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Risk appetite statements drive reinsurance buying trends

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The adoption of formal risk appetite statements by many insurers is driving a fundamental shift in reinsurance purchasing, according to Willis Re, the reinsurance arm of Willis Towers Watson P.L.C.

Willis Re surveyed 241 insurers in 48 countries and found that 64% now have a formal risk appetite statement, with 17% saying they are planning to develop such a statement soon.

Most insurers that have a risk appetite statement — 87% — are using it to drive reinsurance decisions, according to the study published Monday.

Use of risk appetite statements is most prolific in Europe, Asia and Africa, Willis Re said, with more than 85% of respondents from those regions indicating that they have, or will have, a risk appetite statement.

Willis Re said that Solvency II, the risk-based capital regulatory regime for insurers and reinsurers in Europe that took effect Jan. 1, has been a driver for more formalized risk appetite statements, with 71% of insurers to whom the rules apply saying that Solvency II had been a factor in their use of a risk appetite statement, up from 56% in 2013.

Of insurers in North America, 51% said they had a formal risk appetite statement, while 15% said they would employ one soon.

In Latin America, the study showed, 54% of insurers have a risk appetite statement while a further 26% plan one soon.

Willis Re said that the study found that larger companies were more likely to have formalized risk appetite statements than their smaller counterparts.

The study showed that 90% of those companies with gross written premiums of more than $5 billion had a formal risk appetite statement compared with 59% of those insurers with gross written premiums of between $100 million and $500 million, and 60% of insurers with gross written premiums of less than $100 million.

The study also showed a continued trend toward centralized reinsurance buying, according to Willis Re.

The vast majority, 86%, of respondents, said that the final reinsurance purchasing decision was now being made by top executives rather than by individual business lines.

“As an industry, we've observed the broad shift around reinsurance purchasing in recent years with the increasing adoption of formal risk appetite statements,” Tony Melia, CEO of Willis Re International in London, said in a statement.

“Those statements have proven essential to provide macro-level guidance to underwriting, global retention management and alignment of cession to wider strategies linking 'micro' strategies to 'macro' targets,” he added.