15 October 2017 Insurance

Fight for rate hikes or ‘get out of reinsurance’

Retrocessional rates must increase in the aftermath of big losses from the recent hurricanes and underwriters lacking the will to fight for hikes should get out of the business.

That is what Glenn Clinton, managing director, ILS Capital Management, told PCI Today. He believes that seasoned underwriters in reinsurers, who have witnessed big losses and the market cycle before, will be willing to hold firm and push for rate increases. Newcomers to the market, perhaps less experienced in the aftermath of big catastrophes, might be less confident in their offering and so less likely to hold the line.

“If you don’t have the will to stand firm on increases, now is the time to get out of the business. We are the backstop and after five straight years of rate decreases, a year like this should clearly show why cedants need to pay more,” Clinton said.

“I know most of the underwriters in the established reinsurers well and I know they are optimistic—under pressure even—of achieving better rates now. Some of the people in the ILS space, in contrast, I have never met before. I am less optimistic they will understand the importance of driving rate increases, but I hope I am wrong.”

Clinton said he believes that more sophisticated buyers will understand the dynamic of the reinsurance market in the aftermath of a big loss and will accept rate increases.

“They will understand the importance of their backstop,” he said. “They need us as we need them—it is a symbiotic relationship. In terms of that relationship, it is my turn now and if someone cannot understand that I need more rate, and a tightening of some of the terms and conditions in the contract, then we will not be doing business.

“If I am not that important to them they can work with someone else.”

He added that it is not simply a case of rates increasing on the same structure as before, however.

“Buyers usually have fixed budgets to spend on reinsurance but what they do with that money is a different question. If the relative price goes up, so might the retentions. Equally, they could spend money on a different type of coverage, with different attachment points. It is rarely as simple as rates increasing—there will be a negotiation of the entire structure.”

Clinton has seen no sign of investors leaving the sector because of the recent losses. “Before these events, capital was pouring in and we expect our investors to stay in the space; no-one will fall away. But I want to get the rate I need. I will be seeking rate increases,” he said.

He also stressed the importance of the broker in such negotiations—something, he said, some carriers seem to have forgotten. “Your broker is your marketing arm—you live and die by how they represent you,” he said.

“You need to treat your brokers well and help them to do their jobs with timely service and honest feedback on their proposals. You cannot write business you aren’t shown.

“They are a reinsurer’s lifeline in this market, but vastly underappreciated by many. They do so much more for their brokerage than many people realise,” he concluded.

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