Differential Pricing By Reinsurers May Prove Beneficial To Some, Says Report

October 23, 2007

The European Commission (EC) findings on business insurance are expected to add further impetus to the trend toward differential pricing within the reinsurance sector, Standard & Poor’s Ratings Services confirmed in a recently published report. The report, titled “Differential Pricing Reinsurance: EC Findings Could Be A Blessing In Disguise, For Some,” says that while this could be beneficial for the sector as a whole over the long term, it could have a mixed impact over the short to medium term and is likely to favor those players able to offer lead capacity.

It is a common practice within the reinsurance industry for a single price to be paid to all reinsurers participating on a given risk. “The market distortion caused by harmonized pricing could explain, at least in part, why a number of the larger global reinsurance franchises have struggled to consistently produce a level of earnings commensurate with their superior competitive position,” said Standard & Poor’s credit analyst Peter Grant. In addition continued migration toward differential pricing would enhance the efficiency of the reinsurance market. “The reduction in the velocity of capital flows within the sector could temper future underwriting cycles, which would be a welcome development for both buyers and sellers of reinsurance,” added Grant.

Source: S&P, www.standardandpoors.com

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