Cedants retaining more doesn’t need to be bad news

Cedants are retaining more business as a result of increased capital and a better understanding of their own risks, but this is a good thing for the industry, according to David Marra, president of RenaissanceRe Underwriting Managers US.

“Clients are retaining business, both because they understand their risk better than in the past and because they have more capital,” said Marra. “That is a healthy dynamic for our industry and it’s probably not going to change.

“Buying habits and preferences will be cyclical, and capital levels may also be cyclical, but the fact that clients have a better understanding of their risk is, we believe, permanent.”

In a challenging and competitive market for reinsurers, Marra said, innovation and “adding value” are vital for success.

“Clients are looking for partners that can add something in the value chain between the original customer and ultimate capital. This is what will likely separate the winners from the losers going forward,” he said.

“Our approach at RenaissanceRe has always been to be proactive about finding how we can add value in that chain. DaVinci Re and Top Layer Re are examples of pioneering vehicles that we set up many years ago to fill clients’ needs.

“We understand that clients are experts of their risk. Our job is to figure out how best to match that risk with the most efficient capital.”

Marra also spoke of the need to look beyond the short term and not lose sight of important factors such as underwriting excellence.

“Underwriting excellence is not dead. In the short term this can be somewhat obscured by competition and over-capacity, but it will play a big part over the long term in what separates those who are successful in adding value to that chain, and those who are not,” he said.

“Capital providers will need to be chosen as carefully as assumed risk partners. Will that capital understand the risk, and have the willingness and ability to pay when needed?”

Cycle support

Despite being renowned for its background in the catastrophe market, RenRe has always written casualty and specialty business.

Five years ago, the reinsurer made a deliberate move from a narrow risk appetite on this business to a focus on building core casualty and specialty lines to provide support throughout the cycle.

Now, the biggest challenge for casualty and specialty reinsurers is being able to deliver value among such an abundance of capital.

“A challenge should always be to deliver value beyond the capacity in a given transaction. That challenge is more acute in this market than it has ever been as there is an abundance of capacity,” said Marra.

“We believe the better markets will deliver expertise and creativity leading to more valuable capacity. We also believe that this will take the form of creating solutions jointly with brokers on behalf of their clients.

“Brokers who are creative but also recognise the value in sustainability of reinsurance programmes will also be winners in this process.”

Marra described identifying adequate reserving as another big challenge facing reinsurers.

“Evaluating whether various lines of business are adequately reserved is important at present. There have been significant reserve releases in recent years and this can be a challenge in pricing the business profitably today.

“When we actually hit our 1:100 point in the distribution in casualty, it’s usually not because of a couple of specific events, it’s because trends have emerged which cause reserves of multiple accident years to be adjusted at the same time.

“That can cause a whole host of problems, including lack of confidence in management and stock price decline,” he said.

“As many insurers have reduced quota share purchases in recent years, they are more exposed to reserve volatility as those years develop. That is inherently a difficult risk to reinsure, but it’s one of the issues that I’d like to see clients and reinsurers devote resources to understanding better.”

Speaking about the PCI Annual Meeting itself, Marra told PCI Today that growth and M&A would be the topics of choice at this year’s event.

“At one end we’re awash with capital, at the other there are risks that aren’t being insured to the extent risk managers would like them to be. How can we find ways to access attractive risks, and match those up to the most efficient capital?” he said.

“I also expect to hear discussions around M&A and what the industry landscape will look like over the next few years.”