Eastern European reinsurers poised to provide $100m retro capacity

By Kirill Savrassov, SVP & CEO Phoenix CRetro Re

The ability to post collateral abroad now provides insurers in the CEE region with the opportunity to participate in the global markets.

The granting of a special license to the Ukrainian insurance company, Brokbusiness, by the National Bank of Ukraine to post collateral abroad will lay the ground for the provision of retrocession capacity to the global insurance market by insurers in the CEE region. It is envisaged that regional companies will provide around $100m of capacity within the next 3-5 years. This will provide a much welcomed diversification to the portfolios of local players as well as secure capacity for the international market which to begin with will be predominantly Lloyd’s syndicates and global reinsurers.

The Brokbusiness license represents the culmination of certain developments in both the global catastrophe reinsurance markets and the local insurance markets in the CEE and CIS regions. One the one hand, there is the collateralised reinsurance and insurance linked securities (ILS) markets, which are currently growing very rapidly because of the involvement of non-insurance capital. These markets provide a number of different instruments to enable those who are not professional insurers or reinsurers to participate in the international catastrophe reinsurance market.

On the other hand, there are the local markets within the CEE, the CIS and the Middle East where there is the capacity and understanding to participate in the international cat markets, but where the local markets are not quite developed enough. But these markets have no exposure whatsoever to global cat events; they are not able to participate due to the fact that almost no company in these markets market has an adequate financial strength rating as the sovereign rating in these countries, which limits the scope of individual corporate ratings, is well below the minimum requirements of the security committees of international brokers.

Currently, the possibility of CEE insurers making use of letters of credit confirmed by A rated western banks is very limited. This issue is further complicated by the negative attitude on the part of western banks’ towards the region. This makes the whole process very expensive and very complicated for CEE insurers.

However, one of the broader benefits of the license issued by the Bank of Ukraine is it opens up the possibility of making use of “escrow accounts” for use in insurance transactions between companies in Ukraine and companies based elsewhere in the world. Previously, this was not possible because the escrow concept was not properly understood within CEE insurance and the lack of appropriate legislation in various CEE countries. This is also one of the reasons why the opportunities in the ILS market was not considered by other capital market players who normally invest in ILS type securitized asset classes such as institutional investors or asset managers.

It is also now possible to Collateral Trust Agreements (CTAs) within the insurance context. CTAs are widely accepted internationally as a simple, clear and efficient way of collateral provision and are frequently used in transactions between local and international banks. So if local financial systems use collaterals as the way of attract credit for the economy why insurers can’t use it as a way of guaranteeing their financial performance and reap the added benefit of generating inward premium income for the region as well as increasing the diversification of their portfolios?

In terms of this diversification, the CEE region represents a primary insurance market with US$45 to $50bn of gross written premium annually, with a good combined ratio and minimal exposure to global catastrophe events. Indeed, many countries in CEE region usually have one national reinsurer to which the local insurers cede their reinsurance. These national reinsurance carriers are therefore ideally positioned within their local markets to write ILS business to diversify their portfolios. In this regard, they can act as a hub for the amalgamated capacity in their country.

Again this complements the risk/liability profile of the local markets: many of the domestic insurance companies in the region are part of larger financial groups, usually with banks or asset managers as the shareholders who understand the role of ILS as an alternative asset class for investors. And, although the instruments, which are used for these deals are standard ILS instruments because the is the only way for local insurers in the CEE to overcome the sovereign rating ceiling, the participants are still professional insurers who have consciously decide to participate in the global catastrophe reinsurance market, so the capacity, by its nature is still pure reinsurance capacity.

This also a trend which coincides with current World Bank’s policy to encourage emerging states to resort to the ILS market to in order to provide another level of protection for their economies in the event of the country being struck by a major catastrophe. For example, the recent success of the issuance of a cat bond by Turkey should encourage other emerging country governments or insurance groups to follow that example.

There is, however, one major challenge which needs to be overcome. And this is the lack of understanding and almost complete absence of communication between the state and regulatory authorities in the CEE and the global financial centres. One prime example would be how Bermuda is perceived by central banks and regulatory authorities in the CEE. In a number of CEE countries, there are significant regulatory restrictions on transactions with entities based in Bermuda. This is despite the fact, that 15 out of the 40 Global reinsurance groups are based there and that Bermuda is a well-established and highly regarded part of the international ILS environment and represents 30% of global catastrophe reinsurance market. Bermuda, of course, was also the first offshore jurisdiction to be included in the OECD’s international financial centre “White List” category, while the OECD’s most recent assessment rated Bermuda favourably on international standards of tax transparency and placed the island at the same level as the U.S., the U.K. and Germany. However, to transform this state of affairs will require a sustained process of engagement between the global financial centres and the state and regulatory authorities in the CEE.

Original article published here.

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