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The extent to which their insurers use nontraditional reinsurance instruments as part of their overall program is something that corporate buyers of insurance are beginning to monitor more closely, experts say.
Corporate clients need to be assured that their insurers are not overly reliant on nontraditional forms of coverage, said Dennis Sugrue, a director with Standard & Poor's Corp. in London. Dependency on nontraditional capacity may mean that insurers are not able to obtain all the coverage they require, and any additional costs associated with this may be passed on to the insurance buyers, he said.
“Corporate clients do not necessarily need to know very much about the reinsurance protection that their insurer buys,” said Simon Buxton, global head of reinsurance for Allianz Global Corporate & Specialty in London. “However, they do need to know about the financial strength and security of their insurer in order to feel comfortable buying their insurance products.”
This is more usually signaled by rating agencies, Mr. Buxton said. “Reinsurance effectively is just another form of capital that an insurer uses to help maintain a strong financial rating,” he said.
Typically, if insurance buyers use rating agency data to assess their insurance providers, they should be comfortable about the quality of nontraditional forms of reinsurance coverage being used by those insurers because rating agencies assess counterparty risk, among other things, said James Vickers, chairman of Willis Re International, a unit of London-based Willis Group Holdings P.L.C. “The question for really large corporate insurance buyers is, "Can some of their peak risks be transferred to the capital markets?'”
Stronger demand for insurance-linked securities is putting pressure on traditional reinsurers, spurring innovation as reinsurers and brokers develop novel investment structures for institutional investors and the hedge fund managers who invest on their behalf.