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Transcript of Re Insurance Markets and Regulation
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25 March 2011
Reinsurance Markets & Regulation
Reinsurance MarketsCession Rates
Retention Rates
Reinsurers
Emerging MarketsCompulsory Placement of Insurance
Demand & Supply in Developing Countries
Reinsurance Regulation
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Reinsurance Markets
Reinsurance is the most international aspectof the insurance business
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Distribution of Reinsurance PremiumsGlobally (2005)
North
America
51%
Europe
34%
Asia
10%
Rest of the
World
5%
Risk Management and Insurance , Figure 23.6, p. 613
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Swiss Re Premiums Earned (2008)
Swiss Re, 15 Jan 2009
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Cession Rates
The contribution of reinsurance to theworlds insurance markets can be measured
in terms of cession rates reinsurancepremiums divided by direct insurancepremiums
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Cession Rates by Region (1998)
Life Industry Nonlife Industry
(%) (%)
North America 1.6 12.6
Latin America 4.6 15.1
Western Europe 2.2 14.6
Asia 0.8 29.2Rest of the World Nil 26.1
World Total 1.5 14.0
Risk Management and Insurance , Table 23.3, p. 613
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Retention Rates
Retention rates tend to be low in countrieswith low market concentration (i.e., a largenumber of small insurers dominating the
market)
In contrast, high retention rates in the U.Sand Canada are influenced by a preference
toward XL reinsurance in contrast to theEuropean propensity to rely on proportionalreinsurance
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Retention Rates
In the personal and small commercialinsurance lines, insurers demand lessreinsurance
Modest coverage limits
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Retention Rates
In life insurance, reliance on reinsurance tohedge the protection component iscorrespondingly small in comparison with thepure risk component in nonlife contracts
Conversely, life insurers with a greater
proportion of business in mortality ormorbidity-based lines are likely to demandmore life reinsurance than those with agreater proportion of business in savings-oriented products
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Dominance of Large Reinsurers
Large international, professional companiesdominate reinsurance markets globally.
Eight of the 10 largest reinsurers aredomiciled in Europe, with the remaining twoin the U.S.
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Worldwide Reinsurance Premium USD180bn (GPW 2006)
Reinsurance Summit 2007, Swiss Re, 25 May 07
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Reinsurance in Emerging Markets
Reinsurance is critical to building a domesticinsurance industry
Domestic insurers in most developing countries,due mainly to low levels of capitalization, havelow capacity and retentions and acorrespondingly high demand for reinsurance
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Focal markets within Emerging Markets
Banking & Insurance CEO Conference , Swiss Re, 29 Sept 2010
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Reinsurance in Emerging Markets
Dependency on reinsurance supplied byforeign reinsurers
Insuring industrial infrastructure necessitatestechnical expertise
Capitalization of the majority of insurers indeveloping economies
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Reinsurance in Emerging Markets
Most insurers in developing countries haveproportional treaties as the basis of theirreinsurance programs
This permits small, undercapitalized insurers toaccept more risks than they could otherwise
Facultative reinsurance is used in the traditionalway to supplement treaties for large loss
exposures
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Reinsurance in Emerging Markets
Fronting is common in developing countries
With fronting, the insurer acts more as aninsurance service provider than a risk-bearing
insurer
Fronting insurers can come to rely on cedingcommissions
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Compulsory Placement of Insurance
The mechanism by which reinsurance isplaced in the international market often isspecified by local laws
In some countries (largely in Africa), allreinsurance must be placed through nationalreinsurance companies, although the trendis to abandon such practices.
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Compulsory Placement of Insurance
These governments believe that they canincrease domestic retention capacity by:
diversifying the pools of risks from individualinsurers to the national reinsurer
permitting more favorable terms and priceswhen the national reinsurer retrocedes risksinternationally
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Compulsory Placement of Insurance
In addition to compulsory cessions todomestic reinsurers, some governmentsimpose obligations for domestic insurers tocede business to regional reinsurers
E.g. Asian Re 5% of business by SE Asiamember countries
Philnare National Reinsurance Corporation
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Compulsory Placement of Insurance
Resultant concentration of insured exposuresusually fails to diversify risks and exposesthe industry to catastrophic loss potential
Domestic insurers too often fail to developdesired expertise, instead relying on cedingcommissions for large portions of theirincome
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Demand and Supply of Reinsurance inDeveloping Countries
Improving retention capacity has been acommon goal of developing economies,which necessitates the presence of
financially stronger insurers
Through M&As and higher capitalizationrequirements
A smaller number of larger companies can
result in a higher national retention
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Demand and Supply of Reinsurance inDeveloping Countries
Insurers in developing countries sometimesaccept reinsurance to improve their spreadof risks or to utilize available capacity
A smaller number of larger companies canresult in a higher national retention
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Demand and Supply of Reinsurance inDeveloping Countries
In general, business from many developingcountries is considered desirable byinternational reinsurers
International reinsurers wish to diversifytheir portfolios
International reinsurers are an importantresource for insurance companies ofdeveloping countries
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Reinsurance Regulation
Reinsurance is subject to less stringentregulation than is direct insurance
Current initiatives in reinsurance regulationare largely the domain of advancedeconomies and intergovernmentalorganizations
EU, UK, US, and the International Association ofInsurance Supervisors (IAIS)
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Regulation Geographic
Application
Purpose Effective Date
IAIS Standard on Supervision
of Reinsurers
Global Lays down supervisory standards for
reinsurance globally
2003
Financial Groups Directive E.U. Introduces a financial regime for
international financial conglomerates
to enable regulation on a whole-group basis in lieu of piecemeal in
each country of operation
2005
International Financial
Reporting Standards
Global Introduces international accounting
standards
Phase I in 2005 with
full implementation
expected in 2007
Reinsurance Directive E.U. Introduces fast-track adoption ofregulation for European reinsurers 2008
Solvency II E.U. Creates a consistent, risk-based
insurance solvency system, that is
compatible with international
developments in supervision and
financial reporting
2011
Source: Global Reinsurance Highlights (2004).
Some Regulatory Developments inReinsurance
Risk Management and Insurance , Table 23.6, p. 618
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Q&A