The January renewals period show that Solvency II will increase demand for reinsurance products as European insurers attempt to strengthen their capital position through risk transfers, Fitch Ratings said.
The main beneficiaries are likely to be the financially strongest reinsurers in the EU and any other country whose regulatory regime is deemed fully equivalent to the Solvency II regime, Fitch commented in a release.
Fitch pointed to the fact that Hannover Re’s structured reinsurance business — which helps insurers optimize capital — grew by two-thirds in the January renewals.
“This rate of growth probably reflects the timing of some large deals, but we expect demand to remain strong,” Fitch said.
In addition, SCOR has received a lot of interest from insurers seeking to improve earnings stability and optimize capital, while Munich Re’s CFO said balance sheet management and regulatory optimization will become increasingly important drivers of reinsurance business, Fitch noted.
Insurers also are increasingly keen to transfer longevity risk, Fitch said, explaining that the risk margin introduced under Solvency II “creates high capital requirements for longevity risk when interest rates are very low.”
“Transferring longevity risk via reinsurance creates capital charges for counterparty risk, but these tend to be significantly smaller than those for retained longevity risk,” Fitch
Insurers are also looking for other risk-transfer opportunities that can significantly strengthen their capital position under Solvency II, said Fitch.
The ratings agency pointed to the example of RSA’s recent disposal of £834 million ($1.04 billion) of legacy liabilities to Enstar Group, which is designed to boost RSA’s Solvency II capital ratio by as much as 20 percentage points.
Reinsurers in the EU or a country that has been granted equivalence for reinsurance supervision will have an advantage over firms outside these jurisdictions, which could be required to post collateral or liaise with local European regulators, adding costs and delays, Fitch said.
“The biggest and financially strongest reinsurers will also have an advantage,” the ratings agency said. “Counterparty default capital charges will often be lower when transferring risk to one or two very highly rated reinsurers than they would be for transferring the risk to a larger pool of reinsurers with a slightly lower credit rating.”
Further, Fitch said, risk-transfer transactions are likely to cover multiple regions and products, “which will make it harder for small, specialist reinsurers to compete.”