Swedish mutual insurer Länsförsäkringar’s reinsurance general manager explains why ‘slow and steady’ will win the race in the current market
As both a writer of inwards reinsurance and a buyer, Swedish mutual insurer Länsförsäkringar’s Tor Mellbye can appreciate the buying process from both sides of the fence. “I have always had two hats,” he says.
The Norwegian-born executive started his career in Oslo but has lived in Stockholm for almost 25 years. As with many of his peers, he fell into reinsurance buying. “It was coincidence really,” he admits.
With his dual role, Mellbye doesn’t have much time to relax - though he does enjoy running in his spare time. Nevertheless he says he is very happy with his lot. “I enjoy life, my work and my sports. I have many friends inside and outside the business, and I have a nice social life as well.”
Q. How would you evaluate the state of the market?
A. The reinsurers have had a lot of losses, so the results this year are not very good. They are trying to talk up the prices, especially for the larger risks and catastrophe-type business. I think prices will go up on the larger programmes, especially where you have had losses, but not everywhere.
On the other hand, as I see it, the amount of capacity is still the same, the players are the same and the market hasn’t changed very much. For some business the price should really go down, because there is plenty of capacity.
It is a mixed picture: some programmes will have increases. A lot of business will be under pressure and might even have some small reductions. We are not talking big changes. I will keep this opinion until I see some changes in market capacity, and I haven’t seen that yet. It is a fairly disciplined market - there is not silly competition like we had in the past. But as long as the capacity is there, not too much can happen.
Q. How are market conditions affecting your buying strategy?
A. We buy a big pillar of catastrophe protection and the rest of the programme is relatively small limits. I think the catastrophe portion will remain rather stable. There are opportunities to have reductions on the rest of the programme, because there are smaller limits and we have a clean loss record.
With losses, the situation would be slightly different. It really depends on whether you are prepared to keep your existing panel or if you want to make some changes and get in some newcomers. Then it might be possible to achieve some small reductions. However, we are conservative and not changing that much. There is no need to because we have done that quite a lot in the past to achieve changes in the price, structure and terms and conditions of contracts.
We are careful - we don’t utilise this to the maximum that we could, because we want to be a company that shows continuity. If you use this technique to the extreme you get a bad reputation and, in the long run, you don’t benefit much from it. You have to find a balance.
The introduction of RMS version 11 could have an impact in some countries, but I don’t think companies really want to use it yet. They want to understand a bit more how it works first. It will have some impact on pricing, but I think a lot of companies will leave it until next year.
Q. How do you approach the buying process?
A. Today it is really important to utilise the cat models. We subscribe to RMS and we also get help from our brokers. The first step is to analyse the book to know what you should buy. This involves a lot of data collection. We start the process in May and the data collection takes place during
The data is compiled in September and October in close co-operation with our brokers - Guy Carpenter and Aon Benfield - resulting in a renewal information package. In the meantime, we also have board meetings because limits and retentions are decided by our board. That usually happens in October.
We then approach the market. We get some broad ideas of what we want to do, normally in Monte Carlo and even more in Baden-Baden. The renewal information package is finished just after Baden-Baden. We send it out to brokers and then we start discussing pricing and structures with our leading reinsurers. We normally agree on terms and conditions in early December and then we go out and place it. We use brokers on most of the programme. We deal a little bit direct as well.
Q. How will Solvency II affect the buying process?
A. It doesn’t look like we need to make any changes. For catastrophe we buy up to a one-in-200-year event and as a group we are quite well off capital wise, so I don’t think Solvency II will impact our buying behaviour that much. We are of course preparing ourselves for Solvency II. It is a big project. But I don’t think it will be that important for our reinsurance buying.
Q. How much business do you cede to reinsurers?
A. We cede in excess of Skr400m ($60.8m), so it’s not huge amount. We only buy excess-of-loss. The retentions have been pretty stable over the last 10 years. There have been some increases but they are still rather low.
We are slightly different from the stock [non-mutual] companies and so we should buy a bit more reinsurance than they do. So we are buying lower down, and the limits have increased over time, especially for catastrophe. The retentions have also increased a little bit, but nothing dramatic.
Q. What qualities are most important in reinsurers and brokers?
A. For brokers the servicing of the account is very important: the claims service and their negotiating power. That today also includes having the modelling capability and knowledge of the modern tools. It is about being able to handle the business in a good way, place it, and be technically professional. On the cat side, there is a very limited number of brokers you can choose.
For reinsurers it is willingness and ability to pay claims. We determine this not only by the rating but also knowledge we have about whether they are good or bad payers. We are not really that interested in the servicing from companies when it comes to Solvency II. We do that ourselves.
Q. How did you get involved in buying reinsurance?
A. Coincidence really. I started working for a company named Polaris in 1981 and I was both an underwriter and I placed their excess-of-loss programme, so I have always had two hats.
Q. How do you relax?
A. I never relax! I like running, I do a lot of sports. But I don’t have much time to relax. It is a lot of work, a lot of sport and a lot of fun. I enjoy life, my work and my sports. I have many friends inside and outside the business and I have a nice social life as well. I am a very happy man.