Reinsurance in a complex world
By Christine Klebl, Senior Underwriter, Credit, Surety and Political Risk Division at Hannover Re.
World politics, the aftereffects of the COVID-19 pandemic and inflationary pressures are all resulting in ongoing global economic uncertainties and a more challenging global business climate. Taking into account that the deterioration of geopolitical stability is leading to a rise in political risk, and supply chain disruptions are contributing to an increase in commercial risk, manoeuvring through the macroeconomic and geopolitical turmoil in the world is ever more complex.
An adequate management of commercial and geopolitical risk in trade transactions is therefore becoming more crucial. Trade credit insurers and particularly export credit agencies with their interest to serve their country’s economies and with their high level of expertise play an essential role by navigating companies through this changed risk landscape.
Reinsurance – a common practice in risk sharing
A different environment with increasing inflation rates and currency appreciation [particularly the US dollar] also calls for the need of adjustment of capacities. Managing both concentration risk and country limits is therefore high on the agenda of insurers and sharing the risks among partners is an effective method to address this issue.
There are several forms of cooperation within the industry. Spreading the risk between various involved parties according to participation or making use of ‘a second level of insurance’ are alternatives that are commonly seen. The latter option refers to reinsurance, also known as ‘insurance for insurance companies’ based on agreed terms and conditions, a time-honoured practice with treaties dating back to the 14th century.
The international reinsurance industry has developed since then. Through reinsurers offering their services in terms of geographies and products on a well-diversified basis, more drivers, apart from just risk sharing, have emerged over the years as reasons to seek reinsurance support.
- Benefit of strong capital base to reduce volatility.
- Technical exchange based on a global view.
- Flexible and tailor-made solutions adapted to current needs and environment.
- Long-standing relationship through the cycles.
In terms of numbers, global reinsurance premiums in 2021 were approximately $353 billion, representing a share of 8% of the overall global insurance market. There are several global players, wherein the three largest reinsurers account for a gross written premium volume of around $118 billion.
Portfolio distribution and size are individual to each reinsurer’s strategy. However, factors such as global climate change, increasing interest rates, rising inflation rates and currency effects, impact all players.
In particular, extreme weather events such as hailstorms and forest fires can already be seen to be happening more often in Europe. The losses caused by recent events such as Hurricane Ian mark out the challenges for the sector. According to estimates, the total private market insured losses from this event range between $53 billion and $74 billion, with the best estimate being $67 billion.
A reinsurer’s view on credit, surety and political risk insurance
Reinsurance in the sphere of credit, surety and political risk may be more familiar, considering that a higher share of 25% to 30% of the global insurance premium is transferred within that field.
When it comes to export credit agencies, reinsurance buying depends on whether the ownership structure or the explicit mandate allows the ECA to seek reinsurance from the private market, apart from the scope of requesting support for financial goals.
Generally, there seems to be more openness to accessing the private market with a shift in pursuing support from a single risk basis to portfolio sharing. There could be various reasons behind that. In fact, there are a variety of countries with troubling budget positions as countries have put a lot of attention into state aid programmes from the pandemic and subsequent crises.
Nevertheless, there remains the need for governments to tackle both their ordinary tasks as well as the most challenging problems. There is considerable need for infrastructure investments and investments in green energy needed to prevent more severe impacts caused by climate change.
Credit, surety and political risk insurance is an ideal tool to support companies and governments through helping them with insurers’ high level of knowledge on the stakeholders and the legal environment. The sector has shown resilience so far thanks to its proactive approach in risk mitigation, despite the ongoing difficult situation.
However, the sector is unlikely to escape totally from adverse consequences, particularly considering how uncertain future developments are. Some effects can be seen already, such as the rising inflation levels that lead to higher capacity needs and therefore more risk exposure concentration.
Despite the shadowy outlook in the short term, with an increase in payment defaults expected, the medium and long term outlook is positive as the sector can help all countries to adapt to the new circumstances. In particular, as the expectation of counterparty defaults grows, trade receivables protection becomes more beneficial and can assist in converting challenges into opportunities.
A version of this article first appeared in the Berne Union Yearbook 2022
- Global reinsurance premium: Gross written premium of the Top 50 Global Reinsurance Groups according to AM Best ‘Segment Report’ (August 2022) / Company presentation: Hannover Re: the somewhat different reinsurer (October 2022) ↑
- Global reinsurance premium: Gross written premium of the Top 50 Global Reinsurance Groups according to AM Best ‘Segment Report’ (August 2022) ↑
- Risk Management Solutions (RMS) a Moody's Analytics company (as at 07 October 2022) ↑
- Own study (June 2020) ↑