21 October 2015 News

Why cede away control in a buyers’ market?

Despite having gone through a process of rationalisation in recent years, many buyers still acknowledge the importance of maintaining a level of diversity on their panels and including some so-called tier 2 and 3 players, Dirk Spenner, head of Europe North, East & Central at Willis Re, told Baden-Baden Today.

He said that having relationships with a selection of smaller players served a purpose: it usually offers greater flexibility on price and ensures cedants do not become too reliant on a small number of reinsurers, which could lead to their losing an element of control on reinsurance purchasing.

“Although many cedants have settled on working with a smaller number of core players, there remains a need for tier 2 and 3 reinsurers on their panels,” Spenner said. “They bring several things to the table, but mainly they offer  greater diversification and choice.

“It is a buyer’s market, so why give away control? Using a range of reinsurers ensures cedants remain in control. If only a handful of reinsurers are on an account they could become too influential.”

Spenner said the European market remained highly competitive as many relatively new forms of capital tried to establish a foothold in the market. He noted that this included both so-called alternative capital being put to work through alternative risk transfer structures and traditional capital coming into the market from other parts of the world such as Asia.

This dynamic has meant the market in Europe has continued to soften, although Spenner said that compared with some very soft periods in the market’s history such as towards the end of the 1990s, this process was far more disciplined, thanks to the much more sophisticated risk modelling tools available now and the wider understanding of risk.

“I guess you might call it a disciplined softening,” he said. “The market is certainly better informed now in terms of understanding their underlying loss levels and knowing their break-even point on business. But there remains abundant supplyand this is leading to a continued softening of rates, and consolidation.”

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