The arrival and implementation of Solvency II regulations in Europe has heralded a flurry of action from insurers across the continent to ensure readiness for the demands of the new regime.
In many Central and Eastern Europe countries there has been a noticeable difference over the past few years in companies’ preparedness for the new regulations; some insurers have taken a proactive approach, others have taken a more passive approach, awaiting regulator feedback.
The level of proactivity is driven largely by whether an insurer is independent and local or a member of a larger international group, where group-wide guidelines have been rolled out to its subsidiaries.
We have also determined a shift in the attitude of the local regulators in Central and Eastern Europe, many of whom have hired extra staff and linked up with regulators from other larger European countries, such as Germany and Austria, to share knowledge and discuss how to interpret and implement specific areas of legislation.
There was certainly an awakening during 2015 to the impending requirements and a consequential shift in the way companies now behave, not least with regard to their reinsurance arrangements.
Shifts in Risk Management
There has also been a significant change in the way that insurers in Central and Eastern Europe are approaching the topic of risk management. There is a much greater link than ever before to capital management and economic results, measured using very specific criteria. Insurance companies are defining their key performance indicators (KPIs) and using them as a measure to assess the efficiency and impact of their reinsurance protections.
Indeed, reinsurance buyers are working more closely with risk managers within insurance companies than ever before, and are increasingly under pressure to justify the covers they buy in a wider context.
Within their FLAOR/ORSA report, companies are expected to explain the rationale behind each core reinsurance protection and to measure its impact. It is no longer acceptable to use traditional processes, peer behaviour or ‘rules of thumb’ as an underlying basis for reinsurance buying decisions, without being able to explain the benefit it brings in quantifiable terms.
As a result, reinsurance intermediaries are being asked to carry out more analyses than ever before. In many cases, they are also being asked to assist companies in making changes to their reinsurance programmes.
Results from financial models are also increasingly being incorporated into many clients’ internal and external reports as a measure of the value of reinsurance. There is also an increasing demand to use proprietary flood and hail catastrophe models for the Central and Eastern European region in clients’ internal models.
Core to reinsurance decision-making is the topic of risk appetite, which has gained a far greater significance with the arrival of Solvency II.
Companies in Central and Eastern Europe are now thinking in a much more structured way about the amount of net risk they can take, the trade-off between risk and reward, and the potential scenarios which can threaten net results.
Many companies have only recently started to consider risk appetite on a company-wide basis, rather than a single line-of-business basis.
Management boards may be comfortable with a certain amount of net risk in one line of business. However, the interplay with other lines, or the impact of poor results in several lines of business in one single year, has not always been fully analysed or reflected within companies’ reinsurance purchases.
Due to the increasing focus on risk appetite, at Willis Re we have carried out a significant number of gross/net analyses of individual line of business portfolios or whole accounts for our clients during the past year. Many of these analyses have led to alternative reinsurance structures being implemented or additional coverage being purchased, for example to reduce volatility within the net result or to protect better against potential peak severity risk.
One of the most popular forms of additional protection has been aggregate cover, often on a multi-line basis, which can have a very significant impact on reducing net volatility.
During the course of 2015, a variety of solutions have been implemented in Central and Eastern Europe beyond traditional programmes, as well as a change in emphasis on reinsurance strategy. In addition to aggregate protections, Willis Re has been providing support to clients in certain countries looking for a solution to address long-tail reserve risk, as well as retroactive covers to protect specific areas of legacy exposure.
Our perception is that many Central and Eastern Europe clients are starting to move away from the traditional annual view of reinsurance purchasing, where a company seeks the best possible terms available from the market during any one renewal season, and are beginning to recognise the potential advantages of multi-year solutions, multi-line ‘wrap-around’ covers and aggregate solutions, with additional features and linking lines of business in order to optimise placement.
Reinsurers who can offer more than mono-line, traditional reinsurance solutions are profiting significantly from the additional needs of customers in Europe, who see them as potential strategic core partners for the longer-term.
This article, by Maya Popovic-Biereth, Head of Central and Eastern Europe for Willis Re, and Hamish Dowlen, Executive Director of Willis Re International, was first published in Insurance Day on January 2016, as part of that publication’s special report on the Central and Eastern Europe re/insurance market.