Cedants’ credit profiles matter

Reinsurers should pay closer attention to the credit profile and financial strength of their cedants, especially in a period of economic volatility and inflation, Stuart Shipperlee (pictured), managing director of Litmus Analysis, an advisory firm specialising in ratings and credit risk, told Intelligent Insurer.

Shipperlee says many reinsurers do not look at this issue closely enough, many believing that it is largely irrelevant to their business deals with cedants. But he offers two compelling reasons they should pay more attention to this.

“First, an insolvent cedant can represent a significant problem for a reinsurer,” he said. “One of the first things an administrator will do is look at what reinsurance recoverables are owed, and they have zero motivation to accept anything less than the maximum amount they are owed.

“There is no ongoing business relationship to lean on or wider negotiation. They will just seek payment in full—the maximum amount the administrator believes can be claimed, however unreasonable the interpretation seems to the reinsurer.”

Second, he says, there is often a correlation between cedants with weaker credit profiles and the underlying quality of the books of business they write. “If they are under financial pressure, they may be tempted to write more low-quality business, to roll the dice a little more on their underwriting,” he said. “That can result in their taking more risk than a reinsurer might be expecting.”

That is not to say reinsurers should avoid such cedants, he stresses. Litmus has completed a report which identifies many smaller, independent, European cedants ( see previous report). These can offer rich pickings for reinsurers but there can also be big differences in the quality of business they write.

“Reinsurers should not necessarily avoid reinsurers with a weaker credit profile—they are more likely to need reinsurance, and reinsurers can become part of the solution.

“But reinsurers should do their research and understand that credit profile when devising and pricing their solutions, which might help them manage balance sheet weaknesses or volatility in performance, or both,” Shipperlee concluded.