Recent regulations requiring insurers to cede risks to domestic reinsurers has led to a change in the counterparty risk landscape for a number of insurers, said reinsurance advisory firm JLT Re.
Cessions to domestic reinsurers have increased significantly in 2014 after the regulatory change despite being relatively stable in prior years.
This reflects that in the absence of a major loss or credit event, reinsurance tends to be largely renewed with the same counterparties with the same shares, said JLT Re in a market insight report.
Against this backdrop, the net assets of domestic reinsurers have increased as a result of recapitalisation following the significant flood losses of 2013 to levels in excess of the net technical reserves, which should help mitigate some of the increased concentration risks.
While there is a general trend of increasing cession rates to domestic reinsurers, it is important to note this is not solely due to regulatory change, said JLT Re. There are many other influencing factors such as reinsurance pricing, renewal terms and available capacity which come into play.
A share of the cessions to domestic reinsurers is also retroceded out to international reinsurance groups, so the true proportion of the total risks retained within Indonesia is lower than what can be concluded given the available data. Overall, JLT Re believes that this pattern is likely to be similar across many of the reinsurance placements of all (or most) insurers in Indonesia, indicating an increase in concentration of risks across a smaller pool of domestic reinsurers.
Need to monitor concentration risk
Increased dependency on a smaller pool of reinsurers highlights the need to monitor concentration risk more closely. Increased retentions can be positive for insurers where accompanied by indepth consideration for risk tolerances, capacity optimisation and underwriting discipline.
JLT Re notes that this has been the approach taken recently by the Financial Services Authority (OJK). This also highlights the need for risk management strategies to be considered more than reinsurance. A