Insurers wary of reinsurers at potential risk as EU crisis shows little sign of improvement
Reinsurance buyers are being increasingly wary about which reinsurers they use as fears about the eurozone crisis add to heavy 2011 catastrophe losses. Some have started to limit the business they place with those they are most concerned about.
The news comes as financial troubles in Europe continue to erode confidence in the insurance sector. On Monday, rating agency Standard & Poor’s put the ratings of Europe’s three largest insurance groups, Allianz, Aviva and AXA, on negative outlook because of eurozone pressures.
While the crisis is hitting primary insurers with large life books hardest, and reinsurers’ geographic diversity is likely to provide protection, the uncertainty about the crisis’ ultimate outcome is making already nervous buyers even more uneasy.
Lloyd’s insurer Beazley’s head of ceded reinsurance, Christian Tolle, said: “We are monitoring the situation more closely than we were.” While pointing out that his company does not have large exposure to the reinsurers that are most at risk, Tolle said the situation is continually monitored.
“We are very wary about placing new business with the companies we think are most affected,” he said. “We would probably be okay to continue a trading relationship with them, but I don’t think we want to put any more business with them at this point in time.”
The concerns are being prompted in part because there is little sign of improvement in the eurozone’s financial health. “As we don’t seem to be coming out of the eurozone crisis - we seem to be plodding on and, if anything, there is more bad than good news - our concern is definitely heightened,” Tolle added.
While reinsurers have weathered the eurozone storm so far, there is such a wide range of possible outcomes that some buyers are finding little comfort in the resilience to date.
Markel International president Jeremy Brazil said: “Issues such as Solvency II are more tangible. Whereas with the eurozone some people say ‘they’ll never let Greece go bust’, others say ‘perhaps they can’t afford to not let Greece go bust.’”
He added: “It is a worry in terms of solvency margins if someone is very heavily, even if indirectly, into eurozone bank debt. That can have repercussions.”
The concerns are being augmented by the fact that a small group of reinsurers have been hit heavily by the 2011 catastrophe burden. Flagstone Re, for example, has had to restructure after suffering heavy losses in 2011.
More recently, rating agency AM Best has placed A+ ratings on Bermuda-based reinsurer PartnerRe - one of the world’s top 10 reinsurers - after it announced it expected a fourth-quarter 2011 pre-tax operating loss of $110m-$130m (£70m-£83m) because of Thailand flood claims and a deterioration in loss estimates from last year’s Japanese earthquake.
Concerns are also high for companies based in the peripheral eurozone countries. Spanish reinsurer Mapfre Re, for example, was downgraded two notches to A from AA- on 17 January after Standard & Poor’s (S&P) downgraded its parent in line with sovereign rating cuts to Spain.
While elsewhere in financial services, instruments and companies rated above BB+ on S&P’s rating scale are considered investment grade, buyers of commercial insurance and reinsurers consider A- the lowest acceptable financial strength rating. And while they feel no company is yet at risk of collapse, the flow of poor news within and outside the industry is not easing buyers’ jitters.
“A lot of the concern is because the level of confidence is spilling over from the banking sector, where it is just so fragile,” Brazil said.
Part of the problem for insurers is that ceded reinsurance departments, the divisions tasked with buying reinsurance, typically lack the staff and resources to do full financial analyses of each company they use. As such, they rely heavily on the financial strength ratings assigned by the major rating agencies, plus advice from brokers and others.
“In general, independent advice is difficult to come by,” Tolle said. “It is mostly tainted in some form.”
See Insurance Times’s sister publication Global Reinsurance for all the news and opinion from the reinsurance industry.
Pass notes: Reinsurance
How widespread are buyers’ concerns?
Some reinsurance brokers report getting a lot of questions from reinsurance buyers about the eurozone crisis. At an event reviewing the 1 January renewals season, head of Aon Benfield’s international market analysis team Mike Van Slooten indicated that eurozone questions were starting to rival queries about catastrophe losses.
Reinsurers still have lots of money and none has gone bust. Why are buyers worried?
In short, it is uncertainty. Like all managers of risk, reinsurance buyers are nervous about what they cannot measure. The uncertainty is coming from all angles: the ultimate bill from the 2011 losses, the ultimate effects of the eurozone, and their reliance on others for their view of counterparty risk. The negative stories from elsewhere in the financial world are not helping. While reinsurers’ direct exposures are small, what about their indirect ones?
How big could the effect of the eurozone crisis be?
Because of the range of possible outcomes, it is difficult to say, but Swiss Re believes the insurance industry as a whole could be on the hook for up to €143bn (£120bn), or 24.3% of its combined shareholders’ funds, if the sovereign bond values of all the five peripheral eurozone countries are halved.