Conning Study: Estimates $14 to $24 Billion Gap in P/C Reinsurance Recoverables Expectations Is Growing

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The growing gap in expectations between cedants and reinsurers may develop into a critical concern for the industry, according to a new study by Conning Research and Consulting Inc.

Although the expectations gap fits no industry pattern, cedants — primary insurers that cede underwriting risk or reinsurers who retrocede risk — are reporting recoverables expectations that are significantly greater than those reported by reinsurers.

“While there are filing data issues that distort the net gap calculation, we estimate that it was between $14 and $24 billion in 2003,” said Clint Harris, vice president at Conning Research. “The increasing recoverable values expose the industry’s increasing dependence on a financially healthy reinsurance sector.”

The Conning Research & Consulting study, “Reinsurance Recoverables: Mind the Gap” analyzes the current state of reinsurance recoverables, and examines key issues and industry best practices for managing this huge counterparty risk.

“Our study found that as recoverables have grown, so has the gap between cedant and reinsurer expectations,” said Stephan Christiansen, director of research at Conning Research. “The rate of recoverables growth slowed from its 29 percent high in 2001 to 6 percent in 2003, yet the aggregate recoverable gap continued to grow at a 22 percent rate in 2003.”

However, the expectations gap does not appear to be a universal condition between cedants and their reinsurers. Some reinsurers consistently report assumed liabilities that are near or exceed their cedants’ reported expectations. Conning Research analysis found that there is no particular pattern in any major segment of the reinsurance market (direct, large broker, medium broker) or the cedant market (top 10 commercial and other top 100 commercial).

“Reinsurance Recoverables: Mind the Gap” is available for sale by calling (888) 707-1177 or by visiting the company’s Web site at www.conningresearch.com.

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