Insurers should treat reinsurance as a capital management tool rather than simply a form of protection, according to Howden Re, which argues that a softening market presents an opportunity to reassess risk retention and improve returns.
“The best performers treat reinsurance as a capital tool, not only as protection,” the broker said in a report benchmarking 42 European non-life insurers over 2023-25.
It found that the strongest performers combined good underwriting with leaner capital positions, while some insurers holding the largest solvency buffers generated relatively weak returns.
The capital-light, high-return group held around €28 of capital for every €100 of premium, compared with €86 for the capital-intensive, low-return group. The former averaged a return on equity of around 22%, while the latter returned less than 5%.
Howden Re said the current buyer-friendly reinsurance market, with prices softening, allows insurers to redesign programmes around their capital plans.
This could include reviewing retentions, transferring volatility where they lack an advantage in pricing or data, and protecting against accumulated exposures.
However, the broker stressed that capital efficiency cannot compensate for weak underwriting.
Insurers with the best combined ratios averaged around 17% return on equity, compared with around 4% for those with the weakest, while capital efficiency amplified rather than created good underwriting results.
The report urged insurers to review reinsurance structures against explicit capital and return targets rather than simply renewing existing programmes.
It also called for investment risk to be considered alongside underwriting exposures, as market risk can account for a significant part of an insurer’s capital requirements.
Howden Re cautioned that holding less capital is only beneficial if an insurer can withstand stress, noting that its analysis did not test balance-sheet resilience.
As Reinsurance News understands, the appropriate capital buffer therefore depends on how an insurer would respond to severe but plausible scenarios, rather than how its solvency ratio compares with peers.
