Capacity in the credit reinsurance sector remains meaningfully over-subscribed, impacting pricing and terms. Over-subscription arises as a result of various signal contributing factors. The (re)insurance industry in general is oversubscribed, with returns in other lines of business relatively lower. We see no realistic expectation for significant change in the short term. Credit loss ratios worldwide returned to profitable positions far faster than had been anticipated.
Credit is currently delivering relatively more favorable capital returns than most other lines of business. Therefore, new capacity has been attracted into the line in the last 18 months. The new capacity is driven mainly by existing underwriters establishing new operations with reinsurers previously not active in the line of business. Considerable confidence exists for macro-economic conditions to continue to favorably influence and perpetuate below average loss ratios.
Discipline around insurance underwriting and focused risk management activities have allowed quick responses to adverse developments. These may include the Greece financial crisis, the revolts in Arab nations and sectoral collapse, such as the British retail sector. This reduces perceived volatility, maintains confidence and increases the level of capital allocated to the class.
Credit reinsurance rates remained under pressure for a variety of reasons. The premium from non-proportional contracts represents less than 5 percent of the global credit reinsurance premium. The vast majority of credit reinsurance premium is derived from proportional, largely, quota share, contracts.
Even though the global recession was credit’s one in eighty years event, most excess of loss structures were untouched. The global financial crisis really proved that credit is a frequency loss class, with a complete absence of severity.
The direct writers still remain cautious and ever watchful of economic indicators for evidence of systemic deterioration. Paradoxically, with understandably increased demand from insureds, direct prices have fallen month on month for more than 20 months. Such a slackening in original disciplines will undoubtedly impinge on the next cycle.