A.M. Best Briefing: France’s Largest Cedants Demonstrate Stable Reinsurance Purchasing. Analysis of the reinsurance or retrocession purchasing practices of France’s 20 largest cedants demonstrates reinsurance purchasing has increased faster than gross premiums written (GPW), driven mainly by the four largest market players. This was partially offset by a slight decline in reinsurance ceded by the other 16 companies–several of them mutuals or medical insurance specialists–reflecting the particular characteristics of their business models.
Carlos Wong-Fupuy, senior director, said: “Demand for reinsurance is moderately outpacing growth in GPW–reflecting a similar trend in Continental Europe–albeit to a lesser extent in France. In Continental Europe, demand for more reinsurance has been a result of soft market conditions, regulatory demands under Solvency II and the need to support product diversification. In France, the purchasing habits of France’s 20 largest cedants reflect the distinct nature of market participants and on average their more conservative levels of risk appetite.”
According to A.M. Best’s analysis, the four biggest cedants–AXA, Société de Groupe d’Assurance Mutuelles Covéa, SCOR and Groupama–had high retention ratios of between 88.4% to 93.0%. They are well capitalised, with the ability to absorb risks and the expertise to develop new products with a relatively small reinsurance component. Outside these participants, many of the remaining insurers are mutuals, or those offering pensions and health business, as well as credit insurance (Coface). They tend to have a strong reliance on reinsurance and remain comfortable with their levels of exposure. Consequently, a strong feature of the French market is the wide range in retention ratios, with insurers writing significant medical books of business relying heavily on reinsurance with retention ratios as low as 32.8%.
Yvette Essen, director of research and communications, said: “Medical insurers generally transfer the risk component to the reinsurance markets, enabling them to focus on distribution and building relationships with clients and intermediaries–as opposed to being risk carriers. Profits are usually generated based on the service that they provide, rather than on underwriting results. Similarly, mutuals have remained cautious about volatility of risks and exercise very conservative strategies as there is an inherent need to protect their balance sheets. Maintaining stable results is particularly important, given mutual companies’ limitations on raising new capital.”
Going forward, A.M. Best expects while reinsurance rates in the global market remain soft, reflecting competition from alternative capital providers, downward pricing pressures are unsustainable in the medium to long term, as reinsurers struggle to cover their cost of capital. The bigger primary writers rated by A.M. Best are very well capitalised and diversified and should be able to manage any changes to the reinsurance market environment without significant impact to their balance sheets. For smaller medical companies and mutuals with lower retention ratios, A.M. Best expects a risk adverse, cautious approach to continue. Reinsurance purchasing will reflect the nature of risks underwritten, and the primary focus of the insurer.
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