Market Report: US - Under close scrutiny.

(From Reinsurance)

By Isobel McCalman.

Times have changed and so has the reinsurers' approach to ceding companies, according to Roderick Thaler, executive vice-president and national director of Willis Reinsurance - property & casualty. Writing as part of the insurance broker's report on the (re)insurance market - Marketplace realities and risk management solutions, strategies for a changing marketplace - he argues that ceding companies and intermediaries need to have a strategy to more effectively discriminate among reinsurers to improve the prospect of future performance and continuity.

The issue of reinsurance recoverables is now receiving the attention of the rating agencies and is becoming a hot topic as ceding companies push for the collateralisation of these recoverables. There has been an increase in the percentage of reinsurance recoverables that are secured by collateral. However, the applicability of collateral tends to be from non-US reinsurers who require letters of credit to enable ceding companies to take credit for the ceded reinsurance. Mr Thaler considers that while it is possible to "identify with large, well-rated insurers seeking to mange their counter-party credit risk posed by reinsurers whose ratings have been downgraded, there is still considerable variation in the financial strength of reinsurers and a 'one-size-fits-all' approach may not be warranted".

Greater awareness

Other changes that the report notes is the impact of heightened scrutiny from rating agencies on reinsurer reserve changes. This comes at a time when insurers are already dealing with adverse loss development. There is a much greater awareness of the volatility of exposures transferred to reinsurers as the reinsurer performance is more transparent than in the past. A summary of the significant ratings changes, following 11 September 2001, emphasises the amount of action that has been taken (see table).

The number of reinsurers in the US market has fallen from 112 in 1980 to 30 in June 2003, which marks another major market change. However, the policyholders' surplus (PHS) of the remaining companies has risen from $3.5bn to $44.7bn during the same period. The report sees this as being partly down to foreign and domestic investors viewing the US reinsurance market as one of the more profitable sectors in the US insurance market.