In a search for greater diversity and income potential in the face of competition and unattractive economic conditions, reinsurers that in the past had not had a significant primary insurance component appear to be moving in that direction.

“We are seeing a trend of reinsurers moving into the direct market,” said Nigel Brook, partner with insurance law firm Clyde & Co LLP. “Historically, reinsurers were reluctant to do this for fear of being seen to compete for business with their reinsurance customers.”

Brook said reinsurers “face a number of headwinds” in the current environment, among them the fact insurers are retaining more risk; overcapacity; competition from capital markets; and low interest rates and investment returns. “Given these conditions, many reinsurers are looking to hedge their bets and write direct,” he said.

Gregory Hendrick, president, property/casualty, XL Catlin, said “there’s no magical number for the mix” between reinsurance and reinsurance for groups that write both. “Right now were at about $10 billion in gross written premiums for primary insurance and around $4 billion for reinsurance,” he said. “I don’t have a preconceived notion of what the proportion should be.”

Hendrick said he sees “a big advantage” to be able to operate in both markets. “It gives you full insight.”

In a recent Vienna Insurance Group AG conference call, Chief Executive Officer Elisabeth Stadler said one of the group’s main strategic goals is to establish a competitive presence in European reinsurance markets (Best’s News Service, March 23, 2017). Stadler said Prague-based VIG Re, established in 2008, now operates in 31 countries and plans a gradual expansion in Germany and “a controlled entry” into Western Europe with a focus on France, Belgium, Luxembourg and Switzerland.

She said VIG Re, with 2016 premium volume of only 370 million euros ($399.8 million) out of a total 9.05 billion euros for the group, is looking to “position ourselves in the expanded markets as a niche player for special customer and market segments”, mainly local and regional direct insurers.

Hannover Re, the world’s third-largest reinsurer by 2015 reinsurance premiums written, according to AM Best’s annual list of the top 50 reinsurance groups (XL Group is No 15), expanded its presence in the primary market with the acquisition of Argenta Holdings plc, a UK holding company with a number of Lloyd’s-related entities.

“Hannover Re has been active for some time now in the primary insurance field, always as a complement to its main product, reinsurance,” said spokeswoman Janine Bernkurth. She added primary insurance premiums are nearly 10 per cent of Hannover Re’s total property/casualty book.

Bernkurth said the reinsurer’s acquisition of Argenta and its Lloyd’s syndicate “opens up access to new business opportunities not only in the London market but also to worldwide business”.

Clyde & Co’s Brook said there are “significant challenges” in underwriting both insurance and reinsurance. He noted reinsurers are accustomed to writing international business on a cross-border basis but “when it comes to direct business, local regulations make this much more challenging”.

A direct insurer requires much larger underwriting and claims teams than an equivalently sized “wholesale” reinsurer, said Brook. “Competition in the direct market is intense too, not least for the larger international accounts.”

On the positive side, XL Catlin’s Mr Hendrick said having operations in both insurance and reinsurance “allows us to go into small to medium business and personal lines from a reinsurance basis, which gives us a good mix”.

As a primary insurer, XL Catlin has “very little exposure” to personal lines, and that is mainly in fine art and specie, with a little bit in marine and aviation, he said.

A management change instituted by XL Catlin on January 1 gave Hendrick a unique view of both sides when he assumed responsibility for both insurance and reinsurance in the group’s property/casualty operation after having led the reinsurance business alone.

He said there was no shift in XL Catlin’s underwriting strategy with the executive change but added “as you see more players try to get from the end of the risk chain in reinsurance and capital markets and towards the front of the risk chain, or insurance, we continue to see insurance and reinsurance blending”.

“The demarcation lines are starting to blur a little bit, and we felt that now was a time to have a bit of connectivity between it,” he said.

But there are caveats. “From reinsurance to insurance there’s no way we share our data individually from our reinsurance clients to our insurance team,” said Mr Hendrick. He added it would be inappropriate and “not in keeping with the relationships we have with our insurance clients, particularly with those that compete directly with XL Catlin on the insurance side.

Mr Hendrick said XL Catlin can bring insurance products to its reinsurance clients, giving them access to some of the specialty products the company writes.

He noted when operating from the reinsurance side the company is “always a level removed”, thus able to get more aggregated data. “It’s harder to glean insights other than on an aggregated basis,” said Hendrick. “We can see what’s going on in marine reinsurance, for example, on a market-wide basis.”

On the other hand, more detailed information on the insurance side “won’t help us price portfolio-based solutions”, he said.

Regarding regulatory or political changes, Hendrick said primary insurance is more difficult to react to than reinsurance because the level of regulation is greater and the individual markets are smaller. The consequences are more direct and the regulation more minute, he noted.

On an international level, Mr Hendrick noted a good example is the UK decision to leave the European Union. “Our reinsurance carrier is in Dublin. Our insurance operation for international insurance outside the US and Canada is in London” but has a Societas Europaea (SE) designation for Europe (XL Insurance Co SE) and as such “you can easily move it from one jurisdiction to another”.