October 17th, 2013

Achieve Meaningful Scale in Reinsurance

Posted at 1:00 AM ET

In a reinsurance market with abundant excess capital and where most reinsurance programs are oversubscribed, the need for a meaningful line size or differentiated underwriting contribution has never been more relevant.

Achieving shareholder return expectations is not easy, particularly in the current low investment yield environment. An obvious tool for the management of expense ratios is achieving economies of scale and diffusing the semivariable expense base over a larger portfolio of premiums. Equally, capital efficiencies are more obvious for larger entities, with greater diversification credit, better access to financing (both in terms of proportion and quantum) and an implied reduction in the cost of equity.

At the January 1, 2013, renewal, there was tangible evidence that some large U.S. buyers were focusing their reinsurance program on providers of capacity that were meaningful in relation to the overall size of the program or strategically important in terms of the value of the underwriting relationship. This was also evident during the June and July renewals with the ratio of successful signings increasing with the line size offered up to a tipping point of approximately USD50 million - a level where concentration and counterparty credit risks will become important factors in the allocation process.

This drive to scale could and is translating into more consortium arrangements among some of the smaller specialty class players to enable them to compete with the dominant market players, both on the revenue and cost efficiency fronts. The other obvious outcome is an increase in consolidation among smaller participants.

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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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