Reinsurance “Recoverables” Become Less Significant

The global issue of “reinsurance recoverables” appears to have become less of a concern over the course of 2003, according to report just released by rating agency, Fitch Ratings. The report, which takes in results from 1998-2003, finds the industry’s exposure to reinsurance grew much less over 2003 than in the previous five years.

Overall, the industry’s risk retention ratio rose by 0.2% last year to 78.8%, following five years of decline. And, while net reinsurance recoverables grew to US$174.3 billion last year from US$171.6 billion in 2002, recoverables as a percentage of policyholder surplus dropped in 2003 to 48% – a 11 percentage point drop over 2002. “The decline in the ratio of surplus to reinsurance recoverables was even more pronounced among large companies,” the report notes.

“Fitch believes the decline in the growth rate of the industry’s exposure to reinsurance is directly linked to the industry’s strong 2003 underwriting performance and corresponding surplus formation… Because of this strong performance, comparatively fewer losses reached their excess-of-loss attachment points, producing…a decline in the industry’s ceded loss ratio and a corresponding decline in reinsurance recoverables’ growth rate,” the Fitch report observes. Another trend highlighted by the study is the move away from admitted U.S. reinsurers to foreign non-admitted reinsurers. Fitch says the growth of the Bermuda market, along with aggressive growth strategies adopted by European reinsurers, has caused this trend.

In 2003, the industry placed 60.7% of its reinsurance with U.S. carriers, and 63.9% with admitted carriers. Looking back at 1998, 71.9% of business went to U.S. carriers, and 75.5% to admitted carriers. Nonetheless, the move to non-admitted foreign carriers has not lead to collectability issues. Overall, the percentage of overdue recoverables grew by 6% in 2003, and while disputed recoverables with admitted carriers “spiked” in 2003, disputed recoverables declined significantly with non-admitted carriers.