The importance of relationships in reinsurance purchasing is giving way to a tougher and more technical price-driven market, according to a new survey Paul Delbridge examines the implications for reinsurers.

September's Reinsurance Rendez-Vous in Monte Carlo saw the launch of 'Delivering maximum value to capital providers', PricewaterhouseCoopers' third annual survey of the operational drivers that will shape the future direction and performance of the London insurance market.

Reinsurance strategy, purchasing and performance are a key focus of the research, along with capital management and operating costs. The findings are based on in-depth questionnaires and face-to-face interviews with executives from Lloyd's and company market businesses, representing more than 40% of Lloyd's capacity and combined estimated gross written premium of around £9bn in 2004. The companies that took part in the survey included both reinsurance providers and some of the biggest reinsurance buyers in the world.

The respondents anticipate that their reinsurance expenditure will represent around 20% of their gross written premium in 2004, while inwards reinsurance and retrocession business will account for more than a third of gross premium. While the expense is significant, respondents' reinsurance spending in 2004 has fallen by an average of 8% since 2003, which largely reflects higher retentions at this stage of the cycle and reduced reliance on qualifying quota share protection. "As our capital grows, we'll be able to retain more risk," explained a participant. "If the business is good, why cede all the profit?" said another.

Credit rating is the paramount consideration for selecting a reinsurer, with 95% of cover being placed with companies with an S&P 'A' rating or higher. Other key selection criteria include price and diversification of risk. Significantly, however, the strength of the relationship and the expertise of the reinsurer are near the bottom of the list of considerations.

The level of placing service, along with access to key markets and high quality reinsurers at favourable prices, are seen as the most important criteria for choosing a reinsurance broker. Brokers' actuarial/modelling capabilities are at the foot of the list, with a number of respondents looking to separate fees for modelling and placement and carry out more technical analysis in-house. Many participants have also moved from fixed percentage to flat fee brokerage in what PricewaterhouseCoopers believes will be a growing trend.

In choosing the nature of the programme, respondents' key preference is transparency. Many are also looking to simplify their reinsurance arrangements.

"We like reinsurance to be straightforward," said one interviewee. "By simplifying the process you keep the costs down." The accent on simplicity perhaps explains why so few of respondents buy alternative risk transfer (ART) instruments. The main drawbacks of ART are seen as poor value for money and regulatory problems in demonstrating risk transfer.

Losses occurring cover predominates, particularly in the Lloyd's market, though unsurprisingly most respondents would buy more risks attaching reinsurance if it was more readily available. While most respondents are generally satisfied with the level and transparency of their reinsurance programmes, many are concerned about continuing difficulties in securing casualty protection on acceptable terms, especially for working layers.

Many also point to the lack of available terrorism cover.

Buying in 2005

Looking ahead to 2005, most respondents expect to spend less on reinsurance.

However, while the average anticipated reduction is 7%, there are marked variations. While some participants are looking to retain more risk, others are keen to buy more cover to reflect the continuing expansion in their businesses. A number will also seek to purchase more reinsurance as the primary market softens, especially as they believe reinsurance premium rates will start to ease.

Many participants are naturally keen to spread their cover more widely to avoid risk concentration. Yet, while greater diversification was cited as 'important' or 'very important' by over half of respondents, the typical maximum proportion of the programme ceded to the same company is around 20%. In practice, many believe that any substantial redistribution of cover would be difficult in the short-term. It appears, as one interviewee said, that "lack of choice of securely rated reinsurers is inevitably leading to concentration".

Market concerns

The survey also reveals deeper concerns that may have a more lasting impact on reinsurance buying patterns. In particular, it highlights the declining value attached to relationships between buyers and sellers in certain market sectors. Some respondents believe this stems from what they see as a hardening of attitudes among certain reinsurers and resulting difficulties in securing recovery.

Some participants have also been shaken by the withdrawal of capacity in certain lines. "I'm not going to try to build a relationship with someone who is not going to be there in a few years time," explained an interviewee.

Others have found that the greater use of technical pricing and 'walk away' rating levels have resulted in a less favourable climate than had been expected in the wake of the downturn in the primary market.

It should be stressed that many participants were keen to emphasise the value of the support and expertise they receive from brokers and reinsurers after catastrophic events or in relation to complex claims. However, the sense that reinsurance is a 'quasi-credit' scheme appears to be receding.

Indeed, it also appears that many buyers are themselves adopting a tough approach, including dropping longstanding partners from their security list if their reputation or credit rating are called into question.

Seasoned professionals believe that price will become ever more paramount on both sides in the wake of these developments, especially as buyers see fewer opportunities for pay-backs or preferential treatment. Larger groups may also choose to retain more risk, either directly or through captives. Moreover, both sides of the fence are likely to become savvier and more hard-nosed, with fewer openings for arbitrage or what one interviewee described as the "wall of mirrors in reinsurance".

Emerging trends

While PricewaterhouseCoopers' latest survey confirms that class underwriters will continue to play the lead role in negotiating the reinsurance programme within most organisations, many respondents are introducing more thorough peer reviews.

Many organisations are also looking to increase their use of in-house modelling to enhance the basis for buying decisions and ensure their reinsurance programme more accurately reflects the risks being run. More than 90% of respondents have or plan to augment their catastrophe modelling by including reinsurance in their overall capital model. However, while such evaluations are clearly valuable, "you'll never get to the point where the model buys the reinsurance," said an interviewee. "Buying reinsurance is largely about trading. A tough attitude can secure better value for money than a model." Indeed, the optimum level of cover as identified by the model may simply be unavailable at the desired price and terms.

PricewaterhouseCoopers' survey also highlighted growing support for centralised buying. More than 90% of respondents believe this can increase the efficiency of the reinsurance purchasing process and remove duplication in class-specific covers across business units. More than 80% believe it can reduce costs and simplify the programme. In the long run, PricewaterhouseCoopers sees responsibility for reinsurance strategy and purchasing being increasingly taken on by a dedicated unit or a virtual multidisciplinary team, which is certainly the emerging trend in leading global organisations.


London market insurers' reinsurance priorities are shifting in response to both the immediate movements in the rating cycle and more fundamental long-term trends. In particular, few participants believe they are receiving adequate value for money from their present reinsurance arrangements.

Clearly, the current high premiums are an inevitable consequence of supply constraints within the market. However, dissatisfaction about costs appears to have been exacerbated by what some participants see as growing problems with recovery and the withdrawal of cover to longstanding clients. Such concerns are encouraging many organisations to move away from absolute reliance on reinsurance. Many are also looking to more sophisticated technical analysis to deliver improved performance, simplicity and value from their reinsurance programmes.

Copies of 'Delivering maximum value to capital providers' are available for download by visiting