Re/insurers turn to structured deals amid intense competition: S&P

Increasingly intensifying competition in the market has forced property and casualty re/insurers to rethink their business strategies and how best to deploy capital resources.

According to S&P Global Ratings, companies are increasingly using loss portfolio transfers (LPTs) and adverse development covers (ADCs) to de-emphasize their non-core legacy businesses that no longer offer optimal risk-return opportunities.

Re/insurers have relied on these risk management tools to exit lines of business, reduce regulatory capital burdens, minimise earnings volatility, enhance liquidity, shore up their balance sheets, and optimise their administrative resources. These structured solutions go beyond traditional risk transfer covers and combine risk transfer with balance-sheet management considerations.

However, S&P noted that LPTs and ADCs do not provide a complete legal finality, and the cedants retain the ultimate risk of policyholder claims. New Insurance Business Transfer laws in the US could bridge this gap, but the laws are still in nascent stages and not yet applied consistently across states.

"If well executed, these structured solutions can benefit cedants and reinsurers," said S&P Global Ratings credit analyst Saurabh Khasnis. "Cedants can lower earnings and capital volatility while reducing capital requirements. And reinsurers can enhance their business profiles and earnings by leveraging their underwriting and claims expertise while strengthening their client relationships."

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