28 October 2014 News

Renewals will test cedant/buyer relationships

The 1-1 renewals will be a “real test” for relationships between cedants and buyers as the prolonged buyer’s market continues.

Speaking to PCI Today, Paul Little, president of risk modelling firm EQECAT, said that while in the long term the industry will swing between being a buyer’s and a seller’s market, what is now a drawn-out period favouring buyers is putting pressure on reinsurers.

“Reinsurance buyers have always valued the importance of relationships with reinsurers,” he said. “Furthermore, there has always been an implicit understanding that it’s a long-term relationship. But we’ve never had such a prolonged buyer’s market.”

Little said buyers are benefiting from greater diversification in their reinsurance placements and lower reinsurance spend.

“Whether that’s with new reinsurers, the capital markets, or a combination of both, there’s an opportunity for insurers in this market to gain a lot on the bottom line, by reducing their reinsurance costs,” he said.

Little also spoke of the challenges of establishing a technical rate versus a market rate. He said that not all buyers believe that a technical rate should govern a relationship.

“Differentiating between a technical rate, that is a rate generated by a cat model or produced by looking at the premium versus losses over a period of time, compared with the market rate, makes for some interesting conversations,” said Little.

“In one conversation I’ve had, the company in question agued that the US had been subsidising the rest of the world, under-pricing Japan and New Zealand earthquake risks for a long time. But they were not open to the notion that a technical rate should govern the relationship.”

Little added that the role of the risk modeller hadn’t altered that much despite the changes influencing the market. But new risks such as flood would be the drivers of new models and new premium for insurance carriers and reinsurers, he said.

Speaking of the PCI annual meeting, Little said that cyber would dominate talks as would the wide gap between economic and insured losses with the aim of reducing the impact of destruction after natural catastrophes.

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