The industry's larger players are proving they are capable of bringing new capital and capacity into the market
Just what is Warren Buffett doing investing in both of the fierce rivals at the top of the reinsurance rankings?
Straight after his company Berkshire Hathaway completed the world’s biggest life retrocession deal with Swiss Re, he decided to raise his personal stake in Munich Re.
While cynics might have assumed this was a typical example of hedging, the Oracle of Omaha’s buying strategy might equally reflect a belief in the ability of both companies, and larger reinsurers in general, to make money.
It is the larger players which have proved themselves most capable of attracting capital and injecting new capacity into the market, particularly in retrocession.
Munich Re has just launched Ceres Re, a retro vehicle at Lloyd’s, and anticipates that “some reinsurers will try to increase their top lines by writing more retro”.
It is the largest companies which have the expertise and reputation for discipline required to put together such deals.
At the same time, ‘middle market’ reinsurers have dampened their appetite for offering retrocession because of the associated capital requirements.
One can understand the interest in retro from larger players, given that pricing in this area remains higher than reinsurance even in a soft market and that smaller reinsurers are starting to see pricing pressures being knocked-on to them from their cedents.
Improvements in modelling and a wider investor base are also pointing to renewed interest, but the non-traditional types of retro such as collateralised quote-share deals, cat bonds and Industry Loss Warranties (ILWs) have made the most headlines in the opening weeks of 2010.
Hannover Re’s K6 is a case in point. As a collateralised quota-share deal it resembles a sidecar, while Harbor Point’s retro vehicle New Point Re III will be used for writing collateralised property business and ILWs.