It is a relationship that forms the very heart of the industry, but what do cedants really look for in their reinsurers? Far from being all about the money, it seems that stability, trust and understanding are more the order of the day
It’s been a rough couple of years. With the markets all over the place, uncertainty has ruled the day and cedants, worried about their own balance sheets, are demanding more from their reinsurers than ever before. It’s not just about ticking boxes; cedants want to be shown a little love, want a little hand-holding, and a little reassurance that everything will be all right.
With this in mind, Global Reinsurance has launched a special section dedicated to the big issues that concern these all-important market players. Today, we ask them – what makes the perfect reinsurer?
First up, stability and continuity. “We do not want reinsurers trying to pick and choose or adjust their shares at renewal,” Tokio Marine & Nichido Fire Insurance head of reinsurance Takashi Oka says. “Long-term commitment is vital.”
What else makes a reinsurer an attractive proposition? Most cedants look for what Munich Re’s head of insurance analysis and retrocession, Hans Joachim Thoenes, calls the “classical” values: financial strength, a high amount of offered capacity, and keen pricing in the transaction.
But as ever, beauty is in the eye of the beholder, and cedants have different needs. Sompo Japan’s manager of the outward reinsurance section of its reinsurance department, Emiko Maki, says a good business relationship is the single most important factor.
Argo Group’s senior vice-president of business development, Barbara Bufkin, also values relationship very highly. “The quality of the relationship with our reinsurers is an essential component of our partnership,” she says. “It ensures we receive the best terms and coverage.” Others also pointed to the very real business benefits of a good long-term relationship with reinsurers.
So what about the money? Perhaps surprisingly, price, though important, is not the most critical factor in purchasing reinsurance, cedants insist. In fact, they ranked it third overall, after security and business relationship. No one doubts its importance, however. As XL Insurance’s global head of ceded reinsurance, Rob Andrews, succinctly puts it: “Price is price.”
Some cedants seek better prices through tactical timing. At the recent 1 January renewals, some buyers, expecting the market to soften, exploited this by renewing late. Bufkin agrees that “some cedants did hold out for cheaper pricing”, but adds: “However, we did not.”
Fortis Insurance (UK) underwriting director Adam Clarke says he would keep reinsurers on his panel if they match Fortis’s risk appetite, even if their price was not the cheapest. Clarke doesn’t just want good prices, he wants reinsurers to understand his strategy. His company is quickly expanding through acquisition, “so we would need a greater line next year”.
Currently, Fortis UK cedes around £30m-£35m per annum, and reinsurance takes up about a quarter of Clarke’s time from November until the end of renewals. Throughout the year he keeps up his relationships with reinsurance brokers, and takes one or two meetings per month. Clarke employs no dedicated reinsurance staff, so for meetings he brings in staff from the primary side.
“The reinsurers like that because then they hear from people who do it day to day,” he says.
In contrast, UK insurer RSA cedes £800m per annum, and its group reinsurance director, Alan Fowler, manages a team of 24. For Fowler, price is more important for his large cat commodity business than other classes of business. (For the full interview with Fowler, see page 26.)
But while they are looking for something a bit different, one thing is certain: the alliance between cedants and their reinsurers will continue to form the core of the industry.
Most purchasers of reinsurance placed this top, and if not top then second, in importance when describing what they look for in reinsurers. Tokio Marine & Nichido Fire Insurance’s Oka, puts it simply: “There would be no risk transfer effect if a reinsurer is bust.”
For Munich Re’s Thoenes, a good payment history is a prerequisite. “We will not trade with partners whose ability or willingness to pay is questionable,” he says.
As Oka points out, payment history is part of the information that goes into deciding how good the security is.
Argo Group’s Bufkin needs “stable reinsurers with solid management teams to be our long-term partners. Our reinsurers’ ability to stick with us over the long haul is paramount.”
XL Insurance’s Andrews says: “Quite simply, when we buy reinsurance protection, we are transferring our underwriting risk for their credit risk. Therefore, it’s imperative that we enter into the transaction having an ardent belief that reinsurers can act on their promises when we need them to.”
2. Business relationship
“It’s a relationship business,” Fortis UK’s Clarke says; a sentiment echoed by many. Sompo Japan’s Maki also places this top and says: “Trust and longevity of relationship is most important for our reinsurance.”
In cementing such relationships, events like the annual meetings in Monte Carlo and Baden Baden are important.
Oka believes that relationships with core reinsurers are fundamental to the stability and sustainability of his company’s substantial reinsurance purchases. Relationships also help to reduce volatility of pricing and capacity in both pre- and post-loss environments. How much a buyer’s words are trusted would be based on reinsurers’ experience with the reinsurance buyer, Oka says.
Andrews says that having strong relationships is “what allows us to bring those reinsurers with quality, security and knowledgeable capacity to the table”. “As our reinsurers know us and trust in what we’re doing, we find the communication is clearer and it makes the transactions transparent, which we view as fundamental to all our reinsurance arrangements. As a result, we work closely with our reinsurers on- and off-cycle to ensure we are aligned.”
“Price is an important element for deciding how much cover to buy,” Oka says – and who could argue.
Clarke says reinsurance is his company’s second-biggest expense after staff costs. He suggests companies should regard reinsurance as a cost rather than a premium deduction. But he does add that he would keep reinsurers on his panel even if their price was not the cheapest if they match the insurer’s risk appetite.
Andrews says that increased sophistication in risk assessment and pricing tools perhaps make negotiations more protracted than in the past. But even so, “it’s rare that the parties can’t find an acceptable landing point,” he says.
Capacity is what Oka most looks for in reinsurers. “It is most frustrating to have reinsurers suddenly offering reduced capacity at renewal,” he says. Most placed capacity lower, however, perhaps because it is not such an issue at the moment; reinsurance capacity supply remains plentiful, and total premium ceded to the global reinsurance market has reduced.
For Andrews, a combination of “security and capacity are the top criteria we look for in our reinsurers”.
Oka says that he appreciates “reinsurers’ advice about any products and services offered in other markets for our study”. But if you are a retro buyer, receiving advice is not important, Thoenes says.
Clarke says he gets good added-value services from his lead reinsurers, such as their research on global warming.
Maki says: “Some reinsurers can provide the opportunities of education for the cedants, which is also appreciated and helps development of the relationship.”
Concentration of ceded risk to only a few reinsurers would be risky. “We do not want to be controlled by them,” Oka says. If a buyer has too few reinsurers then it becomes difficult to replace them if they suddenly decide to reduce or cancel their shares. Bufkin maintains concentration and credit risk analysis “to ensure no overweighting”.
Andrews says that diversification “permeates our thinking on every deal”. Achieving the correct balance between reinsurers “provides a safeguard against undue financial strain to XL, should any one of them be unable to meet its future obligations”, he says. GR
Buying in the retrocession market is rather different to buying first-tier or direct reinsurance. For one thing, advice is not a key factor: retro is a very sophisticated, reinsurer-to-reinsurer market.
Retro capacity is often volatile. Reinsurers tend to allocate capacity to retro if they are not seeing enough attractive business from first-tier reinsurance business, and sometimes this means that retro capacity is thin. But Munich Re’s Thoenes says that in the next couple of months “we expect to see some reinsurers trying to increase their top lines by writing some retro”.
He says that in a hard market, retro seems to be the most expensive capacity, and in a soft market it is still a little bit more expensive. “Reinsurers try to charge something like a retro malus for granting capacity to competitors,” he says.
Bufkin points to improvements in modelling capability and a wider investor base and behind a renewed appetite for writing retro business. However, she adds: “Our observation is that capacity was flat during this renewal period.”