Relationships are tricky at the best of times, but when the pressure is on, it’s those with strong foundations that survive. We give you some tips on keeping the magic alive with your business allies in a tough market
Trust, honesty, flexibility and resilience through difficult times are the building blocks of every successful relationship. Without these, cracks begin to form and relationships can break down.
The reinsurance market is no exception. As reinsurers, brokers and cedants work towards a common goal – risk shared with fair conditions, in return for a reasonable premium price – good relationships can be crucial.
As Valentine’s day looms, many are examining their personal relationships. Global Reinsurance used it as an excuse to examine how to best approach business ones.
No relationship can survive without trust. A shared belief that two parties can depend on each other is vital to achieving a common goal – and trust is seldom more important than when risk is involved.
Director of International at Lloyd’s broker RFIB, Simon Barnes, says: “Trust has always been a very integral part of the relationship between the reassured and the reinsurer. The parties probably know each other well anyway, but there has to be an element of trust between all.”
For brokers, the sector’s small-town mentality means trust is paramount. Chairman of Willis Re International & Specialty, James Vickers, says: “The global reinsurance market is really small. If you know 3,000 people, you know everyone that matters. There is a limited number of high-quality reinsurers – probably less than 50. To be blunt, reputation is all because you can’t hide a bad reputation in a global pond.”
As the saying goes, honesty is always the best policy. In relationships, this means being open and telling the truth, even if it may cause a short-term blip. Without honesty, relationships struggle to grow.
Honesty, Barnes says, is particularly important for brokers wishing to remain at the top of their game. “You are dealing with large sums of money. If one of the parties tries to be clever then that could lead to a claim not being paid and errors and omissions claims on a broker. This obviously makes you very unpopular when there’s no bonus pool.”
In contrast, being honest and open helps forge strong relationships. “In both the long and short term, you want a partner you can work with. A really simple way of looking at reinsurance relationships is, ‘no surprises’. Be open and upfront,” Canopius reinsurance manager Chris Swan says.
Take it easy
Flexibility in business relationships gives all parties room to develop, which Argo senior vice-president of business development Barbara Bufkin believes is vital in a dynamic working environment.
“We are trying to make a margin in a market that is difficult,” she says. “We want to be flexible in terms of the service and support from our brokers and from our reinsurers in the business when, for example, we are not making our top-line projections.”
For RFIB’s Barnes, flexibility is the key to developing long-term working relationships with cedants and reinsurers. “Contractually, we are talking about a one-year partnership, and there is no obligation to renew the contract in 12-months’ time. Nevertheless, there are only a limited number of people you can go to in future – and reinsurers have long memories.”
But too much flexibility could spell trouble in terms of business strategy, Vickers says. “Yes, we like flexibility as it gets deals done, but we equally like people who run their business in a prudent fashion. This might sound like an odd thing for a broker to say, but we need strong reinsurers, otherwise we don’t have a market to place our client’s business. While it’s nice when reinsurers are accommodating, if they are too accommodating we can start to get worried about their medium to long-term strength.”
You can’t always get what you want. Settling your differences by making concessions can pay dividends. During 2010 fourth-quarter renewals, compromises were key, and helped bring cedants and reinsurers closer together.
“Reinsurers are now lowering prices at a pace equal to or faster than insurers,” says Aon Benfield chief strategy officer Bryon Ehrhart. “This is a change in the market that is positive for cedants. Reinsurers and insurers need to partner to find ways to help insurers differentiate their insurance products in their very competitive global markets.”
Vickers reiterates that trust and honesty helps during renewals. “You need to have the underlying trust and present the business in a fair and reasonable way, deploying considerable technical, analytical skills to explain the risk. The brokers don’t make the prices – the market makes the prices.”
If there is an elephant in the room, relationships can begin to erode. Issues can arise when parties feel misled or misunderstood, but clear and careful communication decreases the chances of a relationship breakdown.
“The key issue brokers have with reinsurers is surprises,” RFIB’s Barnes says. “We understand that people have changes in their strategy, philosophy and underwriting. Things change. But what we like to have is decent advanced notice so we can manage client expectations, find alternative sources and manage the process.”
Swan agrees: “We want no surprises. We want our reinsurers to act as we expect. We don’t want to ask: ‘where did that one come from?’ ” He adds that misunderstandings also cause issues. “Trust is often built up over years, particularly in the USA. It really is two nations separated by a common language. Sometimes their meaning of something is completely different to ours.”
Don’t break my heart
Relationships between cedants, reinsurers and brokers seem to be growing closer, with price concessions, greater sharing of information and a shift back from the colder, more businesslike excess-of-loss covers, towards more trusting proportional business.
But such closeness comes more easily when rates are soft. The true test of a relationship’s strength is a hard market. “In a soft market, when reinsurers are clamouring for your business, it’s difficult to ascertain who your core partners are and who is just chasing you for the business,” Swan says. “We’re always bearing in mind how these people will respond in a tough market or when we say: ‘we’ve got a problem, can you work with us on this?’ If they are the types to run away, then they aren’t for us.”
Bufkin agrees, adding: “In a hard market, if you set principles or paradigms on how you work with trust and transparency, then the main concern will be availability of capacity. But with the excess capacity we have in the market at the moment, it is difficult to predict what limitations will prevail. We should be establishing core reinsurer and broker relationships throughout the market cycle when buying reinsurance.”
Nevertheless, the hard market can also highlight strengths. “A soft market is best when people have relationships already and can just get on with business,” Barnes says, “but a hard market always brings out the best in quality brokers.” GR