With some reinsurers playing it ‘fast and loose’, XL’s global head of ceded reinsurance explains why he prefers a more traditional approach
Rob Andrews started his insurance career in claims at US insurance heavyweight Liberty Mutual. He later switched to underwriting to broaden his horizons.
Before long, Andrews’ talents were noticed by the ceded reinsurance department. As is often the case, one thing led to another, and today he manages the global ceded reinsurance department for XL, the global primary insurance division of the Bermuda-based XL Group.
As might be expected with a company that writes a full range of business lines in 20 countries, the job of buying reinsurance is diverse. Andrews’ division operates out of offices in the USA, the UK, Switzerland and India to support XL’s underwriting around the world. It should come as no surprise, therefore, that Andrews has never experienced what many would describe as an ‘average’ day.
Here, he explains to Global Reinsurance why XL chose traditional reinsurance over catastrophe bonds and describes the disruptive influence of “fast and loose” reinsurers.
Q. How would you describe the current pricing situation in the reinsurance market?
A. We are in a soft market but it’s slightly different from others we’ve historically witnessed. To my mind, we’re embedded in a soft market when we see stepped erosion in pricing, limits management and terms. In this cycle, reinsurance rates have been steadily declining across the market for the past five years, and I have seen some loosening of limits, but contract terms have remained largely stable.
Notable exceptions over this period have been in marine immediately following Deepwater Horizon and, more recently, when property rates began rising in May in response to the plethora of worldwide losses in 2010 and early 2011.
Q. How do you approach deciding what to buy and structuring your reinsurance programmes?
A. Central to our buying philosophy is maintaining a balance between our capital strength, risk management and business objectives. In practical terms, that means fully understanding our exposures so we can construct programmes that protect our capital, dampen volatility and support our business heads’ ability to compete successfully in their market segments.
Q. What in particular is important to your company as part of this process?
A. Dialogue, diligence, the right tools, determination and a commitment to the company’s objectives. And, depending on the market cycle, a fair amount of stamina and good humour doesn’t hurt either.
Building articulate reinsurance solutions requires a team of highly skilled reinsurance professionals who work closely with the business units, risk management, actuarial, finance and others to understand the risk being assumed and to find the best approaches and structures.
Q. How has the current pricing affected your buying strategy?
A. Pricing grabs most of the headlines because it’s the one element to which we can all relate. As a buyer, low prices certainly beat the alternative, but they’ve not caused us to depart meaningfully from our normal buying practices.
As ever, we balance market pricing with our capital strength to achieve the best landing spot in terms of retentions and limits. What I have observed is how it has encouraged the market to develop new products and /or bring previously unattractively-priced products back to the table for discussion. This is a positive trend that I hope continues.
Q. What impact will Solvency II have on the purchase of reinsurance?
A. While there are still details to be finalised by the regulators, my initial impression is that Solvency II should be broadly similar to what we experienced after the financial crisis.
From an operational standpoint, we have well-documented processes and procedures, and we routinely audit our key financial controls. Procedurally, our ceded underwriting team employs catastrophe, risk and capital models to help them assess our exposures, which fits nicely with our focus on protecting capital and executing on XL’s enterprise risk management strategies.
While we purchase treaties on a global basis, we are always mindful that they equally must meet the regulatory needs of our various legal entities. I expect that Solvency II may require some minor adjustments to ensure we continue to hit the mark.
Q: How much premium do you cede to reinsurers?
A. For 2011 we’re estimating a treaty spend of around $600m.
Q. To what extent do you make use of alternative reinsurance structures, such as catastrophe bonds?
A. We evaluate all alternatives when developing reinsurance solutions. In fact, we considered a cat bond this year, but ultimately determined that a more traditional reinsurance approach provided us with a better balance of coverage, basis risk and pricing.
Q. What do you most look for in reinsurers?
A. Alignment. That sounds simple enough and you’ll see it mentioned in various marketing literature, but it is actually more elusive than you would think.
Fundamentally, reinsurance is a trade of underwriting risk for credit risk. Ensuring success means we need to be fully transparent about the exposures we wish to cede and reinsurers must convince us they’ll fully execute on the promise they make even if that doesn’t occur until years later.
Reinsurers that are truly aligned are in sync with, and support, what the company is trying to accomplish and are therefore consistent in their capacity, services, pricing and terms. Nothing frustrates the process more than when we observe reinsurers playing fast and loose with their support or taking arbitrary positions on contract terms such that it causes non-concurrency in coverage or increases processing costs.
Q: How is the success (or otherwise) of your reinsurance purchasing measured?
A. The truest measure is the one you would prefer never to test: did the covers perform as you expected after a loss? XL is a specialty commercial underwriter, so many of the products we sell are long-tailed. Consequently, our primary measuring stick is assessing whether the covers model such that they achieve our objectives.
As you would imagine, we don’t rely on a single metric or model, but rather employ a blended approach to account for intricacies. Based on the losses that have emerged to date, we are comfortable that we are on target.