Despite the central role of reinsurance in the global risk transfer system, it remains structurally illiquid. Once placed, almost all reinsurance capital is held to maturity over annual contracts, with limited scope for adjustment, says Howden Re.
In its new report, “A secondary market for reinsurance”, Howden Re examines the consequences of that illiquidity and articulates a framework for introducing structured secondary trading. By separating origination from ongoing ownership, as other mature capital markets have done, reinsurance could embed optionality into its contracts, improving capital efficiency and supporting more efficient pricing.
A more open, liquid market for primary and secondary risk trading would bring important advantages to the reinsurance market by introducing optionality to the value chain, benefitting cedents, reinsurers, brokers and capital providers. This could, in turn, lower the cost of reinsurance while making reinsurance more economically profitable for underwriters, says the report.
“In credit markets, secondary trading transformed static exposures into dynamic balance-sheet assets. We see the same opportunity in reinsurance. A functioning secondary market would let participants actively manage risk through the cycle, releasing capital when returns compress and adding exposure when pricing improves,” said Mr Rob Bredahl, Vice Chair, Howden Re and Chair, Howden Capital Markets & Advisory.
Secondary trading
“When reinsurance is treated as a third form of capital, the case for liquidity becomes obvious. Secondary trading turns static, hold-to-maturity contracts into flexible instruments with real option value. This, in turn, lowers the cost of capital for cedents while allowing reinsurers to allocate balance sheet capacity far more efficiently,” said Mr David Flandro, Head of Industry Analysis & Strategic Advisory.
The barriers to a secondary market are practical rather than conceptual. Introducing liquidity requires a deliberate, broker-led approach that aligns with the industry’s governance, credit and relationship structures.
A credible secondary market would increase reinsurers’ willingness to provide multiyear covers, thereby offering cedents greater optionality.
Brokers would gain an additional tool to create value through additional placement volume outside of renewal business volumes. More frequent risk trading should eventually create better, more continuous data, underpinning stronger reinsurance structures for clients.
From a capital efficiency perspective, optimising exposure through continuous trading is more efficient than purchasing additional reinsurance or retrocession at a discrete points in time. This could also potentially reduce residual counterparty credit exposure obtained in tighter market conditions. M