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Commercial lines carriers look to arbitrage reinsurance

While commercial lines insurers are attempting to take greater advantage of reinsurance arbitrage in the current buyers' market, they are not altering their underlying appetite for risk, according to Standard & Poor's (S&P).

The firm noted that in a soft reinsurance market insurers are striving to profit by "exploiting" price differences between reinsurance and direct insurance.

"Unlike in the late 1990s, the good news is that US cedants have not changed their underwriting appetite and have not set their risk tolerances based on the availability of reinsurance," observed the ratings agency.

"Instead, reinsurance offers cedants the opportunity to increase their gross limits while maintaining the same net limits. Additionally, cedants are taking advantage of higher ceding, which improves their expense ratios."

In its latest outlook report on the sector, S&P observed that some traditional US specialty writers had increased their gross limits to take advantage of soft reinsurance pricing conditions and "play some offense" in the face of the competitive threat from new participants such as Berkshire Hathaway.

S&P added that reinsurers are increasingly prepared to write treaties for lines of business that are traditionally written on a facultative per-risk basis.

It said that this phenomenon was also focused on the specialty arena, where it noted the emergence of broker-led facilities as well.

The firm suggested that while insurers' reinsurance buying strategies differ, "the common denominator is that reinsurance optimisation does not translate into underwriting dilution".

It added that it will maintain a watching brief on the use of reinsurance. In addition, while unlikely, S&P could take rating actions if it sees signs that insurers are relying on cheaper outwards protection to support excessive growth, poor underwriting standards or a lack of risk management.

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