“The truth is that the major reinsurers are making the decisions within


their own economic capital models. Increasingly, the big ones are becoming quite sophisticated in the way that they are looking at their risk and trying to manage it,” he says. “This comes back to the idea that reinsurers are a ‘toolbox’ for buyers, in that they can model the various different options within their economic capital models and are looking at what works best for them.


“What buyers want, depending on which structure they decide to adopt,


will be different things from different reinsurers; some will look for pure capacity, others will look for a more sophisticated approach and perhaps offer the different types of cover which buyers want.”


He adds that it is also a balancing act between seeking a diverse panel and using a smaller number of partners. “This is a conundrum, because on one level, the best way to manage your counterparty credit risk is to have more partners and more relationships with more people, and certainly on the commoditised lines, such as cat business, that works quite well.


“What is more difficult is when you get into more complex classes and


structures, where a more limited number of reinsurers have the range of technical skills and the ability to bring their underwriting skills together in a way that can deliver the value that the buyers are looking for.”


Waterman believes the implementation of Solvency II will have a


bearing on this decision-making process. “The other driver that I would see coming out of Solvency II relates to diversification, i.e. whether cedants will continue to use large, well-rated reinsurers and have their risk entirely placed with only a few companies, or whether they will look to diversify the panel of reinsurers who they place their business with,” he says.


“I expect that the capital benefit provided by diversification in Solvency II will lead to some cedants looking to place their business with a broader


range of reinsurers. I also believe that they will continue to focus on the credit quality of those reinsurers. I anticipate that we will see lower concentrations of reinsurance placed with specific counterparties and a broader use of different reinsurers.”


Martyn Street, a director in Fitch’s insurance team, agrees, adding that


the ability to pay claims will remain the number one factor. “I think the key thing for the insurers we speak to is the claims-paying ability


of their reinsurers and how quickly claims are settled, particularly sizeable claims, and I don’t think that will change under Solvency II,” he says.


“If you think about what insurers are using reinsurance for, it is to offset


their risk and to receive financial reimbursement when the losses actually come in.”


Waterman adds: “The companies which we speak to are very focused on


the financial strength of their reinsurers and the ability and willingness of those reinsurers to meet their obligations. Another important factor that cedants look at when buying reinsurance is the price.


“The method of distribution, whether intermediated or not, can also influence the type of relationship that a cedant has with its reinsurers. Cedants tend to have longer-term relationships with their reinsurers if placements are direct than if placed through a broker.


“Then there is the issue of service, so not just the ability to pay claims


when they occur, but also the willingness and responsiveness of reinsurers. There is also the ability of a reinsurer to write different lines of business and therefore to participate in several of the cedant’s reinsurance policies. These factors are all in the mix when a cedant decides on the individual reinsurers that they want to do business with.”


IN PROFILE: AXA’S GLOBAL PROPERTY/CASUALTY BUSINESS Compared with other insurers of a similar size, Axa’s cession rate is


relatively small. It cedes, depending on the year, between 12 and 15 percent of its global property/casualty premium. This equates to less than €1 billion premium to the open market.


“Our cession rate is rather small, but is very much linked to the


business need, when compared to our peers,” says Philippe Derieux, head of reinsurance in Axa’s global property/casualty business with responsibility for buying protection.


It buys a variety of types of coverage, but the biggest tier at a


group level is natural catastrophe cover—it buys capacity of about €2.6 billion, Derieux says, retaining €300 million.


But Derieux says the group sees its reinsurance partners as providing


a broad range of services to the insurer. “A reinsurance partner for us fulfils different roles,” he says. “For us, reinsurance is a tool box for different things, so our reinsurance partners need to be able to play different roles depending on how we need to use the tool box.


“The partner will not only provide cover, but also give us a second opinion on the risk analysis we carry out on our portfolio. These


companies giving us a rate on a reinsurance treaty enables us to ascertain the levels of risk which we have. Therefore, we are very interested in getting feedback from reinsurers on our whole portfolios.


“If necessary, depending on the strategy which we are using within


the group, we would also value their opinions and help in regards to emerging markets.”


Derieux says that Axa also prefers to diversify its reinsurance panel


as much as possible, but admits that this is not always as easy as he would like. “The market is quite narrow and we are a significant buyer of protection, such as natural catastrophe cover, so we do have significant partners, with whom we have long-term relationships.”


The company also complements its purchase of traditional coverage


with the use of alternative risk-transfer mechanisms, enabling it to secure coverage in the capital markets. “We are significantly involved with catastrophe bonds,” he says. “There is always a trade-off to be made between catastrophe bonds and traditional reinsurance, depending on the rate and also on the ability of the financial market to provide capacity to us and to avoid shortfalls.”


September 2011 | INTELLIGENT INSURER | 21


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