Cedants buying less is counterintuitive in a soft market
In the absence of a very good, specific reason, the trend of cedants buying less reinsurance in a soft market is counterintuitive, believes Stephen Catlin, chief executive of Catlin Group.
Speaking at the Monte Carlo Rendez-Vous, Catlin acknowledged that while he understands that many bigger insurers are more sophisticated than they once were and have balance sheets capable of supporting more risk, he believes the logic still defines basic economics.
But, he does admit, it depends on the perspective you are coming from.
“Reinsurers would speak out against it because they are losing business. Brokers would also see it as counterintuitive,” Catlin said. “I am probably in that camp. You would expect insurers to purchase more coverage in a soft market.
“I can understand that the bigger players have bigger balance sheets now. They can take more risk onto their books. Many have a global footprint and a size and sophistication that we have not seen in the past. The risk models they use are so much better. But I would still define such a strategy as counterintuitive.”
That said, he added that a growing split is emerging between these large, global players and smaller cedants. If anything, the latter require more support.
“The models might be better but if you are a smaller player, the cost of the models can also be prohibitive,” he said. “They are more in the game of protecting against the unknown and that is where reinsurance is really needed.”
Catlin has spoken out in recent months about another trend: that of brokers talking pricing down. He has accused some brokers of generalising about rates in the market and making statements that are not substantiated by the facts.
Specifically, he believes that some brokers, when quoting price decreases on some lines, are unfairly aggregating the changes in traditional and non-traditional lines of business.
“It is misleading when these figures are quoted out of context,” he said. “The problem is, they also do not want to be telling clients that alternative capital can be cheaper.”
Catlin said he has confronted some brokers about this. They have agreed with his perspective in principle. He said he is waiting to see if the tone of such statements changes during Monte Carlo.
Rates are under pressure in some specific areas, Catlin agrees, especially property-catastrophe risks that flow through the Bermuda and London markets.
But many other lines are stable and some have even enjoyed rate increases, he said. “Different parts of the market are behaving in different ways. The advantage of having a global footprint, as Catlin does, and of operating across insurance and reinsurance, is that we can move capital around to a certain extent to ensure we optimise our portfolio,” Catlin said.
On this basis, Catlin is positive about the market as a whole. He believes only players writing a restricted number of lines which are depending on the Bermuda and London markets will have a real concern over rates at the moment.
He also notes that there is another issue he would like to see on the industry’s agenda to a greater extent than it is: the issue of cost processes. “The industry is Luddite in this regard and we have to get it sorted,” he said. “We have invested heavily in recent years in improving things and I know others are doing the same but the industry as a whole must improve. It is an underlying issue but one I would like to see on the agenda."
