Buyers want no surprises

The third quarter hurricanes in the US have certainly made for an interesting start to negotiations as buyers, brokers and reinsurers lock horns in the run-up to the January 1 renewals. The losses, coming on the back of what have been weak results at best thanks to the enduring soft market in recent years, have made reinsurers apparently resolute that a change is necessary.

This optimism is quickly tempered when they are asked about how much capital keen to enter the market if rates were to increase they are aware of. The consensus now seems to be that at least the softening should now be halted, but there will be some hardening in loss-affected territories.

Yet the opinion of buyers seems more tempered than those of their counterparts. Far from demanding a continuation of rate declines, the main objective of the buyers Intelligent Insurer spoke to in Monte Carlo was to achieve stability in pricing and settle on relationships that transcend such arguably trivial issues.

In part, this sentiment might stem from the fact that many insurers have restructured their reinsurance programmes in recent years—rationalising their panels and buying coverage in a far more efficient manner. Having been through this process—often convoluted and arduous—they simply won’t want the hassle of undergoing further drastic change.

Perhaps it also helps if you also act as a reinsurer—giving much-needed perspective on the challenges of being at the end of the chain (retro aside) in such a tough market. While not averse to a good deal, these commentators certainly seem to see the other side of the coin,

Health of the market

For example, while he would never wish to overpay for reinsurance, Stephen Postlewhite, chief executive officer of Aspen Insurance and the former CEO of Aspen Re, says he prefers to form long-term, sustainable partnerships with reinsurers which are profitable for both parties.

This means he is reluctant to shop around too opportunistically, even in a buyer’s market that is still softening in many areas, if the July renewals are to be taken as a guide of the health of the market.

“We want to use reinsurance to support us, not prop us up, and that means I want to be profitable in a way that also makes money for our reinsurers.”

Aspen Insurance has restructured its reinsurance programme since Postlewhite took the reins some 18 months ago, tasked with repositioning the company’s insurance business and moving it from operating in a number of silos globally into a company offering a truly global approach offered and executed through carefully selected regional hubs.

Since then, the company has developed worldwide product teams and aligned their operations under a common framework for delivering products to the global market. On the back of this, the company now intends to explore opportunities in new markets driven by regional teams with access to this global expertise.

This has meant establishing more quota share treaties with reinsurers willing to support the insurer’s ambitions as it repositions its portfolio and becomes more selective on the business it writes and also looks to manage volatility on its balance sheet.

“We are buying more quota share reinsurance to support our ambitions and remove volatility from our balance sheet,” Postlewhite says. “We will buy more coverage and we expect our net premiums to reduce on that basis.

“When we changed our structure our first instinct was to use the long-standing relationships we have with reinsurers but it is also true that reinsurers interested in pro-rata deals differ somewhat from those that prefer excess of loss business.

“That meant some changes and the reinsurers we work with taking reasonably big shares. But I am very pleased with where we have ended up with our programme. We spent a long time working through everything so that our reinsurers have full transparency and we now feel we have the right long-term partners in place.”

Although open to changes that would ensure his company’s reinsurance programme represents the best fit for the shape and mix of the business, David Reeves, chief executive and one of the founding directors of Barbican, takes a similar view.

He says the business will buy a consistent amount of coverage this year but he will be exploring changes in the structure of the placement.

“We do buy a significant amount of reinsurance and we have no intention of changing that strategy,” he says. “We will buy a consistent amount in line with our risk appetite. But we will look at the structure of our programme. We want to buy in an intelligent way that best suits our portfolio of businesses and risks. That may cost more or it may cost less, the key is that it is the right solution for us.”

Barbican also uses industry loss warranties (ILWs) to hedge some of its risks, a strategy Reeves says will continue. “They have been important for us in the last few years especially for some of the bigger risks and particularly for the energy market. This will remain a part of our strategy.”

In terms of the number of reinsurers Barbican works with, he says its panel sizes have remained stable. This is in contrast to some cedants that have been reducing the number of reinsurers they work with.

“We work with a core of reinsurers and counterparties that support us—we always have and always will,” he says. “We are careful to maintain that core but we are willing to add to the list from time to time. But there will be no radical departure from that list.”

Don’t pass the buck

Mark O’Riordan, group reinsurance director at Ecclesiastical, takes a similar view. He values stability and long-term relationships above all else but is also keen to point out that he will resist any rate increases his reinsurers attempt to impose if they are driven by factors outside his control.

Specifically, he believes that some reinsurers, forced to increase their reserves in the wake of recent changes to the Ogden formula in the UK—the discount rate used for personal injury claims in the UK—could look to pass these costs on to their cedants by increasing rates on some lines of business.

The buyer for the insurer, which specialises in heritage, charity, education, real estate and faith insurance, is seeking a smooth and stable renewal this year with no surprises. Since Ecclesiastical is relatively unaffected by changes to the Ogden rate, O’Riordan will be looking to differentiate the insurer from its peers and avoid any hikes.

“The effect of the Ogden rate change will be interesting in the market. We do not write motor business and withdrew from the commercial care sector some years ago, so we are not affected to the same degree as others, but I suspect some reinsurers will be looking to charge more as a result of this.

“I think there will be a market reaction and we will just do our best to opt out of any generic increases on the basis of the unique characteristics of our portfolio in that we have limited exposure to catastrophic bodily injury occupations,” O’Riordan says.

In fact, the so-called Ogden effect is something of an anomaly amid wider market conditions that point to continued softening, albeit at a slower pace—although this was before the hurricane losses in the US.

“We have been speaking to our reinsurers and key partners throughout the year and we like a no-surprise approach based around long-term relationships and continuity.

Reinsurance is fundamental to our strategy. We have had a very stable structure for several years and we continue to develop those relationships,” he says.