Rating agencies pay close attention to reinsurers’ competitive positions and determine this, in part, by examining a company’s ability to lead business. Peter Hughes, director at Litmus Analysis, examines the implications of this logic.
A key element of the rating process is ‘competitive position’, which for reinsurers refers to their ability to attract and retain business in a tough marketplace. The rating agencies understandably tend to believe that ‘pricing power’ is vital to this process, and to a degree they translate this into the ability the reinsurer has to lead business. That’s identified by the amount of business they actually lead.
For anybody not working in reinsurance, it’s not difficult to follow this logic—if you’re viewed as a leader, you will be offered business, you’re in control of your own destiny (an important concept for ratings) and that must surely give you a competitive advantage.
As a veteran of 20 years of working in the reinsurance markets, before I started working in the ratings world, this had always frustrated me, especially when I think of the smaller reinsurers. OK, so it’s clearly important for the ‘big boys’, but it seems to me that it’s a positive disadvantage for smaller players. The big boys have their feet in most, if not all, markets—they rely on that diversification to give them stability, and leading business is part and parcel of their market presence.
Peter Hughes, Litmus Analysis, London, Europe