A.M. Best Special Report: "Unauthorized" Reinsurance Gains Growing Share of P/C Market

Business Wire, Dec 26, 2007

OLDWICK, N.J. -- An A.M. Best Co. special report indicates that the use of unauthorized reinsurance is growing in the U.S. property/casualty insurance industry, but an expensive infrastructure of collateral tracking, accounting and reporting surrounds the practice. Mitigating credit risk arising from the quality of reinsurance, whether with an authorized or unauthorized reinsurer, has become an integral part of a carrier's enterprise risk management.

* The percentage of insurance premium ceded to reinsurers increased moderately from 1996 to 2001, but reinsurance premium growth slowed abruptly in 2003 as several companies increased their net retention in response to higher reinsurance costs.

* A series of losses beginning in 2002 failed to reignite reinsurance premium growth, and by the end of 2006, premiums ceded had decreased to 11.5% of total direct written premium, the lowest ratio of the 11-year period studied.

* The ratio of net reinsurance recoverable to surplus was volatile over the 11 years, starting at 31.4% in 1996 and ending at 22.6% in 2006, with peaks exceeding 40% in 2001 and 2002 after the Sept. 11 attacks.

* The ratio of the total overdue amount to the total reinsurance recoverable was 37.7% in 1996 and 46.6% in 2006, with some fluctuations between the two years.

* The rate of unauthorized reinsurance ceded premiums increased from 21% in 1996 to 35% in both 2005 and 2006.

* The U.S. P/C industry's total exposure to credit risk on unauthorized reinsurance during the 11 years held relatively steady, and the net credit exposure to reinsurance recoverable was $133.2 billion at the end of 2006.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.