Reinsurance pricing

An audience poll about the current state of reinsurance pricing found that 62% of the audience who voted thought that it was a good time to be a reinsurance buyer. The panel agreed that it was still very much a buyers’ market. There is overcapacity and areas not affected by losses will not pay for losses elsewhere. It is the job of reinsurers to put together a sustainable portfolio in these tough conditions.

The broker viewpoint was that only a culmination of large losses, such as happened between 1987 and 1992, would see reinsurance prices return to a more sustainable level. The panel agreed that low interest rates continue to attract alternative capital into the market. If interest rates were to increase then that would take some of the capital out of the market, but as long as rates are low, then capital will keep flowing into the market and the excess supply will keep prices down. It had been argued that alternative capital would disappear after losses, but when this was put to the test in 2017, the capacity was reloaded. In the current low interest climate, it would take a lot of losses for alternative capital to go out of the market.  

Non-traditional reinsurance/ILS

The audience were asked to vote on a question about their organisation’s position on and accessibility to the purchasing of non-traditional reinsurance. The vote showed that 45% of the audience who voted had access but had no plans to buy non-traditional reinsurance in the foreseeable future.   

For The Co-operators (Canada), although they have the scale to buy ILS, the company is not actively pursuing it because currently there are many factors which make traditional reinsurance more appealing. In Canada, catastrophe reinsurance requirements are driven by earthquake, with companies needing to buy up to 500 years probable maximum loss (PML). Insurance-linked securities (ILS) are more expensive at the top end so would have to be bought lower down. Also, as a buyer you must consider what is covered by the ILS, if certain perils are excluded, then the risk stays with the insurer. Similarly, if an ILS is on a parametric basis, then losses suffered by the insurer can be very different to what is actually paid out on an ILS instrument. Reinstatement is another issue, if a loss occurs but the ILS does not get reloaded, then that would be a big problem for an insurer.

The reinsurer view was that ILS puts downward pressure on prices but is not a suitable mechanism for every client. The cost of putting the structure together may be prohibitive for smaller companies. Also. there is a chance that ILS capacity could disappear if interest rates were to increase. R+V Versicherung (Germany) tends to work with companies which buy traditional reinsurance so for them it is not a big problem. They stay relevant by having a close relationship with their clients and reassuring them that they will be with them for the long term. Some smaller companies buy reinsurance for solvency purposes, and this has been a good opening for R+V Re in recent years, but always based on the broad relationship with the client rather than trying to cherry pick the best business.  

Another problem with ILS is that if there is a parametric trigger, it is possible that events will create an insured loss but there is no recovery if the trigger is not reached. For example, floods in Barbados were not covered because the rainfall was 1mm below the trigger, which is difficult for a broker to explain to its client.

Seeing how different scenarios might affect the risk adjusted capital serves as a starting point in the rating process, looking at how the reinsurance structure responds to certain events. Concentration of capacity and liquidity are also considered. For ILS products, if there is collateral behind it, then it is not an issue.  

Consolidation in the reinsurance market

There has been significant merger and acquisition (M&A) activity in the market. Combined ratios have averaged around 95% over the last few years, which includes reserve releases that will not last, so there is pressure on expenses. Consolidation in the reinsurance and primary field is one way to reduce cost. Some insurers are acquiring reinsurers to achieve better diversification and develop more relationships with financial markets. It can also be a way to access market segments that are otherwise difficult to reach. Some companies are trying to expand through acquisitions, they need to grow to make better use of their capital. Costs of adopting new technology can be prohibitive for smaller companies so they may need to merge to get better cost efficiencies. Insurtech is accelerating that process. For brokers, M&A is also a way to cut costs with many smaller brokers being taken over. 

Consolidation can lead to cost efficiencies but there are potential drawbacks. For reinsurer mergers, one plus one never makes two. Cedants may feel uncomfortable with a reinsurer, therefore you must be careful not to jeopardise existing business when merging. It is possible to grow without acquisitions.

The Co-operators take consolidation in their reinsurance panel seriously; they do not want too much risk concentrated within one reinsurer. They monitor M&A activity quarterly and carefully monitor  how much they are placing with reinsurers as they do not want to just add up the capacity of those combined reinsurers. Diversification is important, if there is consolidation then they have enough good relationships with reinsurers to ensure that those shares can easily be absorbed. It is also important to know what the counterparty risk is of your reinsurers. If a reinsurer is dependant on retrocession cover, then it is essential  to make sure that it fits in with long-term planning.  

Panel diversification is part of the rating methodology. Lower capital charges are applied if the reinsurer has a higher rating, but diversification is an important part of the discussions.   

Session panellists:

• Apundeep Lamba, Vice-President, Corporate Actuarial & Reinsurance Services, The Co-operators (Canada)
• Andreas Beckmann, Chief Underwriting Officer, R+V Re (Germany)
• Greg Williams, Senior Director, A.M. Best (USA)
• Tony Phillips, Chairman, Willis Re Latin America & Caribbean (USA)
• Greg Lockard, Director of Reinsurance Operations, Shelter Mutual Insurance Company (USA) moderator