The hardening in the reinsurance market is expected to be reflected on the whole supply chain with reinsurers seeing positive returns and direct players facing a new reality that requires them to restructure their programmes and revisit their underwriting strategies. Saudi Re’s Messrs Fahad Al-Hesni and Ahmad Al-Qarishi highlight the trends seen in 1 January renewals and explain the implications on the industry.
The reinsurance market continued to show hardening of prices and rigidity of terms in recent renewals, which is already causing ripples in the way reinsurance business is transacted.
“Change and restructuring of the reinsurance equation is being felt globally. Retrocession prices have increased, which has been reflected on the direct provider. This is one of the major reasons for increase in reinsurance prices,” said Saudi Re CEO Fahad Al-Hesni.
Prices have increased for the excess-of-loss (XOL) agreements by 5% to 20% while the increase could jump to 50% for underperforming performing accounts, he said.
“Prices for CAT property covers, however, have seen notable increase regardless of the performance of the account. This has been quite evident in Asia where prices increased significantly to the extent that direct players were forced to increase their retentions. Many players had no choice but to increase their retention levels. It has become more feasible for them to retain a larger portion of risk because of the significant hike in prices.”
Restructuring reinsurance offerings
Severity and frequency of Nat CAT losses in recent years have led to fundamental changes in reinsurance programmes in Asia, said chief underwriting officer Ahmad Al-Qarishi.
“Prices have increased and terms became more stringent along with notable change in commissions. Therefore, insurers had no other option to increase their retentions. The main difference in the Asian market is that the increase could reach 40-50% against up to 20% in the GCC market. This is because of the Nat CAT exposure.”
He added that smaller insurers suffered more. “Small- to medium-sized players encountered difficulties in placing business because of their unbalanced capacity. There is a huge gap between the size of premiums they write and their capacity. This shortage of capacity has forced some of them to restructure their reinsurance programmes. We have noticed that some players, in Asia and the GCC, have suffered shortfall and couldn’t secure the requested capacity.”
Capacity shifts
International and large reinsurers have been withdrawing capacity from Asia and other emerging markets to allocate it in regions that offer higher returns, said Mr Al-Hesni.
“In our region, this has been translated into a wave of restructuring in reinsurance programmes resulting in the decrease of surplus business. Previously, companies used to demand quota share covers and top it up with surplus. However, reinsurers removed or offered limited surplus facilities, especially for Nat CAT business.”
Moreover, to ensure higher profitable returns, reinsurers started using sliding scales for commissions more.
“In the past, reinsurers used to offer fixed commissions for insurance companies. Some programmes have changed to offering a sliding scale of commissions which is tied with the profitability of the insurer. Even the scale of commissions has changed where the maximum level of commissions has dropped by almost 60% in certain cases, especially for fire and engineering.”
Certain restructuring in reinsurance terms was introduced because of Russia president Vladimir Putin’s invasion of Ukraine, said Mr Al-Qarishi. “Some exclusions, such as placing new terms related to the war clause, were included.”
Coinsurance business has seen substantial reforms as well, he added. “Reinsurers have reduced the treaty facility which insurers use to conduct coinsurance operations or write inward facultative business. Some reinsurance programmes have excluded this facility while others have reduced the capacity which was available in previous years.”
The impact on the Saudi market
The adverse results for motor business in Saudi played a main role in reshaping the reinsurance programmes.
“Quota share programmes have become very rigid and expensive for direct players, which prompted them to increase retention rate and rely on XOL agreements,” said Mr Al-Hesni.
This major transformation in the Saudi insurance market indicates that insurers should revise their business strategies. “Because they are retaining large chunk of the risk, sometimes 100%, they will be facing serious profitability issues and run into big troubles. Therefore, there is a need to ensure adequate pricing and increase motor rates.”
Despite the reshuffle that led to reducing the size of quota share operations, from a reinsurer’s perspective, this is considered a positive development, said Mr Al-Hesni. “A number of quota share treaties were discontinued, alternatively, XOL agreements should push for adequate pricing of risk.”
The same applies for medical insurance, said Mr Al-Qarishi. “For some providers, even the price of XOL agreements was extremely high to the extent that they had to retain 100% of the business. The inflation in medical cost along with the additional benefits the Council of Health Insurance has introduced, have raised the cost of medical insurance and therefore providers opted to retain larger share of their medical portfolio.”
For Saudi Re, despite the decline in motor quota share operations in the local market, business written in other markets has enabled the company to achieve decent growth.
“We have seen radical change in the Asian markets and to a lesser extent in the MENA region. In Asia, the terms given this year were very rigid and price continued hardening,” he said.
Correction is necessary to capture opportunities
Motor and medical insurance pricing has to change, said Mr Al-Hesni. “Insurers have to adopt an adequate pricing strategy. Since companies are retaining more risk, underwriting criteria has to be improved. In addition, financial and human capabilities have to improve in order for them to cope with the new market conditions.
Over the past three years, the Saudi Central Bank (SAMA) has been demanding players to strengthen their capitalisation to improve their retention rates.
“SAMA worked on enhancing the capacities of insurers to increase the market retention and take the industry to the next level. The ultimate goal is to create professional risk carriers instead of transacting business similar to intermediaries. For instance, with the new market conditions and SAMA’s endeavours, companies will become more cautious in fronting business and will give more weight to the quality of business.”
In addition, the mega development projects in Saudi require having strong insurers who can cater for the needs of the kingdom’s growing economy, he said. “To capture the opportunities in the Saudi insurance market, companies have to improve their performance and strengthen capabilities. They need to take it seriously because with the economic boom the kingdom is witnessing, the best is yet to come.”
Expectations ahead
The reinsurance market is experiencing hardening which is expected to continue throughout this year, said Mr Al-Qarishi. “With the current norms for investment and with interest rates are not expected to decline, the cost of capital will increase for reinsurance companies. Therefore, further hardening is expected, though we cannot predict to what extent.” M