Many experts tend to look at reinsurance as a homogenized industry. The idea is that reinsurance companies sell insurance covers to commercial insurance companies. Many experts assume that since all cedant insurance companies are commercial in nature, they have similar needs for reinsurance. However, this is not the case. The market for reinsurance is not filled with homogenous buyers, all of whom have the same needs. Instead, the reinsurance market is filled with heterogenous buyers which can be combined into various categories. The top five ways in which reinsurance buyers can be categorized have been mentioned above.
- Global Buyer: The global buyers in the reinsurance market are the name-brand commercial insurance companies which have high customer recognition in most parts of the world. Companies like Allianz, AIG, etc. fall under this category. The purchasing behavior of these companies is quite different as compared to other cedant insurance companies. This is because these companies are completely aware of the scale of the business that they control. They are also aware that they are prized clients for any reinsurance company. Hence, they try to consolidate their business before getting it reinsured.
Global buyers consolidate their global insurable interest and deal with the reinsurer in a centralized manner. This is done in order to ensure that the biggest and most diversified risk portfolio is presented to the reinsurer. Once the reinsurer becomes allured with such a portfolio, the global buyers try to extract the lowest price from them.
Global buyers tend to use their scale and diversification in order to obtain a commercial advantage. Another important point to be noted is that global insurers generally have a strong economic backbone. These large ceding insurers are generally looking for protection against peak or catastrophic risks instead of trying to free up capital for their day-to-day operations.
- Regional Buyer: Regional buyers are like globally renowned insurance companies. However, the scale of their operations is much smaller. This generally includes cedant insurance companies which have a stronghold in one domestic market. However, over a period of time, they have expanded into nearby markets. This makes them a regional powerhouse.
There are many insurance companies that have business interests in Eastern Europe, Western Europe, or North America. Such companies also have the scale and diversification of risks which makes them attractive to reinsurance companies. However, the scale is not so large and risks are concentrated in one geographical region. They too like to obtain lower prices because of the scale of their operations. However, reinsurance companies are not able to provide the lowest price to them because of the concentration of risks as well as the relatively small scale of business.
- Local Buyer: Local buyers are insurance companies that have a stronghold on one particular geographical market. They may be present in different lines of business. For instance, they may be present in the life insurance business, motor insurance business, home insurance business, etc. However, a large chunk of their business is concentrated only in one geographical area. Such cedant insurers are not able to generate the scale of business that interests reinsurance companies.
Hence, these insurance companies generally tend to get separate reinsurance covers for their different lines of business. They are aware of their limitations to get a good price based on their scale of operations. Hence, they focus on the quality of risk coverage. Each line of business tries to get a separate reinsurance cover that meets its specific business needs.
- Emerging Market Buyer: Emerging market buyers are like regional or local players. Their customer base also lies in a concentrated geographical market. However, the difference is that, in the case of an emerging market buyer, the geographical market is not a well-established market for insurance products.
A good example would be countries in South America, Africa, or South East Asia. These countries do not have a huge infrastructure or consumer market for insurance products. As a result, reinsurance is usually purchased by such companies so that they can completely transfer their risks onto a third party. This helps them free up some of their risk capital. This risk capital is then used in order to expand the business.
The small scale of business across different lines of business makes it necessary for such companies to bundle the reinsurance from their different lines of business into one.
- Speciality Line Buyers: Speciality line buyers are cedant insurance companies that sell insurance of a different type. For instance, there are companies that have insurance products related to agriculture as well as weather. These specialty line buyers generally find it difficult to connect with reinsurance companies that understand their business model and are willing to partner with them by taking on additional risk.
These cedant insurance companies are willing to pay a premium in order to obtain reinsurance. These companies are also short on capital and generally rely on reinsurance companies to able to obtain additional capital which they later use to expand their business.
The bottom line is that there are many different types of buyers in the reinsurance market. Also, there are several different motivations and business needs that drive these buyers to purchase reinsurance.
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