Three areas of potential growth

European reinsurers should not bemoan the challenge of finding growth but should instead take advantage of some of the new opportunities that are emerging in the European market, Marc Beckers, head of Aon Benfield ReSolutions EMEA, tells Baden-Baden Today.

While growth in many traditional lines of business has stalled for re/insurers in recent years, there are new lines of business emerging that can replace them for reinsurers willing to be innovative and think outside the box.

That is the view of Marc Beckers, head of Aon Benfield ReSolutions EMEA, and managing director at Aon Benfield Securities, who identifies three potential streams of growth for players in Europe—which all, in different ways, have been growing because of Solvency II.

The first is the mortgage credit business, which has grown substantially in recent years driven mainly by business generated from the US by Fannie Mae and Freddie Mac, the two US government-sponsored financial institutions that provide liquidity to the US mortgage markets by buying mortgages from lenders.

Traditionally, they retained the default risk on these mortgages—until the 2008 financial crisis triggered by the US housing market that meant they suffered big losses and needed to be bailed out by the US government.

Since then and over the last three years in particular, they have been encouraged by government to transfer more risk into the private sector. They now do this in two forms: around 75 percent of risks are transferred into the bond markets and about 25 percent into the re/insurance sector.

Beckers estimates that some $40 billion of risk exposure has been transferred into the private sector so far—20 percent of that into the re/insurance sector. Aon Benfield is the dominant broker in this market, responsible for placing more than 90 percent of the risks.

“There are a number of European players participating in this market and it can be a lucrative source of growth,” Beckers says. “Under the new Solvency II regulation, the capital requirement for the insurance form of this risk is much more favourable than the capital needed when investing in the traditional mortgage-backed securities.”

He explains that Aon Benfield has been responsible for more than $8 billion of business entering the re/insurance markets so far. He notes that while the existing market is US-driven, a similar risk transfer technique could eventually be used by European banks, boosting the market further.

The second area of growth he anticipates is being driven by life insurance companies reassessing their portfolios and their risk transfer need and capital requirements under Solvency II.

He says this is driving an appetite for more high level protection of a number of risks that were previously not always considered by life insurers, including mortality risk, lapse risk (where large numbers of policyholders want to surrender policies early), pandemic risk and longevity risk.

“We are seeing more demand for these types of risks than we have seen in the past,” Beckers says. “Essentially life insurers are having to re-analyse their portfolios and optimise them under Solvency II. It is rare to find that capital is already being used in the most efficient manner.”

He stresses that this market is still not big and it is starting from a very low base. “But it is growing and we anticipate that such deals will become more commonplace in the future,” Beckers says. “It also offers much-needed diversification to some players.”

The final area of growth he foresees is in the form of so-called alternative transactions such as loss portfolio transfers (LPTs) and adverse development covers.

Beckers explains that both types of risk transfer effectively protect insurers from their reserves being inadequate. While there are different ways of structuring such a deal, they amount to the same thing.

“It gives insurers peace of mind that their reserves will not be inadequate, but they also get rewarded under Solvency II in the way their capital and solvency ratios are calculated,” Beckers says.

“It is a sign that insurers are much more sophisticated now and open to more complex risk transfer mechanisms. There is a definite trend emerging of insurers heading in that direction.”

He adds that while it may seem surprising that insurers had waited until after the implementation of Solvency II to use such tools, part of the problem was uncertainty as to exactly what the rules would be, and the reality of applying them has been equally challenging.

“Insurers are still finding their feet, but I feel that it is also up to reinsurers to come up with the solutions to help their clients with their needs and offer solutions,” he concludes

Marc Beckers is head of Aon Benfield ReSolutions EMEA, and managing director at Aon Benfield Securities. He can be contacted at: marc.beckers@aonbenfield.com