High use of reinsurance puts consumers at risk, report claims

Irish general insurers moved risks tied to €2.8 billion of motor to public liability premiums in 2019 to international reinsurance companies, equating to almost three-quarters of all business written by the industry that year, according to a new report.

While much of the transfers were to overseas companies within their wider groups, the high reliance on reinsurance leaves consumers at risk if the company ultimately responsible for covering policyholders runs into trouble or the wider reinsurance market experiences turmoil, according to John Farrell, an industry veteran and author of the report, called ThePinkBook.ie.

The level of reinsurance, at a record 73 per cent of aggregate insurers’ 2019 premiums, compares to an average of about 15 per cent in the decade to 2014, just before the industry went through a period of massive losses, according to the report. Mr Farrell, a former executive with Axa, FBD and, most recently, Aviva, estimates that if insurers reverted to their previous levels of reinsurance, there would be an additional €545 million of capital available in Irish-supervised entities to protect policyholders.

‘Bounds of possibility’

"The big risk for policyholders is if a large part of their policy is effectively taken on by a reinsurer and something happens to that reinsurer. This may be unlikely, but is not beyond the bounds of possibility," said Mr Farrell, who set up a company called Muon Digital Media late last year to produce specialist reports on the general insurance market.

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"There is also a concern that with insurers in Ireland on the whole relying so much on reinsurance, the business model could be hit and insurance capacity lost if there is any dislocation in the market. We saw what happened when banks became overly reliant on international markets for funding and there is now a similar risk emerging in insurance."

Mr Farrell criticised the Central Bank for having no formal policy on the level of reinsurance that is appropriate in the market.

‘Catastrophic losses’

“At its core, reinsurance was designed to cover insurance companies against catastrophic losses,” he said. “But when you reinsure high levels of the business you write, you’re moving away from being an insurance company to becoming a distributor and are merely using reinsurance to cover your result.”

A spokeswoman for the Central Bank said that the regulator “recognises that reinsurance, as a risk-mitigation strategy, can be beneficial and appropriate”.

“However, this needs to be done appropriately as part of a coherent business and risk-management strategy,” she said. “This strategy should have due regard to the quality of the counterparty and the overall business model of the undertaking. We review the approach to and levels of reinsurance on a case-by-case basis in the context of risk management and overall business model of all the insurance undertakings authorised in Ireland.”