economic environment is difficult, so underwriting discipline needs to be maintained,” he cautions. “We hope that premium rates stabilise, and even increase in some countries.”

A similar warning is provided by Peter Schmidt, chief executive at Catlin Re Switzerland, which since its formation in 2010 has built a trade credit, surety and PRI book of business which includes more than 60 clients based in Europe, Latin America, Asia, the US and Canada.

“It is still too soon to determine the full impact of the recent crisis – and the ongoing uncertainty regarding public debt and the future fortunes of the banking sector does not warrant a return to a soft market,” he observes. Schmidt says that Catlin Re therefore expects “stable programmes” at the oncoming renewals.

Results leverage

Market observers emphasise that the major credit insurance groups will be able to brandish vastly improved results during the renewals negotiations.

Edwards points out that “Euler Hermes and Coface have publicly declared an almost record level of profitability, and most of the trade credits sector is in the same position”.

Moreover the quality of trade credits portfolios “is much better than three years ago, so that there is now a much more robust starting point if things get worse again”, he says.

Primary insurers obtained improvements in terms at both the January 2010 and January 2011 renewals, highlights Phil Bonner, head of the credit and financial risks team at AON Benfield, another principal treaty broker.

“The speed at which profitability has returned has surprised many in the market, and loss ratios are, in many cases, 15-20 points better than people had predicted at the beginning of 2009. The market has avoided large losses, and reinsurers are getting decent margins, so customers may test the market again,” he predicts.

“Although reinsurance relationships are important, people want commercial terms. And there is capacity out there, both from the large traditional providers, such as Swiss Re and Munich Re, and from more recent entrants into the market.”

The level of performance by Euler Hermes, according to Benoît des Cressonnières, chief executive at its subsidiary Euler Hermes Re, has been so good that it continues to be entitled to better terms and conditions from the renewal.

“Our portfolio was completely cleaned during the crisis. Premium rates went up 25% over the period 2009-10, with a small reduction in 2011. We reduced our cover, and are much better tooled to face any worsening situation. We think that reinsurers should recognise the work we have done, and the positive technical margin that they enjoyed from us during the crisis. We did get improved terms and conditions in 2011. But I didn’t think it was big enough,” he underscores.

QBE Australia makes excess of loss placements into the reinsurance market every January 1. “We see further softening in the market, mainly due to the unexpectedly rapid upswing in results,” says Richard Wulff, group general manager credit and surety. Wulff adds that he “does not expect major changes for 2012” in the volume of business ceded to reinsurers.

Atradius expects “to cede around the same level for 2012 as we did in 2011” in its January 1 treaty, says Diane Foxall, executive director of reinsurance. “Trade credit insurance remains attractive to reinsurers as it offers some diversification from the more usual property casualty business, which has experienced some major losses this year. For those credit insurers who can demonstrate improved performance and portfolios I would therefore expect there to be more capacity available at this year’s renewal which may also have an impact on rates,” she suggests.

“The high level of uncertainty in the world means that it will be key to keep interests between insurers and reinsurers well aligned,” says Thomas Rothenberger, head of credit and surety at Zurich-based Ariel Re, which began reinsurance operations in autumn 2009 and writes approximately US$120mn of premium from clients across all continents, split almost equally between credit and surety. “On the other hand we also believe in rewarding insurers who outperform the market and their targets as we also benefit from that.”

Surety and PRI

Surety reinsurers also have cause to be satisfied with their primary clients. “If you go back to the beginning of 2009, and look at the expectations of results, the performance of the surety markets since that time is better than predicted,” says Nick Ayres, senior broker, credit and financial risks at AON Benfield.

“Surety has proven to be resilient,” agrees Rothenberger at Ariel Re, specifying that loss activity has been limited to Spain, the UK, Ireland and Austria, with “some increase of frequency in the US, albeit from a very low level”.

Mueller comments: “Aside from Spain, Ireland and the UK, we have not seen any increase in claims as a result of the crisis. But this does not mean that the surety business is immune to the crisis.”

“I expect some more frequency in the surety losses – not dramatically, but in certain countries,” says Mueller. “The order backlog for the construction sector is getting lower in some countries, so things could get more difficult over the next one to two years, especially as public investment volumes could fall.”

Rothenberger cautions that “the surety market should continue to stick to strict product discipline”. In recent years, he explains: “We have seen that in certain markets bonded obligations are sometimes expanded as a result of how the transaction is financed.” At a wider level, he adds that Ariel Re “expects further demand on increasing treaty limits which may prove to be a challenge for certain reinsurers in managing their aggregates”.

In the PRI market, where annual premia received by underwriters amount to around US$1bn, underwriters were hit by huge bank reschedulings in Kazakhstan and Ukraine in 2008, and are expected to pay out a further US$300mn or so on Libya-related claims from 2011.

“The year has had its issues. Libya is the headline event, although it’s easy to forget the impact which the Ivory Coast had on the market at the start of the year,” says Alastair Mole, a member of the specialty reinsurance team at Miller Insurance Services. “Neither of these events is likely to produce catastrophic losses, as the potential for recoveries is high, although they may act to shore up reinsurance terms on January 1.”

Mole forecasts that “although certain reinsurance markets have greater appetite for credit and political risk classes this year, they can afford to be selective and so will focus on supporting the top tier of underwriting talent in this class”.

The PRI primary market is “generally doing fine”, says Mueller. “Loss ratios are at a good level in the investment-related side, where there have been no important claims. The CF (contract frustration) side took some 2008-09 losses, but business has started to recover and the loss ratios are normalising.”

PRI underwriters flag up a healthy relationship with their reinsurers. “You have to protect against catastrophe. I think that one of the good things to have come from the crisis is that there has been a much better communication between the underwriters and the reinsurers, and it would be a shame if our market took the reinsurance market for granted and thus lost that healthier communication,” cautions Peter Jenkins, underwriter political risk and credit, Beazley Syndicates.

“We need to build partnerships with reinsurers, and the crisis showed us which ones we should partner with,” says Olivier David, head of special products, credit and political risks, Atradius. “We don’t know when the bad times will come again, so we need to stick together all the way.”

More capacity

Jenkins points out that PRI reinsurance is “growing in terms of capacity”, while Mueller acknowledges that there is “lots of traffic on the highway” in the wider credit and surety reinsurance classes, and to a lesser extent in PRI. He says: “There is clearly overcapacity on the reinsurance side as up to 10 or so new names have come into our market, companies which still have to prove their commitment to the class over the cycle.”

Bonner agrees that “capacity is there”, but warns that “you just need a major country loss or large insolvency for the market to change”. At Munich Re, Lallinger suggests that there could be “a reduced risk appetite for business exposed to the significant systemic and individual risks stemming from the banking sector or individual banks”.

He continues: “We are already seeing, on average, higher frequency loss ratios due to the economic situation in certain countries and/or industry segments. This has the potential to depress future primary and reinsurance results.”

New structures

While reinsurers fret about a new economic downturn, lack of creativity from reinsurers is bemoaned. “It would be good to see potential new products, or tailor-made products offered for the best-performing players,” comments Euler Hermes’ des Cressonnières.

“To support policyholders in a growing business, we are looking at financial markets to see what other potential solutions might be available, and that could be benchmarked against reinsurance.

We offer our customers solutions best adapted to their specific needs; so should reinsurers do with their cedants.”

With Solvency 2 beginning to loom larger, there is likely to be some changes in how insurers are reviewing their capital position.

“There will be a greater drive to deliver more innovative structures that mitigate capital levels for monoline credit and bond insurers. It will be interesting to see which reinsurers take up this challenge,” notes Guy Carpenters’ Edwards. GTR