Retaining partnerships
As one of the largest purchasers of property catastrophe reinsurance in North America, Weston Insurance has consistently increased its reinsurance buying since inception.
While several larger US accounts have scaled back their reinsurance programmes significantly, Weston has increased its occurrence limit purchase by 28 percent year on year, while also increasing its aggregate reinsurance limit by 38 percent, resulting in approximately $1.9 billion of aggregate reinsurance limit purchased. Michael Lyons, the company’s CEO, says that this increase can be attributed to two things.
“First, Weston’s exposure growth, and second, the lower reinsurance pricing. We’ve decided to recycle the savings from lower reinsurance costs into purchasing additional limit, protecting Weston’s policyholders (and balance sheet) to a significantly greater return period,” he says.
However, Lyons says, the company’s retentions have not changed in 2015.
“Our retentions look almost identical to what they were last year,” he says.
Speaking of Weston’s renewal demands, Lyons says that relationships are a strong part of the re/insurance industry, and while the environment is currently favouring cedants, this will not last forever.
“Weston has been incredibly fortunate to find a core group of reinsurers who have supported us with very meaningful lines. The conversations among us have been frequent and very honest. We understand that due to where we are in the current interest rate cycle, our reinsurance partners’ margins have been significantly compressed, and appreciate pricing is now at, or near, many reinsurers’ technical pricing floor,” he says.
“For us, these relationships are long term. At some point, interest rates will rise and some of the excess capacity seeking yield will likely exit the reinsurance market and be redeployed back into fixed income investments. At that point, the shoe will be on the other foot, and reinsurers’ leverage on terms and conditions will greatly increase.
“This is the nature of this business, and because of that you have to be very careful not to overplay your hand when supply and demand strongly favours cedants. We thought our requests on changes to terms and conditions were reasonable at the latest renewal, and I hope our reinsurance partners did as well.”
Alternative solutions
As talk of insurance-linked securities (ILS) remains on the tip of everyone’s tongue, Lyons says that Weston has also considered its options within this market.
“We held meetings during the Securities Industry and Financial Markets Association (SIFMA) conference last year, and went as far as soliciting pricing indications for a cat bond. Since we’ve scaled Weston’s programme so significantly over the past three renewals, we thought it prudent to hedge in case there wasn’t enough capacity in the traditional ultimate net loss (UNL) reinsurance market.
“Fortunately, the traditional UNL reinsurance market has remained willing to support Weston’s programme as it continues to scale significantly each year. Therefore, inception to date, we have not needed to transfer any risk to the ILS markets,” he explains.
Looking ahead
Weston plans to boost its business through continued expansion into adjacent states, as Lyons explains.
“Weston remains a focused windstorm and hail specialist, and is now one of the top 10 writers of allied lines coverage in Florida. Earlier this year, Weston received licences to write in Texas and Alabama as well.
“We also intend to seek regulatory permission to expand into two or three additional states in 2016, so the trend of purchasing increased reinsurance limits should continue for some time,” he says.
Michael Lyons is CEO at Weston Insurance. He can be contacted at: michael.lyons@weston-ins.com
