The reinsurance industry needs to move to a more sustainable model, argues David Huckstepp
Reinsurers were recently engaged in their late summer pursuit of watching hurricanes develop and wondering how big a loss would be required to change the market. The endless speculation shows up a key part of the cynical reinsurer’s business plan: wait for the loss, raise capital, make lots of money, retire rich. It seems that a good part of the market is relying on a major disaster to solve the problems it is currently creating.
Waiting for a major disaster does not seem to be the best basis for a viable business plan. It is too short-term in approach (and too focused on the benefits to individual reinsurers rather than capital providers or customers), it relies on an ability to raise prices without alienating clients, it is contingent upon raising capital (an interesting proposition in the current financial climate) and it doesn’t work if everybody else has a similar business model.
We need as an industry to move to a more sustainable model, one where reinsurers don’t believe that they can get away with doing foolish things now because the good times are just around the corner.
Could the current approach work if there is no major catastrophe for five or ten years when there are still smaller events to pay for?
While I do not believe we can abolish the cycle, a more long-term approach could mitigate some of the wilder swings. A more realistic approach needs to be based on the development of long-term relationships with both clients and brokers.
Reinsurance really can be a business where all concerned can benefit from the same deal, something which is easier to achieve if we’re not trying to get rich quick.
Currently both buyer and seller push as hard as they can because they believe the balance of power will soon shift the other way. A lack of trust also leads to fear that they won’t be treated well in turn.
By increasing communication we can begin to build up that trust and put ourselves in a far better position to build long-term success for all concerned.
David Huckstepp is active underwriter for reinsurance at R J Kiln & Co Ltd.