Insurance giant Generali Group said in its annual report that while it has historically preferred protection from traditional reinsurance sources, in some cases it has found that insurance-linked securities (ILS) has offered “more competitive terms,” suggesting the insurer may seek to increase its use of ILS going forwards.
Generali explained that it sees reinsurance as “the key mitigating technique for balancing the P&C portfolio” which historically has involved use of traditional reinsurance counterparties.
But importantly, Generali explains its strategy with leveraging reinsurance, saying that it optimises its own use of risk capital, by ceding certain risks to reinsurance counterparties, while also “simultaneously minimizing the credit risk associated with such operations.”
Minimising credit risks means picking the most credit worthy counterparties, or fully collateralising the reinsurance obligations of course. So if Generali is looking to broadly distribute risk to a wide-set of counterparties, while also minimising credit risk exposure, it would find it hard to find a better way than through broadly syndicated ILS transactions.
Generali uses its Group Risk Appetite Framework to help it purchase reinsurance more efficiently, monitoring risk appetite, risk preferences and the state of the reinsurance market at the same time.
The insurer said that it has, “Historically preferred traditional reinsurance as a tool for mitigating catastrophe risk resulting from its P&C portfolio, adopting a centralized approach where the placement of reinsurance towards the market is managed through a central Group Reinsurance Function.”
But that hasn’t proved to be the best way all of the time and Generali has found use-cases for the capital markets which are helping the company to secure reinsurance protection more efficiently, all while maintaining the highest levels of credit worthiness in counterparties, at the same time as broad distribution of the underlying risks ceded.
It’s not just the state of the reinsurance market that has driven Generali towards ILS and catastrophe bonds, but also their suitability for taking out peak peril risks from its insurance portfolio, at attractive rates.
The insurer explained, “Given the trend of increasing weight of European windstorm exposures in the protected portfolio in the past years, part of these exposures have been carved out from the main reinsurance protection and placed in the Insurance Linked Securities (ILS) market.”
Generali placed the EUR 200 million Lion II Re DAC cat bond in 2017, securing capital markets reinsurance for European windstorm, European flood and Italian earthquake risks. The insurer previously hedged just European windstorm risks with the capital markets in a EUR 190 million Lion I Re Ltd. cat bond deal.
Utilising ILS is not just about getting better pricing from ILS though, it’s also about optimising reinsurance purchasing and ensuring that the right risks are pushed towards the right types of capital, in the most efficient structures possible.
Generali has found benefits in pricing for the risks it cedes to ILS, but also overall for its reinsurance program.
The ILS market, in taking these European windstorm risks, was “offering more competitive terms” Generali said. But the benefits flow through its whole reinsurance placement, as while the majority of its Italian exposures were kept in the traditional reinsurance market, the strategy resulted in “a consequent optimization of the overall pricing,” it said.
As a result, the insurer said that, “Alternative risk transfer solutions are continuously analysed and implemented.”
Generali is clearly looking to expand its use of the ILS market, where appropriate, in order to reduce its peak risks and optimise its reinsurance placements.
The company pointed to another recent use of ILS instead of traditional reinsurance, highlighting that, “In addition to traditional reinsurance, a protection was placed during the year on the capital market to reduce the impact of an unexpectedly high Loss Ratio for the Group Motor liability portfolio.”
That was the Horse Capital I DAC third-party motor liability ILS transaction that Generali sponsored, a catastrophe bond like structure transferring these auto liability risks to the capital markets.
Generali noted the “more optimised” protection from catastrophes that the group benefits from, following the issuance of its latest catastrophe bonds.
The comments from the insurer shouldn’t be taken as a sign that Generali is going to gradually switch its reinsurance program to the capital markets, but it should be taken as a sign that one of the world’s largest insurance companies is likely to find other ways to share more of its risks with ILS investors going forwards, be that through further catastrophe bond issues or other means.
Importantly, Generali may turn to ILS again if it can prove more competitive, in terms of pricing or terms, again, as the insurer did find its reinsurance costs increased slightly in 2018, on the back of the catastrophe activity in the prior year.
Generali said, “In accordance with the market cycle, reinsurance costs have marginally suffered from the contingent circumstances, recording increases, although very limited, in reinsurance expenses for the 2018 coverages keeping retentions unchanged or, in some cases, even more conservative.”
Generali ceded more losses through to its reinsurers in 2017, over the prior year, but the companies greatly diversified model meant that it was not significant and the ILS layers of protection did not come into play given the regions where Generali has the most catastrophe risk exposure, versus where the major losses occurred.
The ILS market, having not taken a significant share of Generali’s 2017 loss experience, may well be prepared to offer very attractive terms for any further issues to come from the insurer this year.
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