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Reinsurers have among the most thankless jobs in finance.
These groups, which insure insurers, are often centuries old and play a vital role in spreading risks, making it less likely that a surge in claims will be fatal for their insurer clients, ultimately protecting insurers’ customers too.
They usually do this difficult and generally overlooked job quietly, not bothering outsiders with a curious vernacular that includes terms such as “rate on line” (the cost of the reinsurance) and “retrocession” (reinsurers’ own reinsurance).
But both property and casualty reinsurers, and their counterparts in the life business, are now attracting greater attention.
Let us take them in turn. The steep rise in the cost of home insurance in the US and elsewhere can be traced, in part, to a move two years ago by P&C reinsurers to increase the price of cover against natural catastrophes and toughen their terms.
If your beachfront mansion is flattened in a hurricane, these reinsurers will end up absorbing a great deal of the cost, and in response to factors including climate change and inflation, they began charging insurers much more for the privilege.
A quiet 2023 for hurricanes then meant that reinsurers emerged with their best profits in years. Lloyd’s of London, a big market for property catastrophe reinsurance, registered its best overall performance since 2007.
It was a bad year, however, for other types of extreme weather events such as thunderstorms, where primary insurers were left with a bigger share of the risk after reinsurers pulled back.
This was a major reason US P&C insurers made more than $20bn in underwriting losses for the second year in a row, according to rating agency AM Best. Cue calls from regulators, brokers and others for reinsurers to think of their social purpose and cut prices.
This is a tricky pitch: climate risk is only increasing. Reinsurers say their obligation is to share these risks, but also not to go bust in the process.
Some industry figures say reinsurers need to care about the pressures on property insurers that provide them with a chunk of their business. But state-backed insurers of last resort, which have expanded as private insurers pull back from some areas, are also big buyers of reinsurance.
If P&C reinsurers tend to hover in the background, life reinsurers are not even at the party. These low-profile groups allow life insurers — providers of annuities and other long-term financial products — to reinsure risks such as longevity. Here, they pay a premium to cover themselves against the risk that their customers will live longer than expected.
Recent years have witnessed the rise of what is known as asset-intensive reinsurance or funded reinsurance. In such deals, life insurers offload, often to a reinsurer in a foreign jurisdiction, what is essentially a chunk of their liabilities, plus the assets that support those future promises.
This has become big business in the US, where almost $800bn of life insurer reserves have been offshored according to Moody’s. It has grown in Europe, too. The Bank of England is planning a stress test next year on the effects of a funded reinsurance failure. Eiopa, the EU regulator, recently issued a supervisory statement setting out what insurers should be doing to make sure their offshore reinsurance is sound.
The scenario regulators are worried about is illustrated by 777 Re, a Bermuda-based reinsurer linked to US investment group 777 Partners. Earlier this year, US insurance group A-Cap said it would attempt to take back control of assets ceded to 777 Re after the reinsurer had its credit rating downgraded, and US and Bermuda regulators have been working to disentangle A-Cap and 777.
Bermuda, a hub for global reinsurance, has come under increasing scrutiny from regulators elsewhere for its oversight of life groups, and has recently tightened its more flexible rules on where and how they can invest.
Against this backdrop, insurers in various countries are being urged to consider more closely the risk that their offshore reinsurance arrangements might fail and they are forced to take back their liabilities. The concern is that in the meantime the assets backing those liabilities might have been switched into illiquid securities that have turned sour, or are unsuitable to back long-term retirement promises to customers.
What unites the two types of reinsurers, senior industry figures say, is a lack of contact with the consumers that they ultimately support.
Instead, property reinsurers are free to talk about “adequate compensation for risk” at a safe distance from customers who are inadequately insured or paying very high prices. Life reinsurers, especially those tucked away offshore or as part of a bigger corporate group, can get away without saying much at all.
Ultimately, paying out when they have promised to is how reinsurers prove their value. But developments in the life business, in particular, suggest that greater attention is due, especially given the implications for millions of retirees around the world. After all, strange things can grow in the dark.
