The best and worst of independent cedants

Reinsurers are always open to working with new clients on some level, especially in what is a competitive European reinsurance market. One of the most lucrative sources of this can be independent cedants, of which there are many in Europe. But it is also a real mixed bag in terms of how profitable—or not—business flowing from these entities really is.

That is according to new research by Litmus Analysis, an advisory firm specialising in ratings and credit risk, which has done a detailed study of nearly 80 “independent” European cedants that spend more than €20 million annually on their outwards cover.

The data for this study were sourced from AM Best’s Financial Suite—Solvency II. The selected cohort were non-life companies for which 2021 SII data were available, but which are not rated by AM Best nor identified by them as part of a larger insurance group, and which in 2020 ceded premiums in excess of €20 million to their reinsurers.

Litmus’s research shows that there are many potential clients to be found away from the better-known groups—but in this group there are also some very unprofitable cedants (Figure 1).

Figure 1

Even on a five-year average basis, the ceded loss ratios (CLRs) of the cedants studied ranged from single digits to over 300 percent. Some 21 members of the cohort achieved five-year averages of below 55 percent for their reinsurers, eight of which delivered below 40 percent outcomes. However, 25 gave their reinsurers five-year average results of over 75 percent; nine delivering outcomes in excess of 90 percent.

Research is essential

Stuart Shipperlee (pictured), managing director of Litmus Analysis, said: “Europe has a substantial cohort of independent cedants with material outwards reinsurance spend. Several spend well over €100 million per year. Some of the cohort will be very attractive to reinsurers. But looked at together they come with a surprisingly wide range of CLRs even when averaged over five years. Consequently, the results reinsurers are getting vary dramatically across the cohort.”

The key, Shipperlee says, is research—and a lot can be gleaned from public sources of information. “As can be seen, there are valuable insights that can be gained simply from publicly available financial information. But our advice is to do the work in advance.”

One part of this should be a close examination of their financial strength profiles, which can vary widely. Most cedants of this ilk are unrated, making research essential.

“It’s not just the possibility of writing profitable lines that is important; the financial strength profile of cedants can be a key consideration for reinsurers and brokers: from managing the risk of having clients who become insolvent to optimising the reinsurance solution the cedant needs. Yet most European cedants are unrated,” Shipperlee said.

He added that some 30 of the cohort had a sufficient data history with AM Best’s Financial Suite—Global service for Litmus to deploy its proprietary financial strength scoring and profiling application, LitmusQ, on them. LitmusQ generates financial scores out of 100, which it then benchmarks against the international rating scale.

Taking the cohort member’s size into consideration the benchmarked results range from ‘bb+’ to ‘a-’. Ignoring size, the range is from ‘bbb’ to ‘aa+’, Shipperlee noted.