Best: ‘Unauthorized’ Reinsurance Increasing P/C Market Share

December 27, 2007

A.M. Best Co. has published a special report which examines the increasing use of “unauthorized reinsurance” in the U.S. P/C insurance industry. The report also indicates, however, that an “expensive infrastructure of collateral tracking, accounting and reporting surrounds the practice.”

Best concludes that, “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 rating agency cited the following findings:
— 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 percent 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 percent in 1996 and ending at 22.6 percent in 2006, with peaks exceeding 40 percent in 2001 and 2002 after the Sept. 11 attacks.

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

— The rate of unauthorized reinsurance ceded premiums increased from 21 percent in 1996 to 35 percent 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.

BestWeek subscribers can download a PDF copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet files of the report data at no additional cost from the Best web site at:

Nonsubscribers can download a PDF copy of the full special report (12 pages) for $55 or a combination of the PDF copy plus the spreadsheet file of the report data for $140 from the web site, or call Best’s customer service for more information at: (908) 439-2200, ext. 5742.

Source: A.M. Best –

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